Micro 11 Fiscal Policy Flashcards
(17 cards)
What is fiscal policy and how
It influences AD through changes in Gov spending and tax rate
What happens in the expansionary stage
Increase AD by:
Cutting tax
Increasing Gov spending.
Means the Gov runs a BUDGET DEFICIT
What happens in the contractionary stage
Decrease AD or slow the growth and overheating by:
Increase tax
Cut Gov spending
The Gov will run at a BUDEGT SURPLUS
What part of the economic cycle would the contractionary fiscal policy be used at?
At the peak (boom)
What part of the economic cycle would the expansionary fiscal policy be used at?
At the recession (dip)
Why do are the Gov ok with running a budget deficit?
It will cause a positive shift in LR and so the long run growth is worth it
What is the golden rule of fiscal policy
Only borrow to invest in capital over the course of an economic cycle.
What are the 4 principles of taxation
1.canon of equity
2 canon of certainty
3. Canon of economy
4. Canon of simplicity/ convenience
What is the canon of equity?
Taxes should be fair- rich pay more toward tax than the poor
What is the canon of certainty?
Those who pay tax should be able to predict how much they will pay.
What is the canon of economy?
The cost of collection should be lower the the amount of tax collected
What is the canon of convenience/ simplicity
The tax should convenient and easy to pay.
Tax is paid at the same time every year
Tax should be easy to calculate
What is progressive tax?
The rich get taxed more ( leads to a more equal wealth divide)
What is a regressive tax
The greater the amount u earn the less is subject to tax
What is Proportional tax?
A tax rate that is fixed for everyone no matter how much u earn.
Same % for all.
What is direct tax?
Tax that is paid directly from income and wealth
What is indirect tax?
Taxes levied on transactions
E.g. VAT, Import tariffs
