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Economic > Macro Book 3 - Macroeconomic Policies > Flashcards

Macro Book 3 - Macroeconomic Policies Flashcards

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1
Q

What is fiscal policy?

A

The use of taxation and government spending to manipulate aggregate demand

Fiscal policy aims to influence economic activity through changes in tax rates and government expenditures.

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2
Q

What can the government change regarding taxation?

A
  • How much it taxes – tax rates
  • The type of taxes it imposes
  • What it taxes

These changes are essential for adjusting fiscal policy.

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3
Q

What can the government change regarding government spending?

A
  • The amount it spends
  • What it spends money on

Adjustments in government spending impact aggregate demand and economic growth.

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4
Q

What is income tax?

A

The most significant tax in the UK, direct and progressive, where the rate increases as a person’s income rises

Income tax is a primary source of government revenue.

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5
Q

What is VAT?

A

An indirect and largely regressive tax with a standard rate of 20%, imposed on most goods and services

Some items are taxed at 5%, while most food, children’s clothing, and books are exempt.

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6
Q

What is excise duty?

A

(Specific tax)
An indirect tax imposed on specific products, such as alcohol and tobacco, with rates varying by product

Excise duties are used to discourage consumption of certain goods.

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7
Q

What is capital gains tax?

A

A tax on the increase in the value of investments, such as shares and second homes

This tax targets wealth accumulation.

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8
Q

What is corporation tax?

A

A tax on the profits of firms, currently set at 19%

Corporation tax is a key component of business taxation.

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9
Q

What is inheritance tax?

A

A tax on the wealth of the deceased above a certain level

This tax applies to estates following death.

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10
Q

What does a balanced budget signify?

A

Occurs when government spending and tax revenue are equal

Balanced budgets are ideal but often not realistic in practice.

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11
Q

What is the role of the Office for Budget Responsibility (OBR)?

A
  • Produce forecasts for the economy and public finances
  • Judge government performance against fiscal targets
  • Assess long-term sustainability of public finances
  • Evaluate risks from over-borrowing
  • Scrutinise government decisions on taxes and welfare spending

The OBR was created in 2010 for independent analysis of public finances.

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12
Q

What is expansionary fiscal policy?

A

Rises in government spending and cuts in taxes designed to increase aggregate demand

Used during economic downturns to stimulate growth.

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13
Q

What is contractionary fiscal policy?

A

Designed to reduce aggregate demand through cuts in spending or increases in taxation

Often used to cool down an overheating economy.

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14
Q

What are automatic stabilisers?

A

Forms of government spending and taxation that change automatically to dampen economic fluctuations

Examples include unemployment benefits and tax revenues.

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15
Q

What is discretionary fiscal policy?

A

When governments actively influence aggregate demand by changing expenditure or taxes

This is a deliberate action as opposed to automatic stabilisers.

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16
Q

What is the golden rule of fiscal policy?

A

The government should only borrow to pay for investment spending over the economic cycle

This rule emphasizes financing current spending through taxation.

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17
Q

What is a budget deficit?

A

Occurs when tax receipts are less than government spending

This leads to borrowing to finance the deficit.

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18
Q

What is a budget surplus?

A

Occurs when tax receipts are greater than government spending

Surpluses can reduce national debt.

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19
Q

What is the impact of crowding out?

A

Increased government borrowing raises interest rates, discouraging private investment

This phenomenon can limit the effectiveness of fiscal policy.

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20
Q

What are the advantages of fiscal policy?

A
  • Works automatically to stabilize the economy
  • Directly affects aggregate demand
  • Can influence both AD and AS simultaneously

Fiscal policy can be more immediate than monetary policy.

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21
Q

What are the disadvantages of fiscal policy?

A
  • Time lags exist
  • Difficulty estimating multiplier effects
  • May require additional borrowing (increased debt)
  • Neo classicals belive economy is at full capacity
  • Can damage other macroeconomic objectives
  • Crowding out (expantionary)
  • Crowding in (contractionary)
  • Confidence levels

These factors complicate the effectiveness of fiscal measures.

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22
Q

Fill in the blank: A government budget is the amount of money that the government has, to spend, financed by _______.

A

[tax revenue]

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23
Q

True or False: A rise in spending on the health service may represent a cut in real terms if it rises by less than the rate of inflation.

A

True

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24
Q

What is the marginal propensity to consume (MPC)?

A

The proportion of additional income that consumers spend on consumption

MPC is crucial for determining the effectiveness of fiscal policy.

