270). Expansionary fiscal policy raises interest rates, whereas contractionary fiscal policy lowers the rates. The way that a person can track the policy that is recommended, is by looking at the output. If it has increased, the price level of such commodity is to rise as well. When there is a larger demand for more expensive commodities, the demand for money increases and the cost to borrow follows.
olEvaluate the case for cutting public expenditure rather than raising taxes as a means of reducing fiscal deficits. (30) A fiscal deficit is when the government spends more than it receives in tax revenue. There are many benefits of cutting expenditure rather than increasing taxes. Firstly this will avoid any tax evasion and avoidance. This is because when taxes are increased a smaller amount of income is retained giving people the incentive to declare lower incomes to the HMRC so that they fall into a lower tax bracket.
Proponents of the notion of a "political business cycle" suggest that: A. The standardized budget is a better indicator of the state of the economy than the actual budget B. Cyclical swings in the economy are produced by the inherent instability found in capitalist economies C. A possible cause of economic fluctuations is due to the use of fiscal policy for political purposes D. There is a tradeoff among goals that tends to make the economic policies of state and local governments procyclical 19. One of the timing problems with fiscal policy is an "operational lag" that occurs between the: A. Beginning of a recession and the time that it is recognized that the event is occurring B.
This does not mean that the government will not invest in educational programs; this just means that the investments from the fiscal policy will be less than compared to infrastructure. Four key elements that were utilized in the simulation and emphasized in the lecture were inflation, recession, unemployment rates, and inflation tax. By inflation we can describe the rapidly increase of prices in the, Erehwon, economy and the decline of salaries, another manner to describe inflation can be the rapidly rise of prices and how incomes have stayed the same, making the consumers purchase less items for the same amount of money or more than before (about.com). Recession can be described as the GDP growth goes negative over a period of two or more consecutive quarters; in addition, current unemployment rates, consumer confidence, and spending levels are all part of the factors taken into consideration when dealing with a recession (recession.org). The factors which contribute to a recession and sometimes a depression are: increase in cost of production, higher costs of energy, and the national debt among many others.
Exam 1 Review – FI 301-321 Fall 2014 Chapter 1 what is a surplus unit? Deficit unit? Surplus unit is that participants who receive more money than they spend, such as investors. Deficit unit is participants who spend more money than they receive, such as borrowers. Equity vs. debt securities Debt securities represent debt incurred by the issuer.
This cycle continues on and helps support a normal, functioning economy. When the Great Depression hit, people's natural reaction was to hoard their money. Under Keynes' theory, this stopped the circular flow of money, keeping the economy at a standstill. Keynesian economists were much more tolerant of “moderate” inflation than were the traditional liberal economists. They often claimed that there was a trade-off between unemployment and inflation.
There were certain benefits to his approach, such as his “tax and spend” policies. The U.S. has been inclined to spend more money than it has taken in, which is indicative of the national debt at the beginning of the 21st century. The budget for the majority of the 21st century has a consistency of deficits and economic crisis. In 2008, the economy entered a bad recession resulting in high oil and food prices, and vast amounts of bankruptcies and foreclosures. The federal government attempted to fix the economic problems through costly economic stimulus packages, which only resulted in further national debt.
When the country has a surplus, the more the country retains of its total output, the more tax payers retain of their income. When the country has a budget deficit it devalues the GDP, as money earned from what the country produces will be lost in paying back the deficit. If a country has a GDP of $1 trillion and a budget deficit of $200 billion, the country only gains $800 billion on its GDP. Debt is similar to a deficit except debt builds up over the years and grows with each yearly deficit. The problem with debt is there is an interest payment that must be paid.
In the short-run, a larger government deficit would cause an increase to “total planned expenditures and higher aggregate demand “(Miller, 2012, pg. 308). The real GDP equilibrium would rise above the full-employment level because of deficit spending. The price level would also increase. In the long-run, the economy “adjusted to changes in all factors” and the “equilibrium real GDP remains at its full-employment level” even though the increase in the budget deficit causes a rise in the aggregate demand.
Deficit spending - Definition Like other institutions, governments operate on a budget -- or try to do so. When the expenditures of a government (its purchases of goods and services, plus its tranfers (grants) to individuals and corporations) are greater than its tax revenues, it creates a deficit in the government budget. When tax revenues exceed government purchases and transfer payments, the government has a budget surplus (as in the late 1990s in the United States). Following John Maynard Keynes, many economists recommend deficit spending in order to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases create a market for business output, creating income and