Implementing Policy Flashcards
(87 cards)
1
Q
What is fiscal policy?
A
Influencing the level of economic activity through manipulation of government income expenditure
2
Q
What is the budget?
A
Outlines spending and tax changes und canbe balanced, in a deficit or surplus
3
Q
What is a tax?
A
A compulsory contribution to state revenue levied by the government on worker’s income and business profits or added to cost of some goods, services and transactions
4
Q
Why is tax crucial to fiscal policy
A
5
Q
What are the four cannons of taxation?
A
1) equity
2) certainty
3) convenience
4) economy
6
Q
What is equity as a cannon of taxation
A
The taxes people or organisations have to pay should be proportional to their income
- “ability-to-pay principle” the more you earn the higher your taxes should be
7
Q
What is certainty as a cannon of taxation?
A
- the tax should be clear
- everyone should know how much they have to pay and how much they have to pay
8
Q
What is convenience as a canon of taxation
A
Timing and method of pay are convenient for the taxpayer
9
Q
What is the economy as a cannon of taxation
A
The cost of collecting taxes should be minimised
10
Q
What is a direct tax ?
A
A tax that I levied directly on income
11
Q
What is an indirect tax ?
A
A tax paid on items of expenditure
12
Q
What is a progressive tax ?
A
A tax in which the marginal tax rate increases as income increases
- takes larger percentage of income in taxes from high income groups than low income groups
13
Q
Arguments for progressive taxes?
A
- based on the logic of the ability to pay principal
- higher income groups should pay more because they can pay more
14
Q
What is a regressive tax?
A
- a tax applied uniformly
- it takes a larger percentage of income from low- income earners than from high-income earners
15
Q
Details about regressive taxes
A
- paid regardless of income
- bears more heavily on poorer members of society (greater tax burden)
- inverse relationship between the tax rate and the taxpayers ability to pay
16
Q
What is a proportional tax
A
A tax where the rate of taxation is fixed
E.g 20% of one’s income no matter how much you earn
17
Q
What is the average tax rate?
A
Tax paid as a proportion of income earned
18
Q
How do you calculate the average tax rate
A
Total tax paid/total income x 100
19
Q
How do you calculate the average tax rate
A
Total tax paid/total income x 100
20
Q
How do you calculate taxable income?
A
Total income - tax free allowance
21
Q
What is the calculation for the margins tax rate ?
A
Change in tax paid/change in income x 100
22
Q
What is a flat rate tax system?
A
Al tax payers pay the same amount of tax regardless of income
23
Q
Why is a flat rate tax system good?
A
- simple and efficient to implement
- can provide better incentives to those on higher incomes
24
Q
Why is a flat rate tax system bad?
A
- it is not equitable
- does not allow for redistribution of income between he rich and poor (key macroeconomic objective)
25
What are he two types of government expenditure?
Current and capital expenditure
26
What is government current expenditure?
- spending by the government on goods and services for immediate use
- e.g wages, medicine for the NHS
27
What is government capital expenditure
- spending by the gov on capital projects that is investment for the future benefit of the country
- intended the facilitate long run economic growth
28
What is a government budget deficit
A situation in which the government expenditure exceeds tax revenue
29
What is a government budget surplus
A situation in which government expenditure is less than government revenue
30
What is a government balanced budget
A situation in which government expenditure equals government revenue
31
What is the public sector net cash requirement
The rate at which the British government must borrow money in order to maintain its financial commitments
32
What is the cyclical budget deficit
Government gets less tax and spend more in a recession due to unemployment benefits increasing
33
What is a structural deficit
The level of deficit even when the economy is at full employment
34
What is the national debt
The total amount of government debt based on accumulated previous debts and surpluses
35
What are the economic effects of a budget deficit
- increased borrowing
- higher debt interest payments
- increased AD
- higher taxes and lower spending
- increased interest rates
- crowding out
- inflation
36
How does a government achieve its macroeconomic objectives through fiscal policy
- automatic stabilisers
- discretionary fiscal policy
37
What are automatic stabilisers
The process by which government expenditure and revenue vary with the economic cycle thereby helping to stabilise the economy
38
What is discretionary fiscal policy?
