Fiscal policy and public debt

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  • Created by: charlie
  • Created on: 03-05-16 15:53
LA debt CAUSES
oil supply cut (war) / petrodollar recycling / loans on consume / Volcker Era (IR inc = infl dec)
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LA debt EFFECTS
unemployment / huge debts / Mexico default 1982 $82bn
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LA debt HELP
IMF + US commercial banks / restructuring / money to pay loan interest / Austerity measures (cuts/rises) / INC GROWTH: comparative adv/ devalue currency
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Sovereign debt CAUSES
housing bubble in US credit no longer available (no more borrowing) / countries not admitting problems / one monetary but many different fiscal policies /
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Sovereign debt EFFECTS
mass budget deficits / Greece (113% limit 60% in EU)
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Sovereign debt HELP
IMF + Germany / bailout EU stability mechanism €500Bn / Germany demanded strict Austerity measures (cuts/rises) / need fiscal union as well / INC GROWTH: comparative adv / FDI / backdoor devaluation
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Crisis' similarities
Both caused by negative external shock
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Crisis' differences
type of external shock / IR trend / debt accumulation (public/private)
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expansion fiscal policy
inc AD through tax reductions/ gov spending
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contractionary fiscal policy
dec AD through tax increases/ less gov spending
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history of fiscal policy
1930 lassiez-faire / post depression pushed more active gov / pre recession markets allocated G+S / post recession active fiscal policy
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fiscal help - Economic stimulus act 2008
tax rebates (money paid households) + tax incentives to businesses
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fiscal help - American recovery - reinvestment act 2009
tax credit / business incentives / aid unemployment / gov spending on infrastructure
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Keynes theory
gov should spend to prevent deep recession
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Haynes theory
gov shouldn't intervene = free markets
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G
gov consump and investment
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T
taxes (minus transfers= aid/subsidies)
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D
net gov debt
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Y
GDP
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g
growth rate of GDP
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r
real interest rate
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i
nominal interest rate (exogenous and constant)
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π
inflation rate
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3 public sector measures
Income side (how much through sector) / User side (how much used by sector) / Production side (how much produced by sector)
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2 ways to run a deficit
Increase taxes / Borrow from domestic or foreign investors
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debt accumulation (no growth): equation
.
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debt accumulation (no growth): increasing
.
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debt accumulation (no growth): stabilising
.
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debt accumulation (no growth): explosive
.
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debt accumulation (growth): equation
.
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debt accumulation (growth): increasing
.
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debt accumulation (growth): stabilising
.
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debt accumulation (growth): explosive
.
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debt accumulation example EU
1960's g>r / 1970's lower growth but r-g
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Ways of stabilising debt: Austerity measures
External (exports inc/ imports dec/ tariffs + quotas/ public wage cuts + pensions) Internal (budget cuts/ inc tax/ privatisation)
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Why austerity measures didn't work
multiplier was wrong (GDP change:£1 inc spending) / not focused on growth / citizens reluctant to cuts / less spending = less tax revenue
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Ways of stabilising debt: Growth focus
inc D/Y denominator in long run: comparative adv (LA exports/ EU manufacturing) / devalue or backdoor currency devaluation / FDI inc
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Default: debt restructuring through 'HAIR CUTS'
bond original value reduced, request more time to pay = reduced present bond value
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Richardian Equivalence
methods of financing expenses by gov irrelevant (vicious circle) / gov cuts tax = deficit inc = debt inc = tax inc = spending dec (public save to pay taxes)
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Other cards in this set

Card 2

Front

LA debt EFFECTS

Back

unemployment / huge debts / Mexico default 1982 $82bn

Card 3

Front

LA debt HELP

Back

Preview of the front of card 3

Card 4

Front

Sovereign debt CAUSES

Back

Preview of the front of card 4

Card 5

Front

Sovereign debt EFFECTS

Back

Preview of the front of card 5
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