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25
What is the expected spending in 2021/22 as forecasted?
£1,045bn ## Footnote Budget forecasts are crucial for planning government fiscal policies.
26
What is the Government Budget?
The amount of money that the government has, to spend, financed by tax revenue.
27
What defines a Budget Deficit?
If tax receipts are less than the amount of money the government spends then the government’s budget is in deficit.
28
What defines a Budget Surplus?
If tax receipts are greater than the amount of money the government spends then the government’s budget is in surplus.
29
How is a budget deficit financed?
Borrowing money through sale of government bonds.
30
What is a problem with running a budget deficit?
Interest has to be paid on money that has been borrowed.
31
What does more spending on repaying national debt mean?
Less to spend on education, healthcare etc.
32
What can excessive borrowing indicate?
It can be seen as a sign of weakness.
33
What is a structural budget deficit?
Deficits that arise when governments run deficits over a long period of time.
34
What is a cyclical deficit?
Deficits which are short-term and caused by automatic stabilisers.
35
What is the impact of running a budget surplus?
Leakages are greater than injections from the circular flow of income which means AD is likely to fall.
36
What is the difference between a budget deficit and national debt?
The national debt is the total amount of money the government owes; the budget deficit is the difference between tax revenue and government expenditure in a specific year.
37
What is National Debt?
The accumulated borrowings of government.
38
What is a regressive tax?
A tax which takes a higher proportion of income from those on lower incomes.
39
What is a proportional tax?
A tax which takes the same percentage of income from all people regardless of income level.
40
What is a progressive tax?
A tax which takes a higher proportion of income from high income earners than low income earners.
41
What is a direct tax?
A tax on income or wealth.
42
What is an indirect tax?
A tax levied on goods and services.
43
What are the advantages of progressive taxation?
* Takes more taxes from those who can afford to pay them * Allows very low wage earners to be charged no tax at all
44
What are the disadvantages of progressive taxation?
* Disincentives work for high income earners * Some consider it unfair and punishes success
45
What are the advantages of regressive taxation?
* Easy to administrate * Targets demerit goods
46
What are the disadvantages of regressive taxation?
* Takes a much higher percentage of income from low income earners * Can restrict quality of life
47
What is a flat-rate tax system?
A system of income tax in which each taxpayer pays the same rate of tax regardless of income.
48
What is monetary policy?
Use of interest rate, the money supply and exchange rates designed to manipulate the level of aggregate demand in an economy.
49
What is the primary goal of monetary policy?
To achieve the government’s target of 2% inflation.
50
What happens when inflation is too high?
The decision is taken to increase the rate of interest.
51
What is expansionary monetary policy?
Cuts in interest rates designed to increase aggregate demand.
52
What is contractionary monetary policy?
Designed to reduce the level of aggregate demand in an economy through increases in the interest rate.
53
What is Quantitative Easing (QE)?
A process by which the central bank purchases financial assets in order to release additional money into the financial system.
54
What are the limitations of monetary policy?
* Requires reliable information * Could limit economic growth
55
What is the Monetary Policy Committee (MPC)?
An independent body that sets interest rates to achieve the government’s inflation target.
56
Why is it beneficial for the MPC to be independent?
It can’t be manipulated for political need.
57
What is the acceptable inflation range set by the MPC?
1-3%.
58
How does the MPC use indicators when setting interest rates?
They consider a range of indicators of inflationary pressures in the economy.
59
What is the effect of high inflation on interest rates?
Lenders demand much higher interest rates.
60
What is the relationship between national debt and economic confidence?
As national debt grows, confidence in the economy may fall.
61
What is the poverty trap?
When low salaries are taxed, it may mean people are not much better off working than claiming benefits.
62
What is the transmission mechanism in monetary policy?
The time it takes for changes in interest rates to affect the price level. ## Footnote It can take around 2 years for the transmission mechanism to work.
63
What is one advantage of monetary policy over fiscal policy?
It doesn’t cost the government any money to implement and can be more easily adjusted.
64
What is a limitation of monetary policy related to information?
It requires reliable information; misleading forecasts can lead to incorrect interest rate decisions.
65
How can monetary policy potentially limit economic growth?
By keeping interest rates too high to control inflation, which can restrict growth.
66
What is a liquidity trap?
A situation where consumers and investors ignore changes in interest rates due to low confidence.
67
What can affect the sensitivity to interest rate changes?
Differences in regions and industries; some are more sensitive than others.
68
True or False: Lowering interest rates at very low levels can be effective.
False.
69
What is cost-push inflation?
Inflation caused by rising costs, such as commodity prices, where interest rates may be ineffective.
70
What are supply-side policies designed to do?
Increase the level of aggregate supply and improve market efficiency.
71
List some objectives of successful supply-side policies.
* Increase productive potential of the economy * Prevent inflation * Reduce structural and frictional unemployment * Improve trade position.
72
What are the two types of supply-side policies?
* Interventionist * Market-based.
73
What is an example of an interventionist supply-side policy?
Investment in education and training.
74
What is the main benefit of improving productivity?
It enables sustainable economic growth.
75
Define productivity.
Output per worker over a given time period.
76
What are some reasons for low productivity in the UK?
* Lack of investment in infrastructure and education * Rise of flexible labor markets * Cultural factors * Decline of the manufacturing industry.
77
What can the UK government use to improve productivity levels?
