2.1 Government and the Economy : Unit 31- 34 Flashcards
1
Q
- What are policy instruments?
A
- Tools governments use to implement their policies, such as interest rates, rates of taxation, and levels of government spending.
2
Q
2, What is fiscal policy?
A
- Fiscal policy are decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy.
3
Q
- What is budget?
A
- Government’s spending and revenue plans for the next year.
4
Q
- What are the 4 reasons governments impose taxation?
A
- To pay for public sector services
- To discourage certain activities, and consumption.
- Taxes can be used to help control aggregate demand.
- The distribution of wealth in the economy can be made fairer.
5
Q
- What are the 3 types of taxes? Define.
A
- Indirect taxes: Taxes levied on spending is an indirect tax.
- Direct taxes: Taxes levied on the income earned by firms and individuals.
- Environmental taxes: Taxes that are designed to protect the environment.
6
Q
- What are the 5 key direct taxes used around the world?
A
- Income tax: This is a direct tax on the amount earned by an individual.
- Social insurance taxes: They are imposed on people’s income but the money collected is used specifically for pension benefits and health care.
- Corporation taxes: are levied on the profits made by limited companies.
- Capital gains tax: levied on any financial gains made when selling assets at a profit.
- Inheritance tax: is paid on money that is
inherited from people who die.
7
Q
- What are the 6 key indirect taxes used?
A
- Sales tax: are taxes on spending
- Duties: are often heavy taxes on a select range of goods.
- Custom duties:are taxes levied on imports
- Council tax: is collected by local authorities to help pay for local services such as refuse collection.
- Business rates: are also collected by local authorities and contribute to the provision of local community services.
8
Q
- What are the 3 key environmental taxes?
A
- Landfill tax : is imposed on the disposal of waste in landfill sites
- Climate change levies: meet their commitment to reducing greenhouse gases
- Aggregates levies: is a tax on sand, gravel, and rock that is dug from the ground.
9
Q
- What is fiscal deficit?
A
- amount by which government spending exceeds government revenue.
10
Q
- What is fiscal surplus?
A
- the amount by which government revenue exceeds government spending.
11
Q
- What is the national debt?
A
total amount of money owed by a country.
12
Q
- What are the 2 negative impact of fiscal deficits?
A
- Opportunity cost.
- future generations may be burdened with the debt. Thus, may not be able to forcus on the the growth and development of the economy.
13
Q
- What are the 3 positive impacts of fiscal surplus?
A
- Can be used to spend on the future provision of public services
- Lower taxes in the economy.
- Reduce future interest payments and strengthen the nation’s finances.
14
Q
- What are the 5 impacts of fiscal policy on macroeconomic objectives?
A
- Affect inflation (contractionary fiscal policy)
- Economic growth (expansionary)
- Unemployment (Expansionary)
- Current account deficit (contractionary to reduce demand for imports)
- Fiscal policy and the environment.
15
Q
- What is expansionary fiscal policy?
A
- Fiscal measures designed to stimulate demand in the economy.
16
Q
- What is contractionary fiscal policy?
A
- Fiscal measures designed to reduce demand in the economy.
17
Q
- What is monetary policy?
A
- use of interest rates and the money supply to control aggregate demand in the economy.
18
Q
- What is money supply?
A
- amount of money circulating in the economy.
19
Q
- What is base rate?
A
- Rate of interest set by government or regional central banks for lending to other banks, which in turn influence all other rates in the economy.
20
Q
- What are the 4 reasons many different rates of interest?
A
- Different banks charge different rates as they compete with each other.
- Rates are higher if money is borrowed without security.
- The amount paid to borrowers is higher than the amount given to savers.
- Highest rates are charged to credit card users.
21
Q
- What is mortgage?
A
- Legal arrangement where you borrow money from a financial institution in order to buy land or a house, and you pay back the money over a period of years
22
Q
- What is a rate of interest?
A
Price of borrowing money.
23
Q
- What are the 4 roles of a central bank?
A
- Implementing the government’s monetary policy and regulation of the banking system.
- Acting as a lender of last resort to commercial banks
- Controlling inflation and stabilizing a nation’s currency
- Setting interest rates
24
Q
- What are the 4 impacts of interest rates on macroeconomic objectives?
A
- Inflation (by slowing down the speed at which the money supply is growing, this is likely to involve raising the rate of interest)
- Unemployment: ( use lower interest rates to reduce unemployment, thus people may be able to borrow and afford goods causing aggregate demand to increase and firms to recruit new employees)
- Economic growth
- The current balance:
( reduce spending on imports: lower aggregate demand: increase rates)
25
Q
- What are the 3 factors that have an overall effect on the current balance when monetary policy is changed or implemented?
