1.5 fiscal policy and supply-side policies Flashcards
1
Q
automatic stabilisers
A
parts of fiscal policy that automatically react to changes of the economic cycle
2
Q
balanced budget
A
achieved when government expenditure equals government revenue
3
Q
budget deficit
A
achieved when government expenditure exceeds government revenue
4
Q
budget surplus
A
achieved when government revenue exceeds government expenditure
5
Q
contractionary fiscal polocy
A
fiscal policy implemented to decrease aggregate demand
6
Q
corruption
A
government failure through abuse of power
7
Q
crowding out
A
when an increase in government spending displaces private spending, with little to no increase in aggregate demand
8
Q
cyclical budget deficit
A
part of the budget that tends to rise in economic slumps and fall in economic booms
9
Q
debt sustainability
A
the ability to manage debt so that it doesn’t impede growth or stability
10
Q
deficit financing
A
borrowing to finance a budget deficit
11
Q
deindustrialisation
A
decline in the manufacturing industry of an economy
12
Q
demand-side policy
A
government policies that aim to alter aggregate demand in the economy
13
Q
deregulation
A
removing regulations
14
Q
direct tax
A
a tax on income and wealth paid directly to the government
15
Q
discretionary fiscal policy
A
altering taxation and government spending as a response to an economic cycle stimulus (e.g a recession)
16
Q
dumping
A
when a producer exports products at a lower price than the prices charged in their home country, or lower than the costs of production
17
Q
expansionary fiscal policy
A
fiscal policy implemented to increase aggregate demand
18
Q
fiscal austerity
A
when the government enacts policies to reduce the size of a fiscal deficit
19
Q
fiscal policy
A
use of government spending and taxation to achieve macroeconomic objectives
20
Q
fiscal stimulus
A
changing taxation and government spending to boost demand and output
21
Q
human capital flight (brain drain)
A
when economies experience net outward migration of skilled/young workers
22
Q
hypothecation
A
when tax revenue is saved to be used later for a specific purpose
23
Q
indirect tax
A
a tax on expenditure
24
Q
interventionist policies
A
occur when the government intervenes in, and sometimes replaces, free markets
25
laffer curve
curve illustrating the relationship between tax revenues and tax levels
26
marketisation
shifting the provision of goods or services from the non-market sector to the market sector
27
national debt
unpaid government debt
28
natural rate of unemployment (NRU)
unemployment rate when the aggregate labour market is in equilibrium
29
principle of taxation (canon of taxation)
criterion used to judge whether a tax is good or bad
30
privatisation
shifting the ownership of state-owned assets to the private sector
31
progressive taxation
taxes where a larger proportion of income is paid as income rises
32
proportional taxation
taxes where the same proportion of income is paid as income rises
33
reflationary prices
policies to increase aggregate demand, with intent to increase real output and employment
34
regressive taxation
taxes where a smaller proportion of income is paid as income rises
35
reindustrialise
growth in the manufacturing industry of an economy
36
structural budget deficit
part of the budget that is unaffected by the economic cycle, and is more dependent on the decisions of the goverment
37
supply-side
relates to changes in potential output of the economy which is affected by the factors of production
38
supply-side improvements
reforms undertaken by the private sector to enable firms to become more productively efficient
39
supply-side policies
use of interventionist policies to encourage efficient markets, thus achieving macroeconomic objectives
40
tax threshold
the level above which income tax must be paid
41
explain the downward multiplier effect following an increase in the income tax rate
A higher income tax rate means workers have a lower disposable income and therefore consume less. The decrease in consumption decreases aggregate demand. As consumers spend less, firms will make fewer sales and therefore less profit. This means that they can invest less and so AD will decrease further as investment is a positive component of AD.
