Advanced Fiscal Policy

A set of vocabulary flashcards covering key concepts related to advanced fiscal policy, including mechanisms, theories, and implications for the economy.

Crowding out

The phenomenon where higher government spending leads to a decrease in private sector spending and investment.

Resource crowding out

Occurs when private sector funds are lent to the government, leaving less available for private investments.

Financial crowding out

Happens when government borrowing raises interest rates, making it costly for the private sector to invest.

Crowding in

A Keynesian concept suggesting that during a recession, government spending utilizes idle resources and increases aggregate demand without causing crowding out.

Automatic Stabilizers

Economic mechanisms that automatically counteract extremes in the business cycle, such as increased government spending during recessions.

Fiscal Drag

The phenomenon where inflation and earnings cause taxpayers to move into higher tax brackets, increasing government revenue without raising tax rates.

Ricardian Equivalence

The theory that consumers save for future tax increases that result from current government borrowing, limiting the effectiveness of expansionary fiscal policies.

Gordon Brown’s Golden Rule

The principle that government borrowing should finance long-term infrastructure investments, not current spending.

Laffer Curve

A theory stating that beyond a certain tax rate, increasing taxes can lead to decreased tax revenue due to reduced work incentives.

Balanced Budget Fiscal Multiplier

The idea that increasing government spending and taxes equally can have a positive net effect on GDP due to the multiplier effect.

Time lags in fiscal policy

Delays between government fiscal policy implementation and observable effects in the economy, which can render policies ineffective.

Budget Deficit

A situation that occurs when government spending exceeds its revenue, resulting in the need for future tax increases.

Multiplier effect

The economic principle that an initial change in spending can lead to a larger overall increase in economic activity.

Effectiveness of Fiscal Policy

Dependent on factors like consumer confidence, the state of the economy, and various external influences that impact Aggregate Demand.