Fiscal policy
| English | Chinese | Pinyin |
|---|---|---|
| fiscal policy | 财政政策 | cái zhèng zhèng cè |
| budget deficit | 预算赤字 | yù suàn chì zì |
| budget surplus | 预算盈余 | yù suàn yíng yú |
| expansionary | 扩张性 | kuò zhāng xìng |
| contractionary | 紧缩性 | jǐn suō xìng |
| multiplier | 乘数 | chéng shù |
| marginal propensity to consume | 边际消费倾向 | biān jì xiāo fèi qīng xiàng |
| crowd out | 挤出 | jǐ chū |
Spending and taxing to steer the economy
- When a recession hits, governments can spend more and tax less to revive demand. That's fiscal policy 财政政策 — the budget as a lever.
- It works through government spending (G) and taxation (T), two big slices of aggregate demand.
The government budget
- A budget deficit 预算赤字 = spending exceeds tax revenue (the government borrows).
- A budget surplus 预算盈余 = tax revenue exceeds spending.
- Expansionary 扩张性 fiscal policy (more G, lower T) boosts AD; contractionary 紧缩性 (less G, higher T) restrains it.
Expansionary fiscal policy (higher G or lower T) shifts AD right, raising real GDP — and, along an upward AS, the price level.
Fiscal policy shifts AD
Government spending and taxes move aggregate demand (AD). Drag AD to see real output and the price level change.
A budget deficit occurs when:
Spending > revenue → the government borrows → a deficit.
Expansionary fiscal policy involves:
More G and/or lower T raises AD — that's expansionary fiscal policy.
The multiplier 乘数
- A change in spending has a multiplied effect: the initial spend becomes someone's income, which they re-spend, and so on.
- where MPC is the marginal propensity to consume 边际消费倾向.
Worked example. If MPC = 0.8, the multiplier $= \dfrac{1}{1 - 0.8} = \dfrac{1}{0.2} = 5$ — £1bn of spending raises GDP by £5bn.
Expansionary policy shifts AD right, raising output and prices
The fiscal multiplier, round by round
Set the MPC to 0.8 like the worked example — each spending round is MPC times the last, and the total settles at k × the injection.
If the marginal propensity to consume (MPC) is 0.8, what is the multiplier = 1/(1 − MPC)?
1 / (1 − 0.8) = 1 / 0.2 = 5.
The multiplier equals 1 divided by (1 − ______).
Multiplier = 1/(1 − MPC).
Drawbacks
- Deficits add to government debt; time lags delay the effect; and big spending can crowd out 挤出 private investment.
Heavy government borrowing can crowd out private investment.
Government borrowing can raise interest rates and reduce private investment — crowding out.
You've got it
- fiscal policy = government spending and taxation; deficit = spend > tax
- expansionary (more G, less T) shifts AD right; contractionary restrains AD
- the multiplier $= \dfrac{1}{1 - MPC}$ magnifies a change in spending