Macroeconomics: Fiscal Policy Overview
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Questions and Answers

What defines a budget deficit?

  • Expenditures are equal to or greater than revenue
  • Expenditures < Taxes
  • Expenditures > Taxes (correct)
  • Expenditures = Taxes

Which view advocates for minimal government intervention in the economy?

  • Classical View (correct)
  • Keynesian View
  • Supply-Side Economics
  • Monetarist View

What is a potential result of excessive government borrowing as described in the content?

  • Increased private investment
  • Higher government surplus
  • Economic slowdown (correct)
  • Lower interest rates

What is the primary tool used by the Bangko Sentral ng Pilipinas (BSP) for monetary policy?

<p>Open Market Operations (OMO) (A)</p> Signup and view all the answers

How does monetary expansion occur according to the role of the BSP?

<p>BSP buys government securities (D)</p> Signup and view all the answers

Which of the following is NOT a function of the Bangko Sentral ng Pilipinas (BSP)?

<p>Sets national tax rates (C)</p> Signup and view all the answers

Which of the following statements about fiscal policy is true based on the provided content?

<p>Government should avoid intervention to let the economy fix itself (C)</p> Signup and view all the answers

What happens to the money supply when the BSP sells securities?

<p>It decreases (A)</p> Signup and view all the answers

What is one of the primary goals of macroeconomics?

<p>Sustainable Economic Growth (D)</p> Signup and view all the answers

Which market does fiscal policy primarily influence?

<p>Goods-and-Services Market (B)</p> Signup and view all the answers

Which type of tax system imposes higher rates on higher income?

<p>Progressive Tax (A)</p> Signup and view all the answers

What is the primary focus of monetary policy?

<p>Controlling the Money Supply (C)</p> Signup and view all the answers

Fiscal expansion is generally associated with which effect?

<p>Increased income (C)</p> Signup and view all the answers

Which of the following is a category of government expenditure?

<p>Economic Services (D)</p> Signup and view all the answers

What defines equity in taxation?

<p>Higher contributions from higher earners (A)</p> Signup and view all the answers

What happens during fiscal contraction?

<p>Decreased income (B)</p> Signup and view all the answers

What are the critical roles of health and education in development?

<p>They are both goals for improving quality of life and catalysts for growth. (B)</p> Signup and view all the answers

Why is increasing incomes alone insufficient to improve health and education?

<p>Income increases do not guarantee investments in children's education and health. (D)</p> Signup and view all the answers

What role does maternal education play in the health of children?

<p>Better-educated mothers typically raise healthier children. (A)</p> Signup and view all the answers

What does joint investment in health and education yield?

<p>Improved returns on investments in both sectors. (D)</p> Signup and view all the answers

What approach is essential for effective policy-making in addressing inequality?

<p>Analyzing poverty metrics and various inequality measures. (B)</p> Signup and view all the answers

How does education impact labor market dynamics?

<p>High-skill jobs lead to increased demand for higher education. (C)</p> Signup and view all the answers

What are the components of social benefits in education?

<p>Society-wide advantages like better health and productivity. (B)</p> Signup and view all the answers

What challenges do the education and health sectors face?

<p>Common market failures that require government intervention. (D)</p> Signup and view all the answers

What was a key characteristic of Mercantilism during the 16th-18th century?

<p>Emphasis on the value of precious metals (B)</p> Signup and view all the answers

Which economist is best known for the concept of Comparative Advantage?

<p>David Ricardo (D)</p> Signup and view all the answers

Which concept is associated with Thomas Robert Malthus?

<p>Malthusian Population Trap (D)</p> Signup and view all the answers

What is the primary focus of John Stuart Mill's concept of Utilitarianism?

<p>Quantifying consumer happiness (A)</p> Signup and view all the answers

What was a significant impact of the Industrial Revolution according to Malthus's views?

<p>Increase in population growth (A)</p> Signup and view all the answers

What economic principle did Alfred Marshall introduce?

<p>Marshallian Cross (B)</p> Signup and view all the answers

What motivated David Ricardo to enter politics?

<p>Regulations affecting his family business (C)</p> Signup and view all the answers

Which economist is noted for writing 'Principles of Economics'?

<p>Alfred Marshall (B)</p> Signup and view all the answers

What does the Headcount Index measure?

<p>The proportion of the population living below the poverty line (D)</p> Signup and view all the answers

What is a limitation of the Headcount Index?

<p>It fails to capture distributional sensitivity (A)</p> Signup and view all the answers

Which index reflects deprivation beyond income measures?

