Lecture 16 - Fiscal and Monetary Policy

These flashcards cover key concepts from the lecture on fiscal and monetary policy.

What is the main goal of fiscal policy?

To control aggregate demand by altering government spending and taxation.

What are automatic fiscal stabilizers?

Tax stabilizers and benefits stabilizers that automatically adjust with economic changes.

What does discretionary fiscal policy involve?

Deliberate changes in fiscal policy to influence aggregate demand, such as changing government spending (G) or taxes (T).

What is a structural deficit?

A deficit that occurs even when the economy is at full potential output.

What are the key fiscal indicators for sustainability?

Public sector current budget surplus/deficit, primary surplus/deficit, and debt sustainability rules.

What is the Taylor rule?

A guideline for setting interest rates based on economic conditions, specifically the relationship between inflation and economic output.

How does a cut in taxes affect aggregate demand?

It increases disposable income, leading to higher consumption and thus increased aggregate demand.

What is the role of monetary policy?

To control the money supply and interest rates to influence economic activity.

What are some techniques central banks use to control interest rates?

Statutory base rates, operations in the discount and repo markets.

What are the challenges of controlling the money supply?

Issues like inelastic demand for loans and disintermediation can complicate monetary policy.

What is the significance of quantitative easing (QE)?

A non-traditional monetary policy tool used to stimulate the economy by increasing liquidity through asset purchases.

What are some market-oriented supply-side policies?

Reducing government spending, cutting taxes, and deregulation to enhance economic efficiency.

Why might government intervention be necessary according to interventionist policies?

To address under-investment, imperfections in the capital market, and cyclical investment problems.