Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Macroeconomics (A-Level AQA) > Y12 Booklet 3: Government Macroeconomic Policy > Flashcards

Y12 Booklet 3: Government Macroeconomic Policy Flashcards

(72 cards)

Start Studying
1
Q

How can demand-side government policy be divided?

A

Fiscal Policy & Monetary Policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is Fiscal Policy? Who controls it?

A

controlling taxes & govt. spending to manage the economy
government

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Monetary Policy? Who controls it?

A

controlling interest rates, exchange rates and quantitative easing to manage the economy
Bank of England

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Which is the easier/faster to manage an economy? (Fiscal or Monetary policy)

A

Fiscal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is “fine-tuning”?

A

intentionally maintaining AD levels by frequently managing government policy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What funds government expenditure? What are the problems with these?

A

taxes (unpopular) & borrowing (incurs debts)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does government expenditure usually fund? Why?

A

public and merit goods
under allocated for in free market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the most common/effective way governments manage macroeconomic policy?

A

interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How can policies be divided by their intended impact?

A

Expansionary/Loosening Policies
Contractionary/Tightening Policies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What effect do Expansionary policies have?

A

increase Aggregate Demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What effect do Contractionary policies have?

A

reduce Aggregate Demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How can policies be further divided by how the fit the current economic cycle?

A

Pro-cyclical Policies
Counter-cyclical Policies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How does a pro-cyclical policy suit the economy?

A

works with cyclical tendencies (makes booms & slumps bigger)
e.g. prolonging an economic boom

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How does a counter-cyclical policy suit the economy?

A

works against cyclical tendencies (makes booms & slumps smaller)
e.g. reducing impact of recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Where is a positive and negative output gap on an economic cycle?

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the 2 examples of pro-cyclical policy?

A

expansionary during growth
contractionary during recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the 2 examples of counter-cyclical policy?

A

contractionary during growth
expansionary during recession

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Why might a government use counter-cyclical policies during a time of economic growth?

A

reduced size of boom = reduced size of inevitable slump

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are the reasons for taxation?

A
  • correct market failure (Pigouvian tax)
  • macroeconomic policy tool
  • redistribute income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are Adam Smith’s 4 “Canons of Taxation”?

A

the essentials features of a “good tax”: ACCE

Ability - amount of tax should vary according to ability to pay
Certainty - payers should know how much, when & how to pay
Convenience - method should be convenient to payer
Economy - cost of collection should be low relative to yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are modern economists 4 additional “Canons of Taxation”?

A

CDEF

Compatibility - tax systems should be internationally compatible
Diversity - govt. revenue should be from a variety of sources
Efficiency - causes min. loss of allocative/economic efficiency
Flexibility - should automatically adjust to changes in price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How can a tax be categorised by its effects on different people?

A

progressive
proportionate
regressive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is a progressive tax?

A

takes a higher proportion of higher incomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is a proportional tax?

