4.5 Role of the State in the Macroeconomy Flashcards
(23 cards)
What are the three types of government expenditure?
Current Expenditure
Capital Expenditure
Transfer Payments
What is current expenditure?
This is spending on goods and services, which need constant renewing, as they are constantly consumed. This is for example of paying for the medicine and equipment used in hospitals.
What is capital expenditure?
This is spending on long term assets that can be reused. This is for example roads or schools.
What are transfer payments?
This is money governments give to individuals directly for welfare payments to ensure everyone can receive a minimum standard of living
What is the crowding out effect?
When governments want to borrow or utilize resources, as there is finite money and resources within the economy, it leads to a fall in available resources for private sector causing a reduction private sector activity. Free market economists believe that private sector is more efficient than public sector so this will lead to a worse allocation for resources
What is a progressive tax?
A tax which means that as incomes rise, a greater proportion of marginal income is spent on paying tax, income tax eg
What is a regressive tax?
When the proportion of marginal income paid for a tax decreases as incomes increase, VAT eg
What is a proportional tax?
Regardless of income, the same proportion of income is paid on tax
What does the Laffer curve show?
How the amount of tax revenue gained from the imposition of a tax, rises and then falls based on the tax rate
What is an automatic stabiliser?
Automatic stabilizers are methods that control fluctuations in national income, without any direct government intervention in the market. It uses taxation and welfare benefits.
What is discretionary fiscal policy?
The deliberate manipulations of government expenditure or taxation, to influence the economy.
What is the difference between national debt and fiscal deficit?
A fiscal deficit is when government spending exceeds tax revenue but national debt is the accumulation of fiscal deficits over a prolonged period of time
What is a cyclical deficit?
This is the difference between what a government would need to borrow at the peak of a boom and what it is borrowing currently
What is a structural deficit?
This is the amount of money a government must borrow at the peak of an economic boom.
What is the relationship between structural deficit and national debt?
The greater a countries structural debt, the greater its national debt is likely to be
What are factors affecting the fiscal deficit?
Stage of the trade cycle
interest rates (on government bonds)
Government objectives (if austerity is going on)
What factors affect national debt?
Interest rates (for servicing)
Political stability
Demographic Factors
Currency Strength
Financial institution credibility
What is the significance of national debt and fiscal deficits?
It leads to crowding out as the government may need money
It can cause interest rates to rise as governments fund spending by making bonds more attractive
It can cause inflation as government spending is a component of AD
It can lead to higher taxes to fund austerity measures
It can reduce credibility and make the countries credit rating fall
What policies can be used to reduce the fiscal deficit and national debt?
Decrease spending/Raise taxes
Promote growth (economic areas)
issue bonds
Default on debt payments (last resort)
What policies can be used to reduce poverty?
Develop human capital
Diversify the economy
Boost economy growth
Grow tourism (only some countries can)
Create jobs
What is transfer pricing?
This is a tax avoidance scheme where they try to move their profits into a country with a low tax bill meaning they can maximize their profits
Why is transfer pricing difficult to stop?
It requires international cooperation
What are problems policy makers face?
Inaccurate information
Risks and Uncertainty (not sure what will happen in the future)
External shocks
