week 7 Flashcards
1
Q
The four-sector model
A
- includes household consumption (Cd)
- firms: planned investment (Ip)
- government sector: government spending (G)
- export (X)
PAE = Cd + Ip + G + X
2
Q
income-expenditure multiplier
A
- change in exogenous spending directly affects Y
- higher Y induces further increases in spending, leading to an output higher than increase in spending that started it
3
Q
alternative equilibrium condition in the four sector model
A
- for equilibrium to occur, any injections of expenditure into the economy are exactly matched by withdrawal of expenditure
4
Q
fiscal policy
A
- the use of the commonwealth budget to achieve macroeconomic objectives
- designed and implemented to achieve a pre-determined level of output in the economy
- can be automatic / discretionary
5
Q
automatic fiscal policy
A
- is a fiscal policy action triggered by the state of the economy with no government action
6
Q
discretionary fiscal policy
A
- is a policy action that is initiatted by an act of parliament
7
Q
discretionary fiscal policy - changes in G
A
- intuition: as government purchases of goods and services is a component of PAE, deficiencies in PAE can be compensated with changes in g.spending
- g.spending is exogenous, therefore changes in G will shift the PAE line
- contractionary gap
- > increase in G shift PAE up and increase level of actual output
- expansionary gap
- > decrease in G will shift PAE down and decrease level of actual output
8
Q
discretionary fiscal policy - changes in T
A
- discretionary fiscal policy can also the take form of changes to the level and types of taxes and transfer payments in the economy
- payments are not for the purchases of current goods and services, and are not part of G.
- > therefore these changes do not affect PAE directly
- affect level of disposable income (Y-T)
9
Q
three qualifications of fiscal policy
A
- fiscal policy and the supply side
- sustainability ( deficits)
- inflexible
10
Q
- supply-side effects of FP
A
- affects employment, GDP and aggregate supply
- G spending on public capital (e.g roads) play a role in the growth of potential gdp
- taxes and transfer payments play a role in affecting incentives and therefore economic behaviour
11
Q
fiscal sustainability
A
expansion -> deficits
- politicians can send this debt to future generations
- rules need to be created to prevent this
12
Q
FP is relatively inflexible
A
- lags
- recognition lag
- > time it takes to figure out that fiscal policy needs to start
- law making lag
- > time it takes to pass laws
- impact lag
- > time it takes from passing a tax or spending change to its effect
13
Q
FP and distribution of income
A
- manipulating tax manipulates distribution of income