<p>Human Poverty Index (HPI) (A)</p> Signup and view all the answers

What does the Gini Coefficient represent?

<p>Degree of income inequality within a population (B)</p> Signup and view all the answers

In terms of income share, what does the Lorenz Curve illustrate?

<p>Proportion of income distribution across different population segments (A)</p> Signup and view all the answers

Which range of the Gini Coefficient indicates a highly unequal income distribution?

<p>0.50−0.70 (B)</p> Signup and view all the answers

Which factor is NOT typically included in the analysis of income distribution?

<p>Government policy (A)</p> Signup and view all the answers

What key relationship exists between poverty and inequality?

<p>They are interconnected but distinct issues (C)</p> Signup and view all the answers

Which of the following best describes a key feature of Mercantilism?

<p>Emphasis on accumulating state wealth through trade (D)</p> Signup and view all the answers

What is the primary argument Adam Smith made regarding state intervention in the economy?

<p>It tends to create monopolies and inefficiencies. (A)</p> Signup and view all the answers

What is the main idea behind David Ricardo's concept of Comparative Advantage?

<p>Trade is beneficial when countries specialize in producing goods at lower opportunity costs. (C)</p> Signup and view all the answers

What does the Malthusian Population Trap propose about population growth?

<p>Population growth will eventually exceed food supply, leading to crises. (B)</p> Signup and view all the answers

Which statement best illustrates Adam Smith's concept of the 'Invisible Hand'?

<p>Individuals pursuing their self-interest leads to collective benefit. (D)</p> Signup and view all the answers

In the context of trade, what do countries gain from engaging in it according to David Ricardo?

<p>The ability to produce goods at a lower opportunity cost compared to others. (C)</p> Signup and view all the answers

What was a common characteristic of state intervention during the Mercantilism period?

<p>Legislation favoring domestic industries over foreign ones. (D)</p> Signup and view all the answers

Which economist is known as the 'father of economics'?

<p>Adam Smith (A)</p> Signup and view all the answers

Flashcards

Fiscal Policy

Government policy that uses taxation and spending to control the economy.

Monetary Policy

Bangko Sentral ng Pilipinas (BSP) policy that controls the money supply and interest rates.

Fiscal Expansion

Increased government spending leading to higher national income.

Fiscal Contraction

Reduced government spending resulting in lower national income.

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Progressive Tax

Tax system where higher earners pay higher tax rates.

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Regressive Tax

Tax system where higher earners pay a lower tax burden (proportionately).

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Direct Tax

Tax paid directly by the individual, like income tax.

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Indirect Tax

Tax paid indirectly through a third party, like VAT.

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Budget Deficit

When a government's expenditures exceed its tax revenue.

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Budget Surplus

When a government's tax revenue exceeds its expenditures.

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Keynesian View

Economic theory advocating for government intervention to manage economic fluctuations.

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Classical View

Economic theory emphasizing minimal government intervention and reliance on self-correcting market forces.

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Crowding Out Effect

When increased government borrowing raises interest rates, making it harder for private businesses to borrow and invest.

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Open Market Operations (OMO)

The BSP's primary tool for controlling the money supply by buying or selling government securities.

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Treasury Bills

Short-term government debt securities with maturities of 30-360 days.

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Monetary Expansion

BSP buys government securities, increasing the money supply and lowering interest rates.

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Headcount Index

A measure of absolute poverty that calculates the percentage of the population living below the poverty line. It is calculated by dividing the number of people living below the poverty line by the total population.

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Total Poverty Gap (TPG)

A poverty measure that quantifies the total amount of income needed to raise all individuals below the poverty line up to that threshold. It indicates the overall income deficiency among the poor.

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Human Poverty Index (HPI)

A measure of poverty that goes beyond income to assess deprivation in key aspects of human well-being, including life expectancy, education, and economic provision. It measures the extent to which people lack opportunities and basic capabilities.

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Lorenz Curve

A graphical representation of income inequality. A perfectly equal income distribution would be shown as a diagonal line, while deviations from that line indicate levels of inequality.

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Gini Coefficient

A quantitative measure of income inequality derived from the Lorenz Curve. It ranges from 0 (complete equality) to 1 (complete inequality).

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Factor Share Distribution of Income

This examines how national income is distributed among the factors of production, such as labor, land, and capital. It investigates if income is fairly distributed based on individual contributions.

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Poverty and Inequality

These are two interconnected yet distinct concepts. Poverty refers to a lack of basic necessities, while inequality refers to the uneven distribution of resources and opportunities.