A

takes a equal proportion of everyone’s incomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is a regressive tax?
takes a higher proportion of lower incomes
26
How can progressive/regressive taxes be used in an essay? What must be referred to? Which canon of tax does this mirror?
to evaluate taxes "relative to proportion of income" Ability
27
What is a direct tax? Example?
a tax paid directly by an individual or organisation, for which the burden can't be passed on e.g. income tax
28
What is an indirect tax? Example?
a tax paid on goods and services, for which the burden may be passed on to the consumer e.g. VAT
29
What is the "incidence" of a tax?
who pays the burden
30
When a good's demand is price inelastic, who bears the incidence of a tax? Why? How is this shown on a diagram? Why is this especially bad?
consumers consumption will not be affected much, as price increases proportionally hurts lower-income earners more, regressive
31
When a good's demand is price elastic, who bears the incidence of a tax? Why? How is this shown on a diagram?
producers consumption will be significantly affected, as price increases
32
What is an excise duty? How can it be described?
an indirect tax placed on goods with negative externalities or demerit properties to reduce consumption "sin tax"
33
Pros & cons of using indirect taxes
+ raises government revenue for govt. spending + can reduce market failure + can be easily changed (with little political resistance, unlike direct taxes) -- inflationary -- regressive -- risk of black market
34
Pros & cons of using direct taxes
+ raises government revenue for govt. spending + more progressive (than indirect taxes) -- disincentivises work -- often faces political resistance & consequences
35
What % of government revenue does income tax account for?
>25% | expected 2025-26
36
How is income tax collected?
usually as a % of wages or salary (also can be on interest on savings, profits from unincorporated firms, rents & pensions) collected by employers
37
What is the structure of income tax brackets?
[£0 - £12,570] x 0% (personal allowance) [£12,571 - £50,270] x 20% (basic rate) [£50,271 - £125,140] x 40% (higher rate) [£125,141+ ] x 45% (additional rate) also, personal allowance reduces for incomes >£100,000 e.g. >£125,140 gets no personal allowance
38
How is national insurance (NI) collected? What is the structure of brackets?
usually as % of wages or salary, deducted at source rather than collected later [£12,570 - £50,270] = 8% [£50,270+ ] = 2% collected by employers who also contribute (up to 15% on pay >£5k)
39
What do income tax and national insurance (NI) impact on a diagram?
AD - disposable income, affects consumption LRAS - willingness to work, affects size of labour force
40
What is the idea behind the Laffer Curve?
suggests that there is an optimum tax rate - too high, reduces incentive to work, reduces tax revenue - too low, reduces size of cut of tax, reduces tax revenue
41
What does the Laffer Curve look like?
42
What is the Laffer Curve used to evaluate? Why?
the risks of changes in tax rates unpopular, has political consequences for party making changes
43
How is corporation tax collected? What is the structure of brackets?
as a % of profits [ - £50,000] = 19% [£50,000 - £250,000] = marginal tax relief [£250,000 + ] = 25%
44
What does corporation tax impact? What does it NOT impact?
AD - affects ability & incentive to invest in capital LRAS - affects investment in capital, a factor of productive capacity SRAS - NOT A COST OF PRODUCTION, HAS NO EFFECT
45
How is VAT collected? What does it impact?
standard rate (20%) applied to most goods & services Supply curve - affects costs of prod (despite often being passed onto consumers)
46
Why might VAT not be charged at 20% on some goods? Examples?
exempt - e.g. stamps, gambling zero-rated - e.g. children's clothes, books reduced rate - e.g. gas, electricity
47
How is council tax collected? What does it fund? What are some exceptions?
domestic properties (i.e. houses, flats) given a valuation and placed into a band, which pay different rates of council tax local services; e.g. fire service, libraries, bin men households with only one resident entitled to 25% discount
48
How are business rates collected? Who collects/controls it? Why? What problems could this cause?
commercial properties (i.e. shops, factories) given a rental valuation and category (> or < £51k), which decides the business rate local authorities (i.e. councils) gives councils power to change rates to attract firms to depressed areas risk of "race to the bottom" brings tax harmonisation into question
49
How can different government spending affect the economy differently? Examples?
Pensions - increase AD (C&G), especially since elderly have higher MPC, causes multiplier effect Education - increase AD (G) and LRAS (Lab), increase quality of labour & capital, productive cap grows
50
What is government/national debt?
the accumulation of budget deficit over time (a stock variable)
51
What is budget deficit?
the value by which govt. spending exceeds taxation revenue, so must be funded through borrowing (a flow variable)
52
During a recession, how is government budget affected?
1) tax revenue falls (e.g. unemployment = lower avg incomes, so income tax receipts falls, and less consumption, so VAT revenue falls etc.) 2) govt spending increases (e.g. JSA for unemployed, investments to grow AD etc.) so, governments must cover budget deficit by BORROWING money
53
Pros/cons of a budget deficit?
+ spending promotes AD + pays for public & merit goods (underallocated) + investments increase prod. cap (LRAS) -- opportunity cost of paying back interest via taxes, would be better spent on social security etc. -- intergenerational inequity (unfair bearing of costs on future generations)
54
What is a budget surplus? What is a balanced budget?
the value by which taxation revenue exceeds govt. spending when taxation revenue = govt. spending
55
What is intergenerational inequity?
when a future generation is forced to pay back debts (+ interest) incurred and enjoyed by a previous generation, unfairly
56
What is an "automatic stabiliser"? Example? What does it evaluate?
a factor which changes in a way to automatically stabilise AD and the economic cycle (GDP) JSA, progressive tax structuring etc. (often counter-cyclical tendencies) need for government policy to manage the economy (“fine-tuning”)
57
What is a "discretionary fiscal policy"?
when the government makes a conscious decision to change fiscal policy (as oppose to an existing automatic system, i.e. automatic stabilisers)
58
How are interest rates described?
- cost of borrowing - reward for saving
59
How do banks work?
1) savers deposit money, repaid with interest (smaller reward) 2) banks give to borrowers, repaid with interest (greater cost) smaller reward & greater cost paid out = profits
60
How does MPS affect investment?
in the Long-Run, banks need savers to deposit money, so they can loan this to firms to invest
61
What are the types of interest rate? How do they work?
fixed - amount set to be paid does not change, e.g. 5% / yr variable - amount depends on base rate, e.g. base+2% / yr
62
Who sets the target rate of inflation? What is it currently?
Treasury (government) 2% +/-1%
63
What are the objectives of the Bank of England?
Primary - reach target rate of inflation (2%) Secondary - help govt. aims, e.g. inc. employment
64
What do interest rates apply to?
- savings - loans - mortgages - credit cards
65
How must interest rates legally be framed?
APR (annual percentage rate)
66
What do interest rates influence?
consumer spending (AD) investment (AD) wealth distribution (wealthier= savings, poorer = borrowing)
67
What do supply-side policies affect? When are they useful?
quality/quantity of productive factors 1) when near full employment (AD policy would cause inflation) 2) when bank rate is already low
68
How are supply-side policies shown on diagrams? How can this be explained?
1) policy implemented, indirectly causes improvement of quality/quantity of prod. factors, 2) increases prod. cap. (LRAS shifts right) IF investment: 3) increases investment (AD shifts right)
69
How can firms improve labour productivity?
- improved supervision - training/specialisation - fire less productive workers - bonuses and incentives
70
How can governments improve labour productivity?
- develop infrastructure (geo. mobility of labour) - increase health spending - reduce trade union power
71
What are the free-market supply-side policies? Which factors of production are affected?
1) tax-cuts (increase incentive to work) - Lab 2) privatisation (increase profit incentive) - Cap 3) deregulation (easier to obtain planning permissions, e.g. new factories) - Lan/Cap 4) labour reforms (restrict union rights) - Lab/Cap
72
What are the interventionist supply-side policies? Which factors of production are affected?
1) education/training - Lab 2) infrastructure - Lab & Cap 3) subsidies for development - Cap 4) labour intervention (incentive to work) - Lab

Macroeconomics (A-Level AQA) (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions