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Economics unit 2 > 18) Demand Management(1) FISCAL POLICY > Flashcards

18) Demand Management(1) FISCAL POLICY Flashcards

0
Q

Who is the Chancellor of exchequer, and what is he in charge of

A
  • George Osborne

- In charge of government fiscal policy

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1
Q

What does Fiscal Policy mean

A

The uses of taxes and government spending to manipulate the level of aggregate demand in the economy

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2
Q

What is budget day

A
  • spending and taxation plans are announced
  • by the chancellor
  • in March
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3
Q

What is autumn statement

A
  • further announcement by the chancellor

- in November

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4
Q

What are the four main categories of public (government) spending in the uk

A
  • current expenditure
  • capital expenditure
  • transfer payments
  • debt interest
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5
Q

What is current expenditure

  • definition
  • give example
  • where is it recorded in the AD
A
  • Spending on the day to day running of public services
  • teachers and nurses pay

-recorded in C components on AD
> its households who put money into the circular
flow
> by spending their income

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6
Q

What is capital expenditure

  • give definition
  • example
  • what component is it recorded in the AD
A
  • investment for the future
  • building a new hospital, school and road

-recorded in the G components of AD
-in long run can shit AS to the right
> increase of the factors if production

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7
Q

What is transfer payments

  • definition
  • examples
  • what component is it in the AD
A
  • payments made by governments to the individuals
  • pensions, tax credits, benefits

-recorded in C components of AD
>it is households who put the money into the
circular flow, by spending their benefits

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8
Q

What is debt interest

  • definition
  • example
A
  • Payments to the holders of government debts

- bond holders

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9
Q

What are:

  • income tax
  • national insurance contribution
A
  • direct taxes

- deducted directly from wages

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10
Q

Whats is corporation tax

A

Paid by firms as a % of their profits

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11
Q

What are:

  • capital gains tax
  • inheritance tax
  • stamp duty
A
  • capital taxes

- apply to the assets you require and sell

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12
Q 
What are:
-value added tax 
-tobacco duty
-alcohol duty
-petrol duty
-environmental taxes
 >aggregate levy
 >climate change levy
 >landfill tax
A
  • indirect taxes
  • applied to expenditure

-environmental taxes are a used to discourage activity that causes harm to the environment

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13
Q

What is an expansionary fiscal policy

A
  • to increase AD

- to promote economic growth and lower unemployment

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14
Q

How can expansionary fiscal policy be done

A
  • increase in the government spending, increases the level of injection in the circular flow
  • decreasing taxation reduces the level of leakages from the circular flow
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15
Q

What is contractionary fiscal policy

A
  • to reduce the AD

- by reducing level or inflation, or reducing level of government devt

16
Q

How can contractionary fiscal policy be done

A
  • decreasing the government spending, to reduce injection into circular flow
  • increasing taxation, to increase leakages from circular flow
17
Q

How can a cut in income tax rate be described as an expansionary fiscal policy

A
  • reduces income tax bill
  • increases income after tax has been deducted
  • creates an injection of consumer spending
  • increase in AD shifting to the right
  • increases real GDP
18
Q

How can an increase in cooperation tax rate be described as a contractionary fiscal policy

A
  • increase the tax taken from business profits
  • reduce the amount of profits left after tax
  • reduce amount if business investment
  • decrease AD shifting to the left
  • reducing real GDP
19
Q

What is a budget/fiscal deficit

A

When government spending is greater than tax revenue

20
Q

Give in example of when the UK was in budget/fiscal deficit, and explain why this happened

A 
>2011-12
>-£122billions
>occurred because government borrowed money 
  through the issue of bonds
     >had to pay interests on it
21
Q

What is the impact of a budget deficit on AD

A

A budget/fiscal deficit:

  • increases AD
  • increases real GDP
  • increases inflation
22
Q

What is the impact of budget deficit on injection/leakages in the circular flow

A

Government spending is an injection into the circular flow whereas the taxation is a leakage

-if the injection (G) is greater than leakage (T)
>AD will increase
-if tax is greater that government spending
>budget surplus
> decrease in AD

23
Q

What are the advantages of fiscal policy

A
  • has a big impact on AD
  • can influence behaviour
  • can have supply-side effects on the long run
  • meet environmental goals
  • reduce income inequalities
24
Q

How does fiscal policy cause a big impact on AD

A

-causes multiplier effect
-the multiplier is when an initial injection into the circular flow leads to a proportionally increase in AD and GDP. This is a positive multiplier effect
-an example is a cut in the income tax
>reduces income tax bills
>increases income after tax has been deducted
>creates injection in consumer spending
>causes a shift in AD to the right
>increases real GDP

25
Q

How can fiscal policy be used to influence behaviour

A

-government uses working tax credits to encourage people to work

26
Q

How can fiscal policy effect supply-side policy in the long run

A

-increase spending on education
-increases AD in the short run
-increases AS in the long run
>better educated individual are more productive
>more can be produced at the same level of
resources

27
Q

How can fiscal policy meet environmental goals

A

Carbon taxes reduces CO2 emissions

28
Q

How can fiscal policy reduce income inequalities

A
  • rich pay more income tax to the government
  • re-distributed in the form of benefits and spending on the poorer section of the society
  • a tax that takes larger % of income from the rich is called progressive
29
Q

What are the limitation of the fiscall policy

A
  • budget deficit
  • can have immediate impact but long time to implement
  • only decided twice yearly
  • some fiscal policy measure have disincentive effect
  • increase government spending can crowd out private investment
  • government failure
30
Q

Why is the budget deficit a limitation for fiscal policy

A

increasing government spending can lead to budget deficit
⚫️ means government have to borrow to fund its spending, borrowing means:
➡️government spending will be cut back in future, to pay back the debt
➡️national debt increases
➡️interest payments will have to be paid on this debt
➡️tax rise in future, to repay debt causing C and I to fall

31
Q

Explain how having an immediate impact but taking long to implement is a limitation for fiscal policy

A

➡️e.g
➡️budget has to be presented to parliament
➡️passed through majority vote
➡️government with weak majority vote
➡️could find it difficult to pass the budget

32
Q

Explain how deciding twice yearly is a limitation for fiscal policy

A

⚫️chancellor of the exchequer publishes the governments taxation and spending plans
➡️on budget day
➡️autumn statements

33
Q

Explain how some fiscal policy measuring can have a disincentive effect can cause a limitation of fiscal policy

A 
⚫️if increase in income tax
➡️some people decide to work less
➡️reducing the amount of 
➡️labour willing to work
➡️and quantity of the factors of production
34
Q

Why is an increased government spending crowding out private investment a limitation of fiscal policy

A

⚫️use of builders to build large government funded schemes
➡️mean fewer builders available to build private houses
➡️lead to misallocation of resource
➡️as private sectors usually more productive than public sectors

35
Q

Explain why government failure is a limitation of fiscal policy

A

⚫️government failure can lead to
➡️making things worse
➡️creating a misallocation of resources

⚫forexample
➡️subsidies paid to farmers
➡️resulted in the overproduction of food

Economics unit 2 (21 decks)

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