A
- Income elasticity of imports
- Strength of the link between interest rates and exchange rates.
- The price elasticity of demand for imports and exports.
26
Q
- What are the effects on consumers due the mechanism by which interest rate changes?
A
if it falls: aggregate demand rises, and more able to spend than save.
if it increase : aggregate demand falls, and more encouraged to svae than spend.
27
Q
- What are the effects on firms due to the mechanism by which interest rate changes?
A
- They use borrowed money to fund their business:
thus, if it falls: will be able to produce more goods - boost their profits - business confidence
- lower costs
if it rises - lower profits
- reduce business confidence
- raise costs
28
Q
- What is quantitative easing?
A
- Buying of financial assets, such as government bonds from commercial banks, which results in a flow of money from the central bank to commercial banks.
29
Q
- What is aggregate supply?
A
the total amount of goods and services produced in a country at a given price level in a given time period
30
Q
- What is supply-side policies?
A
government measures designed to increase supply in the economy.
31
Q
- What are the 4 aims of supply-side policies?
A
- improve flexibility in labor markets by removing restrictions.
- restore the incentive to work by lowering taxes on work and enterprise,
- promote competition through privatization, deregulation, and helping small business
- Increase investment by improving the flow of capital.
32
Q
- What are the impacts of supply-side policies on productivity?(2)
A
- improve flexibility on labor
- Training and education of labor
33
Q
- What are the benefits of supply-side policies on total output?
A
- increase the productive potential of the economy.
- national income rises
-living standards will be improved. - less chance of demand-pull inflation.
- Unemployment will be lower as more jobs are created.
34
Q
Name 7 examples of policies used by the governments?
A
- Privatization
- Deregulation
- Education and training
- Policies to boost regions with high unemployment.
- Infrastructure spending
- Lower business taxes to stimulate investment.
- Lower-income taxes to encourage working
35
Q
What is offset?
A
- If something, such as a cost or sum of money, offsets another cost, it reduces or balances it, so the situation remains the same.
36
Q
What is austerity?
A
official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend.
37
Q
What are the 5 macroeconomic objectives the government ideally wants to have?
A
- Economic growth
- Reduced Inflation
- Unemployment down
- Environment protection
38
Q
What are the 4 possible trade offs?
A
- Unemployment and inflation
- Economic growth and Inflation
- Economic growth and environmental protection
- Current account on BOP and inflation
39
Q
What are two types of policies used to reduce inflation? contractionary? expansionary?
A
- contractionary fiscal policy.
- Contractionary monetary policy
40
Q
What are the 5 negative effects of using contractionary monetary policy to help reduce inflation?
A
- higher interest rates will discourage consumers and businesses from borrowing. thus, a fall in consumption and investment.
- Higher mortgage payments
- Firms’ profit will be low as they incur more costs, resulting in them investing less.
- Will discourage firms from borrowing to invest in new technology and expansion.(long-term development/ lose of competitive edge to foreign markets)
- If higher interest rates results in higher exchange rates it may be harder for firms to sell abroad.
41
Q
What are the two negative effects of using fiscal policy to reduce inflation?
A
- Higher taxes and lower government spending could result in unemployment.
- People may suffer as a result of poorer government services after the cuts in expenditure.
42
Q
What policy might avoid the trade-off between inflation and unemployment?
A
supply-side policy.
43
Q
What policy will government use to promote economic growth?
A
- expansionary fiscal policy
- Expansionary monetary policy
44
Q
What do you mean by the economy will be overheated?
A
- this when demand rises too fast causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates.
45
Q
What is the possible disadvantage of economic growth?
A
- overheated economy
-demand-pull inflation
46
Q
What is the policy that could be used to avoid negative trade between Economic growth and Inflation?
A
- Supply-side policy
47
Q
How does Economic growth affect environmental protection negatively?
A
- Emissions from power generators, chemical processors, and other manufacturers.
- When people have more disposable income they may buy more cars, which results in more emission and congestion.
- which may affect people’s health.
48
Q
What is the disadvantage of inflation on BOP balance?
A
- Inflation could result in a rise in prices which would increase the price of exports.
- Inflation could result in consumers switching from domestic products to cheaper imported products, thus, creating pressure on the BOP balance.
49
Q
What policy may worsen the current account for a period of time?
A
- Monetary policy- contractionary
50
Q
What policy should the government use instead to avoid the trade-off between Inflation and the current account on the balance of payment?
A
- Fiscal policy
