Macro 15 - The budget position.

Question 1

Define the government budget?

Answer 1

The amount of money the government has to to spend form tax revenue or from borrowing.

Question 2

What is a budget deficit?

Answer 2

Government spending is greater than tax revenue.
G>T.

Question 3

what is a budget surplus?

Answer 3

Tax revenue is greater than government spending.
T>G

Question 4

How is a budget deficit financed?

Answer 4

Sale of bonds - piece of paper which they sell.

Question 5

What are UK government bonds and EU bonds called?

Answer 5

UK - Gilts.
EU- Eurobuns.

Question 6

What is the problem of running a budget deficit in terms of a countries credit rating?

Answer 6

• Harder to raise money in the bond market.
• The interest placed on your bond will increase, because investors may be worried that you will not be able to pay back the loan.

Question 7

What is the problem with running a budget surplus?

Answer 7

• leakages from the circular flow, due to higher savings - AD will shift left.
• Quality of life may fall.

Question 8

come back to finish chapter - bonds

Question 9

how to draw expansionary and contractionary fiscal policy on diagrams:

Answer 9

expansionary- shift AD to the right

contractionary- shift AD to the left

Use keynesian AS curves.

Question 10

what are budget deficits that are run for a long time called?

Answer 10

structural budget deficits

Question 11

what are deficits that are caused by automatic stabilisers called?

Answer 11

cyclical budget deficits.

Question 12

Define national debt?

Answer 12

The sum of national annual budget deficits.

Question 13

What is the difference between budget deficit and national debt?

Answer 13

Budget deficit is when G>T in a given year, National debt is the accumulation of all budget deficits.

Question 14

consequences of having national debt.

Answer 14

• crowding out argument.
• Affects credit rating.
• Interest placed on bonds increases.
• Opportunity costs for borrowing money - interest money could be spent elsewhere.

Question 15

what are the 3 types of taxes?

Answer 15

progressive.
proportional.
regressive.

Question 16

what are progressive taxes?

Answer 16

When tax burden increases with income - higher proportion form high income earners.

Question 17

what are proportional taxes?

Answer 17

taxe rate is fixed - everyone pays same rate. Eg: mongolia 10%.

Question 18

what are regressive taxes?

Answer 18

tax burden decreases with income - high proportion from low income earners.

Question 19

all 3 types of taxes on a diagram

Answer 19

Question 20

define direct taxes?

Answer 20

taxes on income/profit/wealth.

Question 21

define indirect taxes?

Answer 21

taxes on goods and services.

Question 22

2 advantages of progressive taxation?

Answer 22

1. Takes more from those who can afford to pay them, they can afford basic needs comfortably.
2. allows low wage earners to be charged no tax at all, preventing poverty.

Question 23

2 disadvantages of progressive taxation?

Answer 23

1. Disincentivises work, high income earners lose much of their salary, so many stop opening businesses.
2. people may try and avoid paying tax using complex accounting structures to pay the least tax possible.

Question 24

2 advantages of regressive taxation?

Answer 24

1. Easy to administrate, same taxes charged per item.
2. Targets demerit goods which are more likely to be used by low income groups. - Can help reduce market failure - internalising the externality.

Question 25

2 disadvantages of regressive taxation?

Answer 25

1. takes a much higher percentage of low income earners and punishes the poor.
2. goods may be addictive, price inelastic demand meaning people wont stop using them.

Question 26

what is a flat rate tax system?

Answer 26

everyone pays the same percentage of tax.