Demand side policies - [2.6.2] Flashcards
(18 cards)
What is crowding out?
Higher Govt spending causes an equivalent fall in private sector spending and investment
What is Expansionary fiscal policy?
Gov seeking to increase AD through higher Gov spending and lower taxation
What is national debt?
Uk national debt total amount the government owes to the private sector and other purchases of UK gilts.
What is progressive tax?
Imposing lower tax rate on low income earners and higher on high income earners
What is discretionary fiscal policy?
Discretionary fiscal refers to policies which are decided and implemented by one off policy changes made by the government
What is Automatic fiscal policy?
Tax and spending stabilisers that slow down a in AD when the economy enters a recession and restrains AD when the economy speeds up
What is the fiscal stance?
A neutral fiscal stance is shown if the government run a balanced budget.
A reflationary fiscal stance happens when the government run a budget deficit.
Reflationary involves using gov spending and taxation to stimulate economic activity and combat deflation during a period of economic slow down or recession. Like tax cats more govt spending
A deflationary stance happens when govt run a budget surplus
Deflationary known as contractionary aims to reduce AD by decreasing gov spending and increasing taxes.
What is the problem with increase govt spending during full employment?
Reduced ability for growth, When the economy is at maximum potential output gov increasing spending shifts employment from one area to another.
Known as crowding out
What is the impact of increased govt spending during a recession?
Increased potential for GDP
Creating jobs employment rises increase consumption and potential for the multiplier effect.
What is a fiscal multiplier?
When the ripple effect of a multiplier is brought from increase govt spending.
What makes an ideal govt stimulus package
Timely - takes a number of years to agree the plans for spending by the government. Most govt spending is not discretionary cannot be easily changed
Targeted - Unemployed may not have the skills needed for the work that the government is paying for so the spending does not have a direct impact on unemployment
Temporary - The extra govt spending is only likely to be a small % of GDP is one year so does not have a big impact on overall AD
What factors effect the effectiveness of fiscal policy?
How many jobs are created from additional spending
Will tax cuts lead to additional consumer spending
Will spending cause inflationary pressure in the economy
Which group will benefit the most
What are the targeted areas of govt spending?
Increased govt spending focus on benefits, public sector jobs or capital spending
How does this target spending affect AD?
Poorer people have a high propensity to consume so consumption will rise
A large % of workers have public sector jobs so impacting consumption
Capital investment can create jobs and lead to a multiplier effect on consumption.
What is direct tax?
Direct tax is levied on income, wealth and profit. Direct taxes include income tax, inheritance tax national insurance contributions and capital gains and corporation tax
What are indirect taxes?
Indirect taxation are taxes on spending such as excise duties on fuel cigarettes and alcohol and VAT on many different goods and services.
How do the different direct and indirect tax change impact AD?
Income tax - Lower income tax will increase disposable income and therefore increase demand.
Corporation tax - higher corporation taxes will reduce business investment through greater costs.
Tariffs - Taxation of imports will reduce the BOP deficit by increase the prices of imports.
National insurance - Higher national insurance will reduce labour demand through greater costs for firms
VAT - Higher VAT will reduce consumer spending through greater prices
Tax breaks for research - Higher taxation will reduce business R&D spending because of lack of incentive.
What are the evaluations of fiscal policy?
How is the spending financed - Depends on how govt spending is financed. If through higher taxes than this will counter-balance the higher spending little change in AD.
Crowding out - Economy close to full capacity, high Govt spending can lead to crowding out.
Inefficiency of govt spending - Some free market economics argue govt spending has potential to be inefficient compared to private sector.
State of economy - Impact of govt spending depends on state of economy if close to full capacity then higher govt spending causes inflationary pressure and little change in GDP.
