L3: Fiscal Policy
5 important questions on L3: Fiscal Policy
Perhaps the one thing most people can agree on is that governments are important actors in the economies of virtually all countries.
The government has a variety of powers - including regulating firms' entry into and exit from the industry, setting standards for product quality, setting minimum wage levels, and regulating the disclosure of information.
In macroeconomics, we study a government with general but limited powers.
The government can affect the macroeconomy through two policy channels.
- Name those two channels:
- Fiscal policy - Refers to the government's spending and taxing behaviour.
- Monetary policy - Refers to the behaviour of the nation's central bank, the Federal Reserve, concerning the interest rate.
Some items on the expenditure side of the government budget also automatically change as the economy changes.
Example:
During a recession, income tax receipts decline as incomes decline. This automatic decline in income tax revenues keeps disposable income and consumer spending from falling as much as they would without automatic stabilizers.
- Define the concept of automatic stabilizers:
- Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such way as to stabilize GDP.
- Explain why income transfer payments are Automatic stabilizers:
- Unemployment compensation reduces changes in people's disposable income. Their disposable income remains positive, although at a lower level.
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Automatic stabilizers.
- What the key factor to create a stabilizing impact?
- The key impact of these systems is the ability to mitigate changes in disposable income, consumption, and the equilibrium level of GDP.
If disposable income is prevented from falling as much as it otherwise would in a recession, the downturn will be moderated.
- Define Direct Expenditure Offsets:
- Direct Expenditure Offsets are actions on the part of the private sector in spending income that offset (compensatie) government fiscal policy actions.
Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset.
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