Week 11 - fiscal policy Flashcards

1
Q

What is an automatic stabiliser?

A

gov spending or taxes that automatically increase or decrease with the business cycle. E.g. welfare payments are countercyclical and increase with falling output, raising G and increasing AD.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Discretionary definition

A

Gov takes action to change G or T to achieve its economic objective

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the gov purchase/tax multiplier

A

GPM = change in equilirium GDP/change in gov purchases or taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are policy time lags?

A
  • implementation lag
  • impact lag
  • recognition lag
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are political asymmetries?

A

Expansionary policy is typically more attractive politically and can be hard to unwind. Elected officials may opt for the best option politically rather than economically.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is resource crowding out?

A

situation where with full employment, an increase in G simply replaces private expenditure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is financial crowding out?

A

occurs when gov borrowing leads to higher interest rates, which discourages private investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Formula for gov budget constraint

A

Gov spending + transfers + interest repayments = taxes + new debt + change in money supply

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Why is a budget not always balanced?

A

maintaining a balanced budget each year may involve policies that may destabilise the economy - long-run fiscal solvency needs to be considered though.

Debt to fund long-run infrastructure makes sense, the problem arises when repayments are too burdensome (implies opportunity cost)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What happened in the GFC?

A
  • world equity markets contracted
  • world trade fell
  • interest rates were cut significantly
  • government went into deficit to stimulate the economy (opposite of Great Depression). This follows Keynesian thinking: in severe contractions, demand doesn’t respond normally so gov intervention is necessary
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What happened in the GFC in Australia?

A
  • Australia acted quickly in getting money to people and institutions that would spend it
  • nation building and jobs plan
  • spending and taxing directed to highest MPC groups
    such as tax bonus payments and spending to schools
  • spending happened quickly to prevent permanent sluggishness
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the intertemporal budget constraint?

A

measure of gov fiscal constraint over time

present value of spending + present value of debt and present value taxes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is ricardian equivalence

A

Argues fiscal policy won’t work as any increase in G has to be financed by higher taxes in the future. Rational agents will figure this out and cut back consumption in response to higher gov spending or cut in taxes. In only makes sense in the long run and real world evidence is limited

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the problem with a single currency?

A

You can’t expand aggregate demand by raising net exports. This happened in the Eurozone.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the level of debt limited to

A

Amount the gov can credibly be expected to pay, partly depends on GDP level. Can grow if GDP grows faster

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What happens when debt gets too high

A

lenders worry about the ability of the gov to repay and stop lending or charge higher - in which case the gov may print money leading to inflation or they default and declares it won’t repay certain debts or repay at less than face value