Return to original document

PSNCR - Worksheet

There is one worksheet available about the Public Sector Net Cash Requirement. The worksheet looks at what determines the value of the PSNCR and how it changes. It then goes on to suggest some experiments with the Virtual Economy model to see how it reacts to different policy changes.

Step 1 - The PSNCR cycle

The economy tends to follow a cyclical pattern of growth with boom periods and periods of lower growth or recession. This is known as the trade cycle.

In the table below, fill in what you would expect to be happening to the PSNCR and other economic variables given in a time of boom and recession:

Economic growth	Unemployment (High or low?)	Inflation (High or low?)	PSNCR (High or low?)
Boom / High growth
Recession / negative growth

In the sentence below delete as appropriate the terms in italics, to show the effect on the PSNCR of the trade cycle.

If there is a recession in the economy, then this will lead to unemployment rising / falling. This means that the government will have to pay out more / less in benefits. This increases / reduces their level of expenditure. At the same time the higher / lower level of unemployment means more / less income being earned in the economy. This means the government receives less / more in income tax. The lower / higher unemployment will also mean less / more spending in the economy. This will mean the government receives more / less in indirect taxes. Overall the recession has caused the PSNCR to fall / rise.

These changes will happen automatically. Use the government expenditure theory section to find out definitions of the following terms:

Automatic fiscal policy

|

Discretionary fiscal policy

|

Step 2 - Demanding borrowing?

The PSNCR is determined by the level of government expenditure and taxation. Since both of these have an effect on aggregate demand, it is clear that the value of the PSNCR will also affect aggregate demand.

Fill in the table below to show the effect of changes in the PSNCR on the rest of the economy.

	Aggregate demand (higher or lower?)	Economic growth (higher or lower?)	Inflation (higher or lower?)
An increase in the PSNCR?
A decrease in the PSNCR?

Now try testing these policies on the model. Go to the model and try the following policies:

• Increase government expenditure by 10%
• Cut the basic rate of taxation by 2%

Note the effects on the economy in the table below:

Year	2000		2001		2003		2005		2008
	Before policy change	After policy change	Before policy change	After policy change	Before policy change	After policy change	Before policy change	After policy change	Before policy change	After policy change
Growth (GDP %)
PSNCR
Inflation (%)

Have the effects been as expected? If not, why not?

|

Step 3 - PSNCR - does size matter?

What problems do you think a large PSNCR may cause?

|

Different groups of economists have different views on the way fiscal policy should be used in the management of the economy. Use the library (3rd floor) to find out how the following economists would use fiscal policy:

Classical economists

|

Keynesian economists

|

Step 4 - Anything Gordon can do, you can do better?

The Virtual Economy model gives forecasts for what is expected to happen over the next 10 years. Go to the model and see if you can balance the PSNCR better than the forecasts, using just the levels of government expenditure and taxation.

What policies did you use?

|

How successful were they? What problems are there in trying to use fiscal policy as the main tool of economic management?

|