The deliberate alteration of gov spending of taxation to help achieve desirable macroeconomic objective by changing the level + composition of AD((increasing or decreasing)
39
What is crowding out
A process by which an increase in government expenditure crowds out private sectors activity by raising the cost of borrowing
40
What is crowding in?
A decrease in government expenditure crowds in the private sector lowering the cost of borrowing
41
What is a trade-off?
When a gain in one item must be accompanied by a loss in another item
42
What are the four trade-offs
- unemployment and inflation
- Economic growth and current account of the balance of payments
- Economic growth and inflation
- Fiscal and monetary policy
43
Explain the trade of between inflation and unemployment
- Low unemployment leads to inflation due to increased spending because of higher incomes
- Can be explained by the Phillips curve
44
Explain the trade of between economic growth and the balance of payments
If economic growth is increasing higher incomes are usually a result leading to higher consumer spending on imports which will create a deficit on the current account of the balance of payments
45
Explain the trade of between economic growth and inflation
Economic growth leads to higher consumer spending
Ad Shift to the right causing a rise and the average price level
46
Explain the trade-off between fiscal and monetary policy
- Higher interest rates may reduce consumer spending which limits the extent that the increasing government spending and can shift AD REDUCING THE IMPACT OF THIS FISCAL POLICY
- Overuse of discretionary fiscal policy can interfere with maintaining a stable budget position
47
What is monetary policy?
Involves the manipulation of monetary variables in order to influence aggregate demand
- Altering the bank interest rate or the supply of money
48
Why is the Bank of England dependent from the government
- Increased credibility of policies
- Firms have more confidence in the government actions
49
What are the two main tools of monetary policy?
- interest rates
- The money supply
50
What is the money supply?
The quantity of money that is in circulation in an economy
51
Functions of money
- Unit of account
- Standard of deferred payment
- Store of value
- Medium of exchange
52
What can’t the government do with the interest rate and money supply?
Change it simultaneously and independently
53
What is the rate of interest?
Interest is what you pay for borrowing money and what banks pay you to save money
54
What is the monetary transmission mechanism?
This explains how setting an interest rate can affect AD and the Mac economic equilibrium
55
How does the monetary transmission mechanism work?
- if the MPC increases interest rates
- This increases the cost of borrowing
- This will need to fall in consumption and therefore AD
- This would help reduce inflation
56
How does an increase in the interest rate affect exchange rate?
An increase in the interest rate increases the exchange rate
- Less people buy exports as they appear more expensive
57
If the bank of England thought inflation was high, what would they do?
- Reduce the supply of money
- According to classical theory firms would still produce a flow employment output and would therefore need to reduce prices to sell
58
What is the exchange rate?
The price of one currency expressed in terms of another
59
What are the two types of exchange rates?
- Floating
- Fixed
60
What is the floating exchange rate?
A system in which the exchange rate is permitted to find its own level through the forces of supply and demand
61
What is the fixed exchange rate?
The government agrees to fix the value of its currency in terms of another country
62
What is quantitative easing
- Central bank creates money electronically
- uses that money to buy financial assets e.g bonds from financial institutions
- as all the bonds are bought up this increases demand for the bonds and therefore the price
- The yield or interest rate of the bond then falls
- this will feed through to commercial banks provide them with liquidity
- We can loan out this money to consumers which increases consumption and investment stimulating economic growth
-
63
What is a liquidity trap?
In an economy when interest rates can fall no further and monetary policy cannot influence demand
64
What is inflation rate targeting
An approach to monetary policy in which the central bank is given independence to set interest rates in order to meet an inflation target
65
What are the two approaches to inflation targeting?