* Investment * Shorter working week * Substitute capital for labor * Deregulation * Technological progress.
78
What is a potential downside of reducing trade union power?
It may lower protection for vulnerable workers.
79
How can supply-side policies affect equity?
Some may lead to rising inequality and unintended consequences.
80
What is the impact of deregulation on businesses?
It can increase efficiency and allow new firms to enter markets.
81
What is a consequence of privatization?
Private firms may prioritize efficiency and profit over health and safety.
82
What does the 'productivity puzzle' refer to?
The ongoing discussions about the causes of low productivity in the UK without a definitive answer.
83
What are the two types of supply side policies?
Interventionist and market based ## Footnote Interventionist policies are implemented by the government, while market-based policies involve reforms undertaken by private firms.
84
What distinguishes supply-side policies from supply-side reforms?
Supply-side policies are government actions, whereas supply-side reforms are improvements made by private firms to maintain efficiency and competitiveness.
85
What can be considered supply-side initiatives beyond traditional policies?
A large number of fiscal policy initiatives ## Footnote Fiscal policies can also enhance the supply side of the economy.
86
List the main categories of supply-side policies.
* Increase incentives * Promote competition * Reform the labour market * Improve skills and qualifications * Improve infrastructure
87
What is the impact of education and training as an interventionist supply-side policy?
Increases productivity and employability of workers ## Footnote It addresses skills shortages but may take a long time to show results.
88
How can government assistance to new firms serve as a supply-side policy?
Provides tax breaks and grants to encourage innovation ## Footnote This policy may distort market mechanisms if not properly targeted.
89
What is the effect of reducing direct taxes as a market-based supply-side policy?
Incentivizes firms to invest, increasing capital quantity ## Footnote The impact on labor supply is debated.
90
What is a potential downside of implementing a national minimum wage?
May create inefficiencies and increase costs for firms ## Footnote It could lead to unemployment and distort the market mechanism.
91
What effect does cutting benefits have as a market-based supply-side policy?
Encourages economically inactive individuals to enter the labor market ## Footnote This policy can affect the poor and increase poverty.
92
How does reducing trade union power function as a supply-side policy?
May increase labor productivity by reducing inefficiencies ## Footnote It could lower protections for low-income earners.
93
What is the purpose of privatization in supply-side policies?
Allows private firms to produce efficiently ## Footnote It may compromise health and safety standards in pursuit of profit.
94
What does deregulation aim to achieve in the context of supply-side policies?
Increases efficiency and allows new firms to enter the market ## Footnote It can lead to monopoly power and lower protections for workers.
95
What are the benefits of increasing competition as a supply-side policy?
Improves efficiencies, product quality, and lowers prices ## Footnote Assumes that increased competition will result in lower prices.
96
How does improving infrastructure serve as a supply-side policy?
Reduces business costs and increases economic production capacity ## Footnote This requires significant investment and time.
97
What is an example of a recent supply-side policy implemented in the UK?
Relaxation of Sunday trading laws ## Footnote Other examples include investment in Crossrail and HS2.
98
What is the main aim of using zero-hours contracts by companies?
To make it easier for firms to hire and fire workers ## Footnote This policy aims to reduce the unemployment rate.
99
What is a significant advantage of supply-side policies over fiscal and monetary policies?
They enable growth without causing inflation ## Footnote Supply-side policies can theoretically make an economy recession-proof.
100
What is a potential limitation of supply-side policies?
They may have no impact if there is insufficient aggregate demand ## Footnote AS policies achieve potential growth but not necessarily actual growth.
101
What is productivity defined as?
Output per worker over a given time period ## Footnote It measures the efficiency of an economy in producing goods and services.
102
What are some benefits of high productivity?
* High growth * High wages * Low inflation * Improvements to balance of payments
103
What are some reasons for low productivity in the UK?
* Lack of investment in infrastructure and education * Rise of flexible labor markets * Cultural factors * Decline of the manufacturing industry
104
Which policies can the UK government implement to improve productivity levels?
* Investment * Shorter working week * Substitute capital for labor * Deregulation * Technological progress * Improve protection for workers
105
What is the conflict in expansionary fiscal policy?
It can lead to demand-pull inflation and increase the budget deficit ## Footnote It may also reduce international competitiveness of UK goods.
106
What is the conflict in contractionary fiscal policy?
It can create negative output gaps and reduce economic growth.
107
What is the aim of expansionary monetary policy?
To prevent negative output gaps and unemployment ## Footnote It may lead to demand-pull inflation.
108
What is a potential conflict of contractionary monetary policy?
It can create negative output gaps and reduce real GDP.
109
How can supply-side policies help achieve stable growth and stable prices?
By creating spare capacity in the economy ## Footnote Policies like privatisation and deregulation can drive efficiency.
110
Which policy is most effective in overcoming cyclical unemployment?
Fiscal policy ## Footnote Government spending directly affects aggregate demand.
111
What is the most effective policy for controlling cost-push inflation?
Government should lower firms' costs using supply-side policy ## Footnote This may involve cutting corporation tax or increasing subsidies.
112
What policy is most effective in controlling demand-pull inflation?
Deflationary fiscal or monetary policy ## Footnote The primary method in the UK is changing interest rates.
113
In the long run, which policy ensures low inflation?
Supply-side policies ## Footnote They ensure productive capacity grows at least as quickly as aggregate demand.

Economic (9 decks)

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