Policy Trade-offs Flashcards

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What is a policy trade-off in fiscal policy?

It is when a tax or spending choice helps one goal. But it makes another goal harder to reach.

How can higher government spending create a trade-off between unemployment and inflation?

It raises demand so more people get jobs. But prices can rise faster, causing higher inflation.

What trade-off can a cut in income tax create for the budget balance?

It can boost spending and growth. But it cuts tax revenue, so the budget deficit may rise.

What is the trade-off between boosting growth now and public debt when the government spends more or cuts taxes?

Output and jobs can rise now. But borrowing often rises too, adding to public debt.

How can expansionary fiscal policy affect the trade balance?

Higher demand leads to more imports. So the trade deficit can widen.

What is crowding out in fiscal policy?

Extra government borrowing can make it harder or more expensive for firms to borrow. So private investment falls.

What trade-off exists between better public services and the tax burden?

More spending can improve health, schools, and transport. But it may mean higher taxes now or later.

What is the trade-off when a government cuts spending or raises taxes to reduce the deficit quickly?

The deficit can fall. But growth may slow and unemployment may rise in the short term.

Why can cutting capital (investment) spending be a trade-off?

It saves money now. But it can harm future growth by reducing spending on roads, schools, and technology.

What trade-off can arise from using taxes and benefits to reduce income inequality?

Incomes can be fairer. But high taxes may reduce incentives to work, save, or start a business.

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