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A-level microeconomics revision > macro - fiscal policy > Flashcards

macro - fiscal policy Flashcards

1
Q

what is fiscal policy?

A

influencing the level of economic activity through manipulation of the taxation and spending decisions made by a government

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2
Q

what type of fiscal policy aims to increase aggregate demand?

A

loose or reflationary

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3
Q

what type of fiscal policy aims to decrease aggregate demand?

A

tight or deflationary

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4
Q

what is the budget?

A

an annual statement presenting the revenues and spending for a financial year
can be in deficit, surplus or balanced

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5
Q

identify the main sources of tax revenue in the UK?

A

income tax
national insurance
VAT

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6
Q

identify the main sources of government expenditure in the UK?

A

social protection
health
education

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7
Q

define current government expenditure

A

the short term running of public services which need to be renewed annually e.g. wages for teacher, NHS

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8
Q

define capital government expenditure

A

spending on physical assets and investing in the long term e.g. infrastructure, hospitals

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9
Q

what is a progressive tax?

A

takes a larger percentage of income in taxes from the high income group than the low income group. As income increases, tax rate increases

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10
Q

what is a proportional tax?

A

also known as flat tax.

where the rate of taxation is fixed

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11
Q

what is a regressive tax?

A

tax imposed in such manner that the tax rate decreases as the amount of taxable income increases

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12
Q

what is the marginal tax rate?

A

rate of tax imposed on each additional pound of income

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13
Q

how do you calculate the marginal tax rate?

A

change in taxes paid/change in income

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14
Q

what the the average tax rate?

A

total amount of income tax that you pay as a percentage

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15
Q

how do you calculate the average tax rate?

A

total income tax paid/total income * 100

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16
Q

according to Adam Smith, what makes a good tax?

A

equity
certainty
convenience
economy

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17
Q

what is equity in relation to a good tax?

A

an individual’s contribution should be in proportion to the revenue they enjoy under the protection of the state.

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18
Q

what is certainty in relation to a good tax?

A

an individual will be sure of the amount they are taxed

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19
Q

what is convenience in relation to a good tax?

A

a tax easy to pay and work out

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20
Q

what is economy in relation to a good tax?

A

state should take amount necessary to make society work

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21
Q

what is direct taxation?

A

atax directly levied on an individual or organisation e.g. income tax-

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22
Q

what is indirect taxation?

A

a tax levied on goods and services e.g. VAT

23
Q

what did Arthur laffer propose?

A

at tax rates of 100% and 0%, the government receives no tax revenue.
at 100% no one would work, and at 0%, no tax would be paid

24
Q

what is the substitution effect?

A

following an increase in direct taxes, substitutes to work, namely leisure, seem more attractive and people will work less.

25
Q

what is the income effect?

A

increase in taxes would reduce people’s income, therefore they will need to work harder to achieve the same level of REAL income

26
Q

if income effect > substitution effect…

A

more labour being supplied

27
Q

if substitution effect > income effect

A

less labour being supplied

28
Q

what did laffer say could happen if taxes were increased to pay for public spending?

A

it may create a disincentive effect and lead to long term supply side problems.

29
Q

what are the advantages of a flat rate tax system?

A

it is equal across the whole income board
tax administration is simple and straightforward]
motivates people to increase productivity

30
Q

what are the disadvantages of a flat rate tax system?

A

it is regressive as in application, it affects the lower income group more

31
Q

what is budget position/fiscal stance?

A

the difference between government revenue and expenditure

32
Q

what is a budget surplus?

A

when government revenue exceeds government expenditure

33
Q

what is the budget deficit?

A

amount that government has to borrow annually to finance current spending plans

34
Q

what is a balanced budget?

A

when government revenue equals government expenditure

35
Q

what is the cyclical budget position?

A

takes into account fluctuations in tax revenue and spending due to the economic cycle

36
Q

what is the structural budget position?

A

takes into account level of deficit even when the economy is at full employment

37
Q

what is the current budget?

A

a summary of net cash flows at that particular time

38
Q

what is the national debt?

A

total amount British government owes to the private sector and other purchasers of UK gilt

39
Q

what are gilts?

A

fixed-interest loan securities issued by the UK government.

40
Q

what are the economic effects of a budget deficit?

A

increased borrowing
increased AD
increased interest rates

41
Q

how does a budget deficit lead to increased borrowing?

A

in order to finance spending, the government will have to borrow from the private sector, and it does this by asking the bank of England to sell bonds and gilts to the private sector.

42
Q

how does a budget deficit lead to increased AD?

A

it implies lower taxes and increased government spending, increasing AD and causing demand-pull inflationary pressure

43
Q

how does a budget deficit leads to increased interest rates?

A

if the government sells more bonds, this is likely to cause interest rates to rise. This is because they will need to increase interest rates to attract investors to but the extra debt

44
Q

how is the budget deficit financed?

A

selling bonds to the private sector (either domestic or foreign)
central bank can finance shortfall by increasing the money supply and buying bonds

45
Q

what are the factors which influence how much a government can borrow?

A 
domestic savings
relative interest rates
prospects for economic growth
confidence and security
inflation
foreign purchase
46
Q

what are the policies to correct a budget surplus or deficit?

A

cut government spending
increase tax
economic growth

or
bailout
default

47
Q

what are the consequences of government debt?

A

crowding out due to high interest rates
future higher taxes and lower spending
crowding in due to low interest rates

48
Q

what is crowding out?

A

a process by which an increase in government expenditure “crowds out” the private sector by increasing the cost of borrowing

49
Q

why is crowding out a consequence of government debt?

A

it will have to sell debt to the private sector and getting individuals and institutions to purchase the debt may require higher interest rates. A rise in interest rates may then crowd-out private investment and consumption, offsetting the fiscal stimulus

50
Q

what is crowding in?

A

a process by which a decrease in government expenditure “crowds in” the private sector by decreasing the cost of borrowing

51
Q

why is crowding in a consequence of government debt?

A

-

52
Q

method 1: what are automatic stabilizers?

A

forms of government spending and taxation that change automatically to offset fluctuations in economic activity

53
Q

what is an example of an automatic stabilizer?

A

when economic activity rises, spending on job seeker’s allowance automatically falls, to help prevent inflation

54
Q

method 2: what is discretionary fiscal policy?

A

actively influencing AD by changing taxes and or spending

A-level microeconomics revision (23 decks)

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