As consumers spend less and firms make less profit, corporation tax and VAT revenues will decrease. This means the government can spend less and so AD will decrease further. As firms contract, they will decrease their derived demand for labour and so incomes will decrease. This will further decrease spending and income tax revenue and so consumption and government spending will further decrease. So, the overall impact on aggregate demand will be much larger
42
budget surplus
tax revenue is more than spending
43
balanced budget
spending=revenue
44
budget deficit
when government spending is more than tax revenue
45
specific tax
a fixed amount of tax paid on each unit sold
firms pay this tax to the government
46
ad valorem tax
charged as a % of the price of the good e.g. VAT
47
current account deficit
outflows > inflows
48
national debt
all debt built up over time from borrowing
49
government bond
method used to borrow money
they sell a bond to an investor and pay it back at a later date with interest
50
expansionary fiscal policy
government spending increases
taxes decrease
AD increases
worsens budget deficit
51
contractionary fiscal policy
government spending decreases
taxes increase
AD increases
budget deficit improves
contracts economy
52
positive effect of decreasing income tax
e.g. a decrease in the top rate of income tax paid by highest earners from 45% to 40%
pay less tax
keep more of their disposable income
increases consumption
increase/raise aggregate demand
53
multiplier effect
occurs when an initial injection into the circular flow causes a bigger final increase in real national income
54
consequence of decreasing income tax
revenue from income tax will fall
in 2016 the government received 27% of all of its income tax revenue from the richest 1% of the world
so tax revenue will be cut
limiting government spending on services
if government spending decreases AD will fall
decreases real GDP
55
effect of increasing income tax of top earners from 45% to 50%
less disposable income
spend less
decrease consumption
decrease aggregate demand
this brings PL down from PLe to PL1, reducing inflation
income tax revenue increases
budget deficit decreases/balanced
PL down, control inflation
56
possible consequence of increasing income tax
real GDP will decrease from Ye to Y1 due to the downward multiplier effect
higher income tax
lower disposable income, consume less
AD falls
firms make fewer sales, therefore less profit
invest less, AD decreases further
workers may use accountants to avoid tax, they may work less, they could relocate
despite increasing income tax, income tax revenue may not actually increase
57
effect of increased VAT
likely to decrease budget deficit as government earn more tax revenue and will need to borrow less
58
consequence of an increase in VAT
if firms need to pay more tax their costs will increase
likely to shift in SRAS
can reduce economic growth
can lead to cost-push inflation
59
effect of decreasing VAT
a decrease in VAT will decrease costs for firms which will increase SRAS
this will increase real GDP and economic growth
brings price level down
60
consequence of decreasing VAT
decreases tax revenue and worsens budget deficit
61
effect of increasing infrastructure spending
results in an increase in the geographical mobility of labour
shifts out LRAS
increases quantity of labour
as new workers start earning and spending, consumption will increase
AD shifts out
equilibrium moves up from Ye to Y1(LRAS and AD shift out)
62
infrastructure
items needed for businesses to operate such as roads and telecommunication networks
63
crowding out
when government spending increases, the government demands more borrowed money, land, labour and capital
the price and interest rate increases which increases costs for firms and reduces supply
64
what type of fiscal policy is crowding out?
expansionary fiscal policy
65
what type of fiscal policy is increasing healthcare and education spending?
expansionary fiscal policy
66
effect of increasing education spending
government could increase subsidies for university degrees
decreases costs
encourages more students to go
learn new skills
more productive in workplace
LRAS shifts out
67
consequence of increasing education spending
more government spending
budget deficit worsens
increased subsidies only useful if consumers choose courses that increase productivity
need practical skills
68
effect of increasing healthcare spending
more physically fit
increased productivity
alive for longer
quantity of hours provided of labour is more
shifts LRAS out again
69
consequence of increasing healthcare spending
increased NHS spending only helps if money goes towards treating real illnesses
much of funding goes towards paperwork and admin (bureaucracy)
some funding pays for cosmetic surgery which productivity won't increase from
70
what type of fiscal policy is decreasing education and healthcare spending?
