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)</p> Signup and view all the answers

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

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

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

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

    What is one of the primary goals of macroeconomics?

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

    Which market does fiscal policy primarily influence?

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

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

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

    What is the primary focus of monetary policy?

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

    Fiscal expansion is generally associated with which effect?

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

    Which of the following is a category of government expenditure?

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

    What defines equity in taxation?

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

    What happens during fiscal contraction?

    <p>Decreased income</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.</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.</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.</p> Signup and view all the answers

    What does joint investment in health and education yield?

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

    What challenges do the education and health sectors face?

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

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

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

    Which concept is associated with Thomas Robert Malthus?

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

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

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

    What economic principle did Alfred Marshall introduce?

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

    What motivated David Ricardo to enter politics?

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

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

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

    What does the Headcount Index measure?

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

    What is a limitation of the Headcount Index?

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

    Which index reflects deprivation beyond income measures?

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

    What does the Gini Coefficient represent?

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

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

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

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

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

    What key relationship exists between poverty and inequality?

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

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

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

    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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    Description

    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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