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Macroeconomics Y1 > F: Demand Side policies > Flashcards

F: Demand Side policies Flashcards

1
Q

according to the specification

What does fiscal policy involve?

A

The use of government spending, taxation and the budget balance?

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2
Q

Budget (fiscal) deficit

A

When government spendng exceeds tax revenue

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3
Q

Structural budget deficit

A

Budget deficit at full employment

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4
Q

Cyclical budget deficit

A

budget deficit in a recession

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5
Q

national debt

A

total STOCK of governemtn debts over time

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6
Q

Fiscal surplus

A

when government spending is less than tax revenue

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7
Q

Direct taxation vs Indirect taxation - what are they?

A

Direct taxes - WIP; wealth, income and profits
Indirect taxes- Expenditure

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8
Q

What are key aspects to consider with fiscal policy?

A
  1. Financing governement spending
  2. Changing the distribution of final income and wealth
  3. Providing a welfare state safety-net
  4. Managing the economic cycle
  5. Improving long-run competitiveness
  6. Tackling important market failures
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9
Q

How is government spending financed?

A

Collection of taxation and borrowing the shortfall (with a deficit)

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10
Q

Resource/Current Spending?

A

Spending on day-to-day items that are used up (e.g salaries of civil servants). Short-term expenditure made each year.

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11
Q

Capital spending ?

A

Spending on investment (e.g building new infrastructure). Long-term expenditure which does not have to be renewed each year

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12
Q

Examples of current spending

A
  • Salaries of NHS employees
  • Drugs used in healthcare
  • Road maintenance budget
  • Army logistics supplies
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13
Q

Examples of capital spending

A
  • Construction of new motorways and bridges
  • New equipment for NHS
  • Flood defence schemes
  • Extra defence equipment
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14
Q

Why is government spending significant?

A
  • Can help to achieve greater equity in society
  • Improves provision of merit and public goods
  • Is a key component of Aggregate Demand
  • Can have a regional economic impact
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15
Q

What are the 4 key areas of government spending?

A
  1. Public goods proviion
  2. Merit goods provision
  3. Debt servicing costs
  4. Welfare expenditure
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16
Q

How can we compare the two types of demand management?

A

Expansionary fiscal policy refers to either increases in G, reductions in T or both; AD shifts rightward
Contractionary fiscal policy refers to either decreases in G, increases in T or both; AD shifts leftward

17
Q

What are some bad effects of expansionary fiscal policy?

A
  1. Demand pull inflation and current account deficit - trade offs
  2. Worsening on government finances
  3. Crowding out effect
  4. X-inefficiency
  5. Time lags
18
Q

How can we begin to evaluate expansionary fiscal policy

A
  1. Size of the output gap
  2. Size of the multiplier (so thinking of MPC’s effect)
  3. Consumer/business confidence
  4. State of governement finances
  5. LR returns to the governement (tax revenue)
  6. Laffer curve ideas (cuts may incentivise, reduce evasion and avoidance)
  7. Role of automatic stabilisers
  8. Crowding out vs crowding in(accelerator effect to exploit profit potential)
  9. Classical view of self-correcting economy in a recession
19
Q

Ricardian equivalence

A

This is the idea that** consumers anticipate the future** so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged.

Similarly, higher government spending, financed by borrowing, will imply lower spending in the future.

If this theory is true, it would mean a tax cut financed by higher borrowing would have no impact on increasing aggregate demand because consumers would save the tax cut to pay the future tax increases.

20
Q

What’s X inefficiency?

A

X-inefficiency happens when a lack of effective competition in an industry means that average costs are higher than they would be if the market was more contestable. This leads to a loss of technical / productive efficiency. X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary.

21
Q

What determines whether a producer will be able to pass on the burden of an indirect tax?

A

The price elasticity of demand and supply

22
Q

what are the current tax rates?

A

20%, 40% and 45%

23
Q

How does progressive taxation help government to achieve their macroeconomic objectives?

A

Progressive taxation is when the marginal rate of tax rises as income rises so those on higher incomes pay a greater proportion of their income in tax compared with those on lower incomes. This is used as a method of reducing income inequality in order to achieve a more equitable distribution of income however high taxation changes behaviour of high earners and encourages tax avoidance (laffer)

24
Q

Regressive taxes

A

taxes that increase in relative size on lower income earners (the rate of tax paid falls as income rises)

25
Q

Proportional taxes (flat tax)

A

Taxes paid in equal proportions by everyone - one rate of tax

26
Q

What does it mean to levy a tax?

A

To impose or to place a tax

27
Q

What are some disadvantages of corporation tax?

A
  1. May deter FDI
  2. Encourages tax avoidance
  3. Discourage business investment
28
Q

What’s wrong with this sentence:
‘the government could raise corporation tax’ ?

A

It is unclear whether the student means that the rate of corporation tax had risen or whether the government was simply able to earn more from corporation tax, perhaps because businesses had more profit. It would be better to write ‘the government could raise the rate of corporation tax’.

29
Q

Demonstrate the chain of reasoning …
Explain the economic impact of cutting the rate of corporation tax

A
  1. Government cuts the rate of corp tax
  2. Business retained profit increase
  3. Might lead to a rise in planned investment
  4. Investment might be by both domestic and foreign businesses
  5. Increased capital spending = injection into circular flow
  6. Positive multiplier effect on demand, output, employment and LRAS increase
30
Q

Here are some macro objectives

How could a rise in the standard rate of VAT possibly impact :
1. Inflation
2. Economic growth
3. Unemployment
4. Balance of trade in goods and services
5. Spare capacity in the economy
6. Business investment
7. Fiscal budget balance

A
  1. Higher in short run as business pass on tax
  2. Slower as real incomes and demand falls
  3. Higher if AD weakens
  4. Improved - falling incomes may mean less imports
  5. Rising from weaker demand
  6. Decline if businesses are hit by lower profits and weaker consumer spending
  7. Short run improvement from higher taxes but risk of faling revenues in medium term
31
Q

One of the canons of taxation is equitability. How can equity be measured?

A

Horizontal equity - where people with similar income levels pay similar amounts of tax
Vertical equity - tax paid is based on ability to pay

32
Q

what three things can meddling with AD impact?

A
  1. real gdp
  2. unemployment
  3. the price level
33
Q

How can taxation affect aggregate supply?

A
  • Changes in employers’ national insurance affect costs of employing extra workers in the labour market
  • change in VAT changes retail prices and affects real incomes of consumers
  • changes in tax rates and tax allowances have a direct and indirect effect on SRAS and LRAS
  • changes in VAT affects business costs
  • changes in direct taxes can influence work incentives
  • changes in corp. taxes may affect the level of FDI
  • taxes can also affect the incentive to start a business or to spend money on research and development
34
Q

How can expansionary fiscal policy reduce unemployment?

A

A government can reduce unemployment levels through expansionary fiscal policy. Higher government spending and a larger budget deficit may men there is a greater deamand for workers as a result (labour is a derived demand)

35
Q

Direct taxation is levied on…

A

Direct taxation is levied on income, wealth and profit. The burden of a direct tax cannot be passed on

36
Q

What are some examples of direct taxes?

A

Include income tax, inheritance tax, national insurance contributions, capital gains tax and corporation tax

37
Q

Indirect taxes are imposed on…

A

Indirect taxes are imposed on producers (suppliers) by the government.

38
Q

What are some examples of indirect taxes?

A

Excise duties on cigarettes, alcohol and fuel, VAT

Macroeconomics Y1 (4 decks)

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