Fiscal Policy Flashcards
(20 cards)
What is involved in fiscal policy
Government spending and taxation
What is expansionary fiscal policy
Shifts AD to the right by increasing gov. spending or lowering taxes
What is contractionary fiscal policy
Shift AD to the left by reducing gov. spending and increasing tax
When would expansionary policy be put in place
During a budget deficit
When would contractionary policy be put in place
During budget surplus
What are the aims of Expansionary policy
Increase economic growth
Reduce unemployment
Drawbacks of expansionary policy
Increases inflation and worsens BoP - more imports
Aims of Contractionary policy
Reduce economic growth - reduce inflation
Increase unemployment
Benefits of contractionary policy
Reduce price levels - inflation
Improve current account of BoP - less is spent on imports
What are automatic stabilisers
Government automatically reacts to changes in the economic cycle - recession causes gov. spending to increase by giving more benefits
What is discretionary policy
Government deliberately change their level of spending and tax - raise tax to pay for improvements in infrastructure
Current expenditure
Expenditure on wages, raw materials etc.
Capital expenditure
Physical assets
Roads, bridges, infrastructure etc.
Horizontal equity
Everyone pays the same amount
Vertical equity
Those who have the ability to pay more should pay more
Direct tax
Paid by an individual, straight to the government
Indirect tax
Tax on goods and services
Progressive taxation
Individual’s taxes rise as income rises
Tax used to redistribute income and reduce poverty (benefits)
Increases equality
Regressive taxation
Individual’s tax falls as income rises
Encourage supply side growth
Incentive to work harder
Increases inequality
Proportional tax
Everyone pays same amount of tax
Unfair to low income workers
May not raise enough tax revenue
