Econs - 4.2

Question 1

government budget - definition

Answer 1

refers to its financial plans in terms of planned revenues (mainly tax revenue) and expenditure (healthcare, education)

Question 2

budget surplus - definition

Answer 2

revenue > spending

Question 3

budget deficit - definition

Answer 3

spending < revenue

Question 4

reasons for government spending

Answer 4

• essential services (state education, housing, healthcare)
• redistribute income & wealth (welfare benefits & state pensions)
• correct market failure
• to pay interest on national debt
• influence economic activity (more jobs)

Question 5

tax - definition

Answer 5

government levy on income or expenditure

Question 6

reasons for taxation

Answer 6

• salaries & profits : taxes are used to redistribute income & wealth in the economy
• goods & services : increase selling price => can limit demerit products
• foreign goods/services (imports) : protect domestic firms from oversea rivals

Question 7

5 classification of taxes

Answer 7

1. direct tax
2. indirect tax
3. progressive tax
4. regressive tax
5. proportional tax

Question 8

direct tax

Answer 8

• passed to the government
• from income, wealth / profit of company or individuals

eg. income tax, corporation tax

Question 9

indirect tax

Answer 9

• collected by the seller (shop / business) when consumer buys goods / service
• seller passes it to the government

eg. VAT, GST, fuel duty

Question 10

progressive tax

Answer 10

• higher ability to pay = higher rate of tax
• the wealthier u are, the more u pay
  *eg. income tax, captial gains tax & stamp duty

Question 11

regressive tax

Answer 11

• higher ability to pay = lower rate of tax
• the wealthier u are, the less u pay
  eg. sales tax

Question 12

proportional tax

Answer 12

• same percentage of income paid no matter how much you earn

Question 13

6 principles of taxation

Answer 13

1. equitable (fair) - to make it justifiable
2. economical - should be cheap and easy to collect
3. convenience - encourage tax payers
4. certainty - tax payers pay with confidence
5. efficiency - achieve aims without any undesirable side effects
6. flexibility - need to flexible enough to adapt to change in the economic state

Question 14

who / what taxes impact

Answer 14

1. price and quantity
2. economic growth
3. inflation
4. business location
5. social behaviour
6. tax avoidance & tax evasion
7. distribution of wealth

Question 15

impact on price & quantity

Answer 15

• sales tax => high cost of production => supply curves shifts left => price charges increase => reduced quantity sold
• depending on PED of product this can reduce the amount of tax revenue for the government
• BASICALLY … more expensive things => people buy less

Question 16

impact on economic growth

Answer 16

• higher taxes => less disposable income (less spending) => slow downs growth
• if used correctly (using higher taxes to build public services) => can boost long term growth

Question 17

impact on inflation

Answer 17

• indirect taxes rise => cost-push inflation
• direct taxes => people spend less => inflation may fall (less demand)
• BASICALLY … more tax => more cost => higher prices

Question 18

impact on business location

Answer 18

• rates of corporation tax & income tax affects business costs
• lower rates => lower costs

Question 19

impacts on social behavior

Answer 19

• can be used to discourage harmful behavior & encourage good habits
• high taxes => encourage demerit goods

Question 20

impact on tax avoidance & tax evasion

Answer 20

• tax avoidance : legal - minimising payment of taxes (arranging finances smartly to pay less tax)
• ta evasion : illegal - act of not paying the correct amount of tax (lying or hiding income to not pay tax)

Question 21

impact on the distribution of wealth

Answer 21

• progressive : reduces inequality
• regressive : increase inequality

Question 22

fiscal policy - definition

Answer 22

the use of taxes and government spending to affect macroeconomic objectives such as economic growth & employment

Question 23

budget balance formula

Answer 23

budget balance = government revenue - government spending

Question 24

expansionary fiscal policy

Answer 24

• used during recession
• increase spending, decreased taxes
• boosts demand, job, and GDP

Question 25

contractionary fiscal policy

Answer 25

- used during inflation - decreases spending, increase taxes - reduces demand and slows prices

Question 26

effects of fiscal policy on government macroeconomic aims

Answer 26

1. economic growth - government capital expenditure on infrastructure helps to boost investment in the economy 2. low inflation -government can change taxes & their spending 3. employment - creates jobs when government does projects 4. healthy balance of payments - high taxes / lower government spending 5. redistribution of income - progressive taxes to reduce inequality, government spends to help poverty