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What are the main functions of the government in the public sector?
Preserve market competition, regulate monopolies, provide public goods, correct externalities, ensure equity, fight recessions, invest in strategic sectors.
What does the public budget record?
All revenues and expenditures of the public sector.
What are the two main types of taxes in government revenues?
Direct taxes (e.g. income tax) and indirect taxes (e.g. VAT, corporate taxes).
What constitutes government spending?
Government consumption on goods and services, purchases of goods and services, and transfers to the private sector.
What is the difference between a budget surplus and a budget deficit?
Surplus occurs when revenues exceed expenditures, while deficit occurs when expenditures exceed revenues.
How can the public budget deficit be financed?
Through monetization (central bank purchases), or selling public debt in bond markets.
What is the risk premium in public debt?
The difference between the interest rate paid by a risky bond compared to a risk-free bond.
Define expansionary fiscal policy.
A policy that involves decreasing taxes and increasing government spending to stimulate the economy.
What is the Keynesian view of business cycles?
Business cycles are driven by changes in aggregate spending.
What makes up the components of GDP?
Consumption, investment, government spending, exports, and imports.
Explain the consumption function in the Keynesian model.
C = C̅ + cYD, where C is total consumption, C̅ is autonomous consumption, c is the marginal propensity to consume, and YD is disposable income.
What does the aggregate demand equation Z represent?
Z = C + I + G, where Z is total demand for goods.
What is the equilibrium condition in the goods market?
Production (Y) equals demand (Z).
What is the spending multiplier effect?
An increase in autonomous spending leads to a more than one-for-one increase in equilibrium output.
What is meant by automatic stabilizers in fiscal policy?
Parts of the public budget that automatically respond to income changes, such as unemployment benefits.
How does disposable income (YD) relate to taxation?
YD = Y - T = Y(1 - t) + TR, where T is tax revenue and t is the income tax rate.
What could be a negative consequence of public debt?
It can lead to crowding out of private investment and increase the burden of debt repayment.
What is monetary policy?
Monetary policy refers to the actions of a central bank to control the money supply and interest rates to achieve macroeconomic goals.
What are the two main tools of monetary policy?
The two main tools are open market operations (buying/selling government bonds) and adjusting the discount rate (interest rate charged to banks).
What is inflation?
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
What is a recession?
A recession is a significant decline in economic activity across the economy, lasting more than a few months.
What is fiscal policy?
Fiscal policy involves government spending and taxation decisions to influence economic conditions.
What is the role of the central bank?
The central bank manages a country's currency, money supply, and interest rates, and often oversees monetary policy.
What is GDP deflator?
The GDP deflator is a measure of price inflation that reflects the changes in the price level of all new, domestically produced, final goods and services in an economy.
What are the main components of aggregate supply?
The main components include the total production output of goods and services in an economy at different price levels.
What is the significance of the Phillips Curve?
The Phillips Curve illustrates the inverse relationship between inflation and unemployment, suggesting a trade-off between the two.
What does it mean when an economy is at full employment?
Full employment occurs when all labor resources are being used efficiently, and unemployment is at the lowest sustainable level.
What is the purpose of government regulation in the market?
To ensure fair competition, prevent monopolies, and protect consumer interests.
How does the government correct externalities?
By imposing taxes or providing subsidies to influence the behavior of producers and consumers.
What role do public goods play in the economy?
Public goods, such as national defense and public parks, provide benefits that are shared by all and are not excluded from consumption.
How does strategic sector investment help the economy?
It fosters innovation and development in key industries that drive growth and enhance competitiveness.
What is the impact of crowding out in terms of public debt?
Crowding out occurs when government borrowing reduces private investment by raising interest rates.