contractionary fiscal policy
71
effect of cutting healthcare spending
could force the NHS to be more efficient and provide more effective treatments, more productive workers
72
consequence of decreased healthcare and education spending
gov spending is a component of AD which will decrease if spending on healthcare and education is reduced
this reduces consumption
73
long run consequences of cuts in healthcare spending
healthcare cuts, more
illnesses left untreated
less productive workers
LRAS decreases
decreases long run economic growth
74
long run consequences of cuts in education spending
can't learn skills needed for future
decreasing productivity
LRAS decreases again
limits economic growth
75
corporation tax
tax on profits made by a firm
76
effect of increasing corporation tax
increases corp. tax revenue for gov.
helps to balance budget
could use corp. tax revenue to increase gov. spending, shifting out AD and increasing growth
77
consequence of increasing corporation tax
because firms have to pay more corp. tax, they get to keep less of their profits and investment decreases so AD decreases
real GDP falls ,growth falls
capital will depreciate as in long run firms can't invest in new machinery to replace old machinery
supply-side disadvantage
78
what type of fiscal policy is increasing corporation tax?
contractionary fiscal policy
79
what type of fiscal policy is lowering corporation tax?
expansionary fiscal policy
80
effect of lowering corporation tax
right shift of SRAS
increases real GDP in the short run from Ye to Y1
in long run, more profit
investment increases
AD increases
investment in new tech and capital increases productivity
SRAS and LRAS increase
81
consequence of lowering corporation tax
gov. tax revenue falls
gov. has to cut back on spending
AD falls
economic growth falls
less benefits
worsens inequality
worsens budget deficit
82
benefits
payments made by the government to unemployed or low income workers
83
effect of increasing benefits
benefits don't change government spending component of AD since money is just transferred to low income households who spend which increases consumption instead
AD shifts out via the multiplier effect
increases economic growth and decreases income inequality
84
consequence of increasing benefits
increasing benefits too much decreases the incentive to work
benefits trap, stay unemployed
increases unemployment
85
consequence of lowering benefits
contractionary fiscal policy
less money transferred to unemployed workers and low income households
decreases consumption
AD falls, shifts in again due to downward multiplier
decreases economic growth increases income inequality
86
effects of lowering benefits
budget deficit decreases
closer to balanced budget
escape benefits trap, earn more from work
increase employment
87
explain the downward multiplier effect following an increase in the income tax rate
consumers spend less
firms make less profit
corp. tax and VAT revenues fall
gov. can spend less, AD decreases further
as firms contract, they will decrease their derived demand for labour
incomes decrease
further decrease spending and income tax revenue
consumption and gov. spending further decreases
overall impact on AD much larger
88
supply side policies
any government policies which aim to increase the aggregate supply in the economy
89
interventionist supply side policy
when the government increases its intervention in the economy
actively involved in increasing AS
90
market-based supply side policy
government decreases its intervention in the economy
aims to increase AS
allows for markets to be efficient
91
what type of supply-side policy is an infrastructure spending?
interventionist supply-side policy
92
effect of an increase in infrastructure spending
e.g. gov, is spending £50bn on HS2, London to Manchester in 68 minutes
improves geographical mobility of labour, increasing productivity of labour
LRAS shifts out
there will be an increase in real GDP and a decrease in GPL
consumption increases
consumption is 65% of AD, AD shifts out
93
consequence of an increase in infrastructure spending
can result in crowding out of private firms by using up their resources
gov had to borrow £50bn for CLL
increases demand for borrowed money and CLL
increases costs for firms
shits inwards SRAS
decreases real GDP
94
what type of supply-side policy is reducing corporation tax?
market-based supply side policy
95
consequence of reducing corporation tax
gov. receives less tax revenue
opportunity cost, less money available to spend in other areas such as healthcare
in UK cuts in corporation tax have cost UK government around £5bn per year since 2010
could be spent on infrastructure, increasing geographical mobility of labour, increasing productivity of labour
shifting LRAS out, increasing real GDP - corp. tax cuts means this won't happen
96
effect of increasing corporation tax
increased incentive for firms to expand and incentive to start a new business
in long run there are more funds available for profits
increased investment
goes towards more productive machines and tech
LRAS increases
since investment is 14% of AD, AD will shift out
97
what type of supply-side policy is education spending?