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Free Markets

In a free market, resources and incomes are theoretically allocated based on the contributions of the factors of production. This assumes that income is distributed fairly based on productive inputs.

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Health & Education as Development Goals

Both health and education are essential for improving quality of life in any society. Nations with strong health and education indicators are considered more developed.

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Health & Education as Growth Catalysts

Investments in health and education boost a country's productivity and economy. A healthy and educated workforce contributes to higher economic output.

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Joint Investments: Health & Education

Investing in one improves the returns on the other. Healthier individuals learn better, and educated people make healthier choices.

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Income Alone Isn't Enough

Simply increasing incomes may not translate to better health and education for children. Focus on policies that address the root causes.

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Maternal Education's Impact

Well-educated mothers tend to raise healthier children. They are better equipped to understand health needs and provide proper care.

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Market Failures in Education & Health

These sectors often face challenges that require government intervention. Examples include access to quality services and affordability.

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Educational Supply & Demand

The number of jobs requiring specific skills affects the demand for education. If high-skill jobs are plentiful, demand for higher education increases.

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Social vs. Private Benefits of Education

Social benefits include societal advantages like better health and productivity. Private benefits are personal gains like higher income and job security.

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Mercantilism

An economic theory emphasizing state wealth accumulation through precious metals, maintaining a positive balance of trade, and heavy state intervention in the economy.

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Positive Balance of Trade

A situation where a country exports more goods and services than it imports, resulting in a surplus of money flowing into the country.

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Invisible Hand

A metaphor describing how individuals pursuing their own self-interest unintentionally benefit society as a whole through the free market.

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Comparative Advantage

The ability of a country to produce a good or service at a lower opportunity cost compared to other countries, leading to specialization and trade benefits.

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Malthusian Population Trap

Theory suggesting population growth outpaces food supply, leading to famine, poverty, and societal checks like war and disease.

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What is the difference between mercantilism and the classical school?

Mercantilism advocates for state intervention and wealth accumulation through bullion, while the classical school emphasizes free markets and individual self-interest. Mercantilism favors protectionist policies, while the classical school promotes free trade.

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How does comparative advantage benefit countries?

By specializing in goods they produce most efficiently, countries can trade with others and obtain goods they produce less efficiently, resulting in greater overall wealth and welfare.

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What is the main criticism of the classical school?

It lacks adequate safeguards against market failures, such as monopolies, environmental degradation, and income inequality, which can harm individuals and social well-being.

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Classical School of Thought

A school of economic thought emphasizing free markets, limited government intervention, and individual liberty, with key figures like Adam Smith, David Ricardo, and Thomas Malthus.

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David Ricardo's Comparative Advantage

A concept suggesting countries specialize in producing goods or services where they have lower opportunity costs, leading to mutually beneficial trade.

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Comparative Advantage Example

A country can produce both wheat and cloth, but it's more efficient at producing wheat compared to another country. Both countries gain by specializing: one in wheat, the other in cloth, and then trading.

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Thomas Malthus's Population Trap

The theory that population growth outpaces resource growth, leading to poverty and crisis unless population growth is checked.

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John Stuart Mill's Utilitarianism

A moral philosophy where actions are judged based on their contribution to overall happiness or utility, maximizing well-being for the greatest number of people.

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Alfred Marshall's Supply and Demand

The foundation of Neoclassical economics explaining how prices are determined by the interaction of supply and demand, visualized in the Marshallian cross.

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Marginalism

A concept in Neoclassical economics that analyzes the additional utility or satisfaction gained from consuming one extra unit of a good or service.

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Study Notes

Macroeconomic Goals

  • Macroeconomic goals aim for sustainable economic growth, maintaining price stability, and ensuring employment stability
  • These goals are influenced by the goods-and-services market (Fiscal Policy), financial (money) market (Monetary Policy), and the labor market

Fiscal Policy Overview

  • Fiscal policy involves instruments used by the government
  • Managed by the Executive Department, approved by the Legislative Department
  • Focuses on government taxation and spending

Fiscal Policy: Government Expenditure

  • Fiscal expansion: Increased government expenditure leads to increased income
  • Fiscal contraction: Reduced government expenditure leads to decreased income
  • Categories of government expenditure include:
    • Economic services (infrastructure, agriculture, tourism)
    • Social services (education, health, social security)
    • Defense (national security, peace maintenance)
    • General public services (administration, public order)
    • Debt burden (interest payments on debts)

