What is it called when tax revenue and expenditure are equal?
A balanced budget
What is a budget deficit?
Expenditure > taxes
What is a budget surplus?
Taxes > expenditure
When is contractionary fiscal policy used?
When positive output gaps become too large
When is expansionary fiscal policy used?
When negative output gaps become too large
When AD increases, what also needs to increase for there to be no inflationary effects?
LRAS
The best fiscal policies that increase AD do what as well?
Increase LRAS (E.g. Building new schools)
What are automatic stabilisers?
Automatic fiscal effects which influence the path of economic growth due to cyclical changes in tax revenue and welfare costs
Chain of reasoning for why taxes are automatic stabilisers?
Economic growth
Tax revenue rises
Welfare costs fall
Limits the upturn of an
economy
Fiscal finances improve
What is capital spending?
Provision and maintenance of key national infrastructure
What are determinants of government spending?
Politics, economic performance, demographics and lifestyles, finances
What can be used to show income inequality?
A lorenz curve
How is inequality determined on a lorenz curve?
The greater the distance from the Lorenz curve to the Line Of Equality, the greater the inequality
What is the gini index?
A statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the lorenz curve
How is the gini index calculated?
A/B (answer will be between 0 and 1)
What are the principles of a tax system?
- Easy to administer
- Mustn’t disincentivise work
- Easy to understand
- Horizontally and vertically equitable
Horizontal equality
A tax impacts individuals in the same set of circumstances equally
Vertically equitable
A tax is equally fair for individuals on high earnings as those on low earnings
Indirect taxes are usually…
Regressive
What is a structural deficit?
Deficit not related to the economic cycle
What is cyclical deficit?
Deficit related to the economic cycle (should automatically correct over time)
What measures are implemented during austerity?
Contractionary fiscal policy, expansionary monetary policy, expansionary supply side policies
Which school of thought supports austerity and who is against is?
Classical - support
Keynesian - against
What is crowding out?
When the effect of expansionary fiscal policy (increased government spending) is offset because this reduces resources and finance available to the private sector
What is the laffer curve?
A theoretical analysis which suggests that raising tax rates does not always generate more tax revenue. It is supported by classical economists.
According to the laffer curve, when the size of the private sector increases..
The size of the public sector decreases
What does Keynes argue about the laffer curve?
As there is normally an output gap, the government can increase spending in the public sector without the private sector shrinking
Why do classical economists believe that the public sector is less efficient than the private sector?
- No private capital is risked
- No competition
- Funding is guaranteed
- Consequences of failure is less severe
- Weak profit incentives
What is the money supply?
The entire stock of money and other liquid assets at any point in time
What do supply side policies include and not include?
Includes: incentives, support, regulations
Does not include: spending
Example of a fiscal policy that can have supply side policy effects?
Tax cuts may incentivise more people to work