interventionist supply-side policy
98
effect of increasing education spending
subsidies allow universities to offer their courses at a lower price
this will encourage students to pursue higher education
over time, makes workers more productive
leads to increase in labour supply
LRAS increases
economy grows
99
consequence of increase in education spending
in the short run, education subsidies lead to a decrease in the supply of labour as more people spend their time studying instead of working
this leads to an increase in wages
increases costs of production
reduces SRAS
reduction in economic growth in the short run
100
what type of supply-side policy is reducing income tax?
market-based supply-side policy
101
effect of reducing income tax
lower income tax, workers can keep more of earnings
increased incentive to work
increase work hours
increased supply of labour will cause the wage to decrease
decrease in cost of production for firms which will cause SRAS to shift out
economic growth
102
consequence of reducing income tax
means workers keep more of their earnings
workers need to work fewer hours in order to pay for necessities
increase their leisure time
decreases supply of labour
increases wages
increases firms' costs
SRAS falls, limiting economic growth
103
what type of supply-side policy is reforming benefits?
market based supply side policy
104
effect of reforming benefits
reduced benefits means that unemployed workers will have less money to live on
increased incentive to work
increasing labour supply
wages decrease
decrease in costs of production
SRAS shifts right
105
consequence of reforming benefits
reducing benefits means that there will be a reduction in consumption which will lead to a decrease in AD
will be a reduction in consumption which will lead to a decrease in AD
C is 65% of AD
AD will decrease further due to downward multiplier effect
decreases economic growth / GDP
increases income inequality
might be better to tweak benefits rather than reduce them
e.g. in 2015 UK reformed disability benefits so that they went to those who really needed them
worse off had disposable income
everyone else was incentivised to work
106
what type of supply-side policy is increasing healthcare spending?
interventionist supply-side policy
107
effect of increasing healthcare spending
more funding for the NHS means more doctors and nurses to help reduce more illness
workers more fit
increase productivity, LRAS increases
estimated that British firms lose £77bn of productivity due to ill health
could be reduced by improved NHS
reduce sick days
labour hours increase
LRAS increases, increased economic growth
108
consequence of increasing healthcare spending
depends on quality of healthcare spending
a lot of funding may be put into admin (bureaucracy)
or more money could be spent ineffective,y
report in 2017 found that some NHS hospitals spent x2 they needed to on expensive toilet roll, no effect on productively
109
what type of supply-side policy is reducing the national minimum wage?
market-based supply side policy
110
effect of reducing the national minimum wage
at the national minimum wage, more labour is being supplied than is being demanded
there is excess supply
real wage unemployment occurs because the wage is above the equilibrium
decrease in wage costs will decrease the cost of production for firms, which will increase SRAS
111
consequence of reducing the minimum wage
reduction in minimum wage will reduce disposable income for many households
this will reduce consumption and decrease AD, real GDP falls
may mean that workers emigrate from the UK in search of higher wages
this will reduce LRAS and reduce economic growth
decrease real GDO
112
deregulation
regulations are removed from markets to lower barriers to entry
113
what type of supply-side policy is deregulation?
market-based supply-side policy
114
example of deregulation in airline industry
American airline industry
deregulation meant new airlines can fly any routes they want to
new firms chase cheaper, shorter routes that weren’t allowed before
decreased costs of production
SRAS increases
costs of production decreased
increased real GDP
115
privatisation
when the government transfers ownership of a public sector firm to the private sector
decrease in costs will shift SRAS to the right
if firms begin to profit maximise then there is more incentive to become efficient and decrease costs
as costs decrease, firms are willing to supply more so SRAS will increase and therefore shift to the right
