Follow by Email

Sunday, 5 February 2012

Fiscal Policy video

Paj Holden's video on fiscal policy is a great material for revision or learning fiscal policy from scratch.

Key points/summary of topics explained

Fiscal policy - manipulating government spending and taxation levels in order to manage the level of AD in the economy.

Definition of AD (C+I+G+X-M)

In a weak economy (low AD), the government might consider loosening fiscal policy - lower taxes (boost consumption) and increasing government spending. Disadvantage of loose fiscal policy, if spending becomes too high, deficits rise, creating problems, such as the Eurozone crisis.

Explains the Euro crisis

Business cycle and output gaps

Note: The AD/AS diagram he uses shows the Keynesian LRAS (notes to come!)

Case Study: Greece

---> GDP growth of -6.6%

---> Budget deficit (2009) was 15% of GDP. In 2010, it was 11% of GDP and in 2011 it was 8% as a result of increased taxes and lower government spending (austerity measures). However the Greek government is still spending 8% more than revenues gained from taxation. There is also interest gained from the additional spending, demonstrating the importance of their fiscal constraints.

Quantitative Easing