Economics Module 5 Flashcards
What is the role of the government in the economy?
To support the economy at a local, national and international level
What are the three types of policy the government uses to manage the economy?
Fiscal, monetary and supply-side
What are the five main macroeconomic aims?
- Economic growth
- Prices
- Income distribution
- Balance of payments
- Employment
How does the government deal with conflicts between macroeconomic aims?
Trade-offs - accept less of one for more of another
What is fiscal policy?
It alters government spending or taxation in order to achieve optimal balance of the macroeconomic aims
What are the three budget possibilities?
- Deficit (spending > revenue)
- Surplus (Revenue > spending)
- Balanced (Taxes/spending equal)
What are reasons for taxation?
- Revenue for government spending
- Discourage certain activities
- Discourage imports (tariffs)
- Redistribute income
In what ways can taxes be classified?
- Direct/indirect
- Progressive/regressive/proportional
What are the qualities of a good tax?
Simple, fair, effective
What are the two types of fiscal policy?
- Discretionary (one-off change)
- Automatic stabilisers (mechanisms)
What is monetary policy?
The management of the quantity and price (interest) of money in order to balance the macroeconomic aims
How does the management of the quantity of money affect the economy?
- Quantitive easing - increase money supply, encourage spending, avoid recession
- Too much leads to hyperinflation
How does the management of the price of money affect the economy?
- Exchange rates kept stable, good for international trade
- In recession interest should be lowered (encourage borrowing)
- In hyperinflation interest should be raised (discourage borrowing)
What is supply-side policy?
Making the economy more productive by making the factors of production more efficient
What are examples of supply-side policy?
- Investment in education/training
- Limit supply of labour
- Deregulation of restrictions on business
- Incentives to work/invest
