3.6 Demand Management: Fiscal Policy - DP IB Economics: HL

Flashcards covering key vocabulary and concepts related to Demand Management, Fiscal Policy, the Keynesian Multiplier, and an evaluation of Fiscal Policy based on the provided lecture notes.

Fiscal Policy

The use of government spending and taxation (revenue) to influence aggregate demand in the economy.

Expansionary Fiscal Policy

Government policies that generate economic growth by reducing taxes or increasing government spending to increase aggregate demand.

Contractionary Fiscal Policy

Government policies that slow down economic growth or reduce inflation by increasing taxes or decreasing government spending to decrease aggregate demand.

Government Budget

An annual presentation by the government detailing its projected income (revenue) and spending (expenditure).

Balanced Budget

The condition where government revenue equals government expenditure.

Budget Deficit

The condition where government revenue is less than government expenditure, requiring public sector borrowing.

Budget Surplus

The condition where government revenue is greater than government expenditure.

Public Sector Borrowing

The means by which a government finances a budget deficit.

Public Debt

The total accumulation of past public sector borrowing.

Sources of Government Revenue

Mainly include taxation, the sale of goods/services by government-owned firms, and the sale of government-owned assets (privatisation).

Direct Taxes

Taxes imposed on income and profits, paid directly to the government by the individual or firm (e.g., income tax, corporation tax).

Indirect Taxes

Taxes imposed on spending, where the supplier is responsible for sending the payment to the government and may pass on a proportion to the consumer (e.g., VAT, excise duties).

Government Expenditure

A significant portion of aggregate demand, broken down into current expenditures, capital expenditures, and transfer payments.

Current Expenditures

Daily payments required to run the government and public sector, such as wages, salaries, and payments for goods/services like medicines.

Capital Expenditures

Investments in infrastructure and capital equipment, such as high-speed rail projects, new hospitals, and schools.

Transfer Payments

Payments made by the government for which no goods/services are exchanged, and which do not contribute to aggregate demand (e.g., unemployment benefits, subsidies).

Goals of Fiscal Policy

Aims to maintain low inflation, low unemployment, reduce business cycle fluctuations, create a stable economic environment for long-term growth, redistribute income, and control the net external balance.

Aggregate Demand (AD)

The total demand for goods and services in an economy at a given price level and in a given time period, calculated as C + I + G + (X - M).

Keynesian Multiplier

The ratio of change in real income to the initial injection that created the change, based on successive rounds of spending.

Multiplier Process

The phenomenon where an initial injection into the economy leads to a larger final increase in national income because one individual's spending becomes another's income.

Marginal Propensities

The proportion of the next dollar earned that a consumer saves, consumes, is taxed, or purchases imports with.

Marginal Propensity to Consume (MPC)

The proportion of additional income that is spent on consumption (ΔC / ΔY).

Marginal Propensity to Save (MPS)

The proportion of additional income that is saved (ΔS / ΔY).

Marginal Propensity to Tax (MPT)

The proportion of additional income that is paid in tax (ΔT / ΔY).

Marginal Propensity to Import (MPM)

The proportion of additional income that is spent on imports (ΔM / ΔY).

Multiplier Formula (based on MPC)

Multiplier = 1 / (1 - MPC).

Multiplier Formula (based on Withdrawals)

Multiplier = 1 / (MPS + MPT + MPM).

Time Lag (Fiscal Policy)

The delay between when a fiscal policy decision is made and when its desired effect on the economy actually occurs, which can be up to 18 months for the multiplier effect.

Automatic Stabilisers

Automatic fiscal changes that occur as the economy moves through stages of the business/trade cycle (e.g., progressive taxation, unemployment benefits), moderating fluctuations without explicit government action.

Crowding Out

A phenomenon where expansionary fiscal policy, particularly government spending, can result in a reduction of private sector spending or investment due to increased government borrowing raising interest rates.