- asymmetric
- Symmetric
66
What is symmetric inflation targeting
Requirement placed on the bank to respond when inflation is too low or too high
67
What is asymmetric inflation targeting?
When the central bank places importance on one side of inflation rather than the other
E.g - only intervening when it’s too high rather than low
68
How does inflation targeting affect behaviour economic agents?
- Expectations: if they set a target, people will tend to have low inflation expectations
- With no target people may have higher inflation expectations meaning workers will demand higher wages and firms will have to put up prices
69
What are the advantages of monetary policy?
- Expansionary monetary policy can reduce unemployment
- Contractionary mine policy can reduce inflation
- Interest rates can be adjusted monthly
70
What are the disadvantages of monetary policy?
- There was often trade-offs: expansionary monetary policy can increase inflation
- Time lag
- Liquidity trap may be an issue
- role of expectations may impact the effect
71
What is supply side policy?
A range of measures intended to have a direct impact on LRAS and specifically the potential capacity of the economy
72
What are the two types of supply side policies?
- Market based: relies on markets to work more freely providing incentive for enterprise
- Interventionist: the government intervenes directly to stimulate aggregate supply
73
What are the different types of supply side policy measures?
- privatisation and deregulation
- Improved labour market flexibility
- Reforms of the tax and benefit system
- Education and training
- Infrastructure
- Subsidies
- Research and development
- Competition policy
- Immigration control
74
What is privatisation and how does it work as a supply side policy?
- transfer of an industry from public to private ownership
- production will become more economically efficient because of profit motive and competition
- This can also reduce costs and lower prices for customers and reduce inflation
75
What is the deregulation and how does it work as a supply side policy?
- Removal of regulations to open up the industry
-reduces barriers to entry making it easier for firms to enter an industry
76
What are subsidies and how do they work as a supply side policy?
- money given to firms usually by the government and the aim is to reduce costs
- As they reduced costs a promotes greater production in these industries and makes it easier for new firms to set up
77
What does improved labour market flexibility in? How does it work as a supply side policy?
- workers can respond to changes in economic activity promote macroeconomic stability
78
What are reforms of the tax and benefit system and how does it work as a supply side policy?
- lower taxes on incomes increase LRAS by increasing the incentive to work
Because it increases the quantity of labour available to firms
- Lower probation taxes increase profits for firms which give them greater funds to invest
79
What is labour productivity?
Output per person employed
80
What is human capital?
Knowledge skills and other attributes embodied by individuals and used to produce goods or services
81
What is education and training and how does it work as a supply side policy?
- Government investment into education and training increases skills of the labour force
- Increases labour market productivity rates
- Reduce the structural unemployment because the labour market is able to respond to changes quicker
82
What is infrastructure and how does it work as a supply side policy
Government investment into infrastructure can increase the geographical mobility of labour
- Supply chain can be more fluid making production more efficient and increasing productivity
83
What is research undevelopment and how does it work as a supply side policy?
Investment into R&D boost dynamic efficiencies by firms
- A lower ratio may lower unit costs and improve competitiveness
- Can create a new comparative advantage
84
What is competition policy? How does it work as a supply side policy?
The CMA works to promo competition to benefit consumers
- This greater competition gives firms an incentive to innovate and create better products for consumers
85
What are immigration controls and how do they work as a supply side policy?
If migrant workers have different skills from native workers, they can plug a skills gap and increase productivity
- Consumption rising to the multiplier effect will be great economic output
86
Advantages of supply side policy
- there are no trade-offs with increasing economic growth
- Can help create jobs on sustainable economic growth
- Can help reduce inflationary pressure in the long-term
- Higher labour productivity can increase international competitiveness
- And new comparative advantage can be generated
87
What are the disadvantages of supply site policies?
- Increase in the productive potential will not raise economic performance if there’s a lack of AD( use Keynesian)
- Gov investment into supply side policies may not be possible if there are other constraints e.g low incomes
