Demand-side Policies Flashcards
Austerity
Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments.
Automatic stabilisers
Automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a recession.
Budget balance
The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G
Budget deficit
Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.
Budget surplus
Occurs when tax revenues exceed government spending. A surplus can be used to repay some of the national debt.
Central bank policy interest rate
Also known as the monetary policy rate, it is the official lending rate for loans set by a nation’s central bank e.g. the Bank of England or the European Central Bank.
Corporation tax
A tax on the profits made by companies, in the UK the main rate of corporation tax is 19% and is expected to fall to 18% by 2020.
Cyclical budget (fiscal) deficit
The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low.
Discretionary fiscal policy
Deliberate attempts to affect the level and growth of aggregate demand using changes in government spending, direct and indirect taxation and borrowing.
Direct taxation
Taxes levied on streams of income and profits such as income tax and corporation tax.
Exchange rate
Exchange rates are the price of one country’s’ currency in relation to another.
Exchange rate index
The trade-weighted external value of a currency.
Excise duties
Indirect taxes levied on specific goods, typically alcoholic beverages, tobacco and fuels.
Expansionary monetary policy
A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost aggregate demand, output and jobs – includes lower interest rates.
Expenditures witching policies
Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP.
Fine-tuning
Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates / taxation.
Fiscal austerity/Fiscal tightening
Fiscal austerity refers to decisions by a government to reduce the amount of borrowing (i.e. cut the size of a fiscal deficit) over time.
Fiscal deficit
When government expenditure is higher than the revenue from taxes in a given year.
Fiscal policy
A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.
Fiscal stabilty
Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending equal revenue.
Fiscal stimulus
Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity.
Global financial crisis
A severe world-wide economic financial crisis beginning with the collapse of the investment bank Lehman Brothers on 15/9/2008 and resulting in bail outs and other fiscal measures to prevent the collapse of the world financial system. The crisis caused a global economic downturn and the greatest financial crisis since the Great Depression of the 1930s.
