4.5 role of the state in the macroeonomy Flashcards
(39 cards)
why does the government spend money
It is used for macroeconomic
management to control AD and achieve macroeconomic objectives: economic growth, low and stable inflation, balanced current account and low unemployment.
what is capital government expenditure
Capital government expenditure is spending on investment goods such as new roads, schools and hospitals which will be consumed in over a year
what is general government final consumption
General government final consumption is spending on goods and services that will be consumed within the next year, such as public-sector salaries.
what are transfer payents
Transfer payments are government payments for which there is no corresponding output, where money is taken from one group and given to another, for example
benefits and pensions.
why do poorer countries governments not spend as much
This is because poorer countries tend to have a lower tax revenue , due to avoidance, inefficiency at collecting and a smaller amount of wealth to tax.h
why do richer countries governments spend more
citizens in higher income countries demand more services from their governments ;
why did the global financial crisis lead to increased government expenditure
The Global Financial Crisis led to huge increases in government spending as governments had to increase welfare payments and some governments used taxpayer money to bail out the banks.
positive impacts of government expenditure on productivity and growth
provide the infrastructure, such as roads, necessary for the economy to
run efficiently.
Education creates the human capital necessary for growth whilst the healthcare system reduces the number of days workers lose from serious illness
Through spending, the government can create a multiplier effect and this can be focused on areas of the country with high unemployment, creating growth.
negative impacts of government expenditure on productivity and growth
Free market economists argue that government spending is wasteful and causes inefficiency
positive effects of government spending on living standards
Government spending can cause large improvements in living standards. The
government corrects market failure and provides public goods , which improves social welfare.
they reduce absolute poverty by providing benefits and basic goods, such as education and healthcare.
negative effects of government spending on living standards
There is some debate about how much the government can contribute to improved
living standards. It is argued that the government will be inefficient at providing goods and services and will have a negative disincentive impact on workers, meaning that
output overall is reduced and so living standards fall.
It can be argued that the government suffers from the principal agent problem since they make decisions on behalf of the people and individuals may have spent that money differently
what is crowding out
The crowding out view is that a rapid growth of government spending leads to a transfer of scarce productive resources from the private sector to the public sector where productivity might be lower. It can lead to higher taxes and interest rates which then squeezes profits, investment and employment in the private sector.
effects of government spending on crowding out
higher interest rates. This will discourage firms from investing and individuals from buying on credit.
limited number of resources in the economy means that for every resource used in government spending, there are less resources available for the private sector.
government spending effect on equality
Spending should increase equality as it leads to redistribution and helps to provide a minimum standard of living for the poorest in society. It ensures everyone has
access to basic goods, such as education and healthcare, which will help to give them a fair start in life.
what is tax used for
Tax is used to pay for the number of goods and services that the government provides .
On top of this, tax can be used to correct market failure at a microeconomic level and to manage the economy and redistribute income at a macroeconomic one.
what is a progressive tax
example
Progressive tax is where those who are on higher incomes pay a higher marginal rate of tax; they pay a higher percentage of their income on tax. Direct taxes tend to
be progressive, for example income tax
what is regressive tax
example
Regressive tax is where the proportion of income paid in tax falls as the income of the taxpayer rises. Those on higher incomes pay a smaller percentage of their
income on the tax.
example is VAT
what is proportional tax
Proportional tax is where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes e.g. 10% of income is spent on tax, regardless of income.
what does the Laffer curve show
The Laffer curve shows that a rise in the tax rate does not necessarily increase tax revenue. If people were taxed at 100%, they would not do any work and this means that tax revenue is 0 at both 0% and 100%.
progressive tax system on equality
A progressive tax system will increase the equality of income distribution as more money is proportionally taken from the rich than from the poor
regressive tax system on equality
. A regressive one will
decrease income equality. Since direct taxes tend to be progressive and indirect taxes regressive, a move from indirect to direct taxes will improve equality.
rise in tax effect on AD
A rise in direct taxes will reduce the level of disposable income an individual has, which will cause a fall in their spending and thus a fall in AD. It could also cause a fall in leftover profits for businesses and therefore a fall in investment.nd
indirect tax effect on inflation
Indirect taxes, particularly VAT, often cause cost push inflation.
increase in taxes effect on trade balance
A rise in taxes will decrease income and therefore decrease consumption,
theoretically this will also mean consumers spend less on imports . Imports in the UK have been found to be highly income elastic. As a result, the trade balance will improve in the short run.l
