class 9- Fiscal policy and the Economy. (copy)

Why does the GDP fluctuate?

• due to consumption and investment changes/ decisions.

How do governments stabilize the economy?

• spending during downturns → improve household consumption and business investment.

  • financed through debt or savings.

• Automatic stabilizers → tax redistrubution from rich to poor jurisdictions.

become the first spenders → jump-start consumption and investment.

What are the 3 fiscal policies?

• MONETARIST

  • should just accept poverty and wait for investors to come to the rescue.

• KEYNESIAN:

  • demand management → promote consumption by government spending.

• POST KEYNESIAN:

  • Supply managment

  • strategic investments in infrastructure and critical industries.

What are the 2 parts of Agregate Consumption?

• autonomous consumption:

  • fixed costs determine spending

• Consumption dependent on current income.

→ Marginal propensity to consume.

What is the MPC?

• marginal propensity to consume.

  • poor households → large MPC:

    • sitimulus money gets spent quick.

  • wealthier households → smaller MPC.

    • dont need to spend straight awy.

What is the doods market equibrilum?

Y= AD (agregate demand)

What is the multiplier process?

fall in investment → fall in AD → lower output and income → further fall in demand and income → new equilibrum.

What is target wealth?

= the level of wealth that a household aims to hold, based on its economic goals and expectations

What are precautionary savings?

= an increase in saving to restore wealth to its target level → drops consumption.

What effect does owning a house have on consumption?

• change in household wealth → home equity.

  • morgage intrest rates can change.

What do firms investement decisions depend on?

• expected return on investment

• interest rate.

How can governments counteract the AD from private sector?

• FISCAL STIMULUS.

  • cutting taxes

  • increase government consumption → increase AD

  • including infrastructure investment.

What is the Austerity policy?

= reinforce a recession by further reducing AD.

• “shock therapy” to attract investors once prices drop.

Why does the government borrow?

• primary budget deficit → gap between spending and revenue.

• Government debt → repaid bonds (matured)

Whatd ies government borrowing depend on?

• size of national economy.

  • debt-to-GDP ratio.

Who can fund government soverign debt crisises?

• IMF:

  • bilateral loans → lower interest rates.

  • broker debt forgiveness and debt restructring to reach debt sustainability.