Fiscal Policy: Taxation

  • Types of tax systems:
    • Progressive tax: Higher income, higher tax rates
    • Regressive tax: Higher income, lower tax burden
    • Proportional tax: Same tax rate across all incomes
  • Types of taxes:
    • Direct tax (paid directly by the individual, e.g., income tax)
    • Indirect tax (paid indirectly through a third party, e.g., VAT)
  • Concepts in taxation include:
    • Equity (those earning more should contribute more)
    • Efficiency (precise collection)
  • Budget outcomes:
    • Budget deficit: Expenditures > Taxes
    • Budget surplus: Expenditures < Taxes
    • Balanced budget: Expenditures = Taxes

Fiscal Policy Effects

  • Keynesian View: Advocates for government intervention, recognizing that government intervention can have positive consequences, and that governments can curb consumer spending.
  • Classical View: Believes in minimal government intervention, asserting that the economy will correct itself in the long run and that government intervention is unnecessary.

Monetary Policy Overview

  • Monetary policies are used by central banks (e.g., BSP) to control the quantity of money, affecting interest rates
  • The Bangko Sentral ng Pilipinas (BSP) created under R.A. 7653
  • Ensures price stability for balanced economic growth
  • Functions of BSP include:
    • Control of money supply
    • Management of exchange rates and foreign reserves
    • Regulation of banking systems
    • Acts as the lender of last resort

Monetary Policy Instruments

  • Open Market Operations (OMO): Outright purchase/sales of government securities, and voluntary transactions with rates set by BSP.
  • Secondary Tools:
    • Reserve Requirements: Percentage of deposits that banks must hold.
      • Monetary Expansion: Reduced reserve requirements
      • Monetary Contraction: Increased reserve requirements
    • Interest Rates:
      • Nominal Interest Rate: Stated rate
      • Real Interest Rate: Adjusted for inflation
    • Exchange Rates:
      • Fixed exchange rate: Controlled by central bank.
      • Floating exchange rate: Determined by market supply and demand.
    • Rediscounting: BSP loans to banks using loan papers as collateral.
    • Printing Money: Expanding monetary supply.
    • Moral Suasion: BSP persuades banks to align goals with monetary goals.

Exchange Rate Systems

  • Fixed Exchange Rate: Central bank intervenes to stabilize the currency.
  • Floating Exchange Rate: Market-driven and self-correcting.

Poverty, Inequality, and Development

  • Topics include:
    • Poverty and inequality: Focus on unequal distribution of income and disparities in developing nations.
    • Dimensions of Inequality: Income and assets

Absolute Poverty

  • Definition: Minimum income level needed to meet basic necessities (food, shelter, clothing).
  • Poverty Lines:
    • International poverty line: $1.90/day (2011 PPP prices)
    • Local poverty line (Philippines): 2018 data(family of 5 needed 7,337/month for food, 10,481/month for food and non-food)
  • Poverty Incidence: 16.1% of Filipino families below the poverty line in the first semester of 2018

Measures of Absolute Poverty

  • Headcount Index (H/N)
  • Total Poverty Gap (TPG)

Additional Metrics

  • Average Poverty Gap (APG)
  • Normalized Poverty Gap
  • Average Income Shortfall (AIS)
  • Human Poverty Index (HPI)

Inequality

  • Measuring Inequality: Focuses on individual income levels (Personal Distribution of Income)
  • Size Distribution of Income
  • Lorenz Curve
  • Gini Coefficient

Key Insights on Poverty and Inequality

  • Poverty and inequality are interconnected but distinct.
  • Addressing inequality requires analysis beyond income and includes factors like health, education, and political participation.
  • Policy-making relies on understanding poverty metrics and inequality measures.

Education and Health

  • Central roles in development and growth.
  • Link between education and development
  • Link between health and development
  • Joint investments in education and health
  • Challenges in improving health and education

Why Increasing Incomes Alone Is Insufficient

  • Income increases don't always lead to significant investments in children's health and education.
  • Maternal education is critical
  • Market failures in health and education require intervention

Education and Development

  • Educational supply and demand, influenced by employment opportunities
  • Social vs. private benefits/costs
  • Human capital approach (initial investments in health/education increase future income)
  • Present Discounted Value (PDV)
  • Private and social returns

History of Economic Thought

  • Key schools of thought (Mercantilism, Classical School, Neoclassical School, Keynesian School)
  • Reasons to study economic thought:
    • Political Economy/Social Science, Cumulative View of evolution, Competitive View, and Contextual View.

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This quiz covers the essential aspects of macroeconomic goals and fiscal policy. It explores how government expenditure and taxation influence economic stability and growth. Understand the different categories of government spending and their implications for the economy.

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