2.1.2 Fiscal Policy Flashcards
What is a policy instrument
Tools the government use to implement their policies such as taxation and interest rates
What is fiscal policy
It is adjusting taxation and government expenditure to influence aggregate demand
Eg. Placing heavy tax on cigarettes to reduce consumption
Where does the government get its money from and where does it spend it
Taxation. To pay for public services To discourage certain activities Control aggregate demand To make economy more fair
Direct taxes and where do they come from
Imposed on firms and individuals and are usually linked to income and wealth
Income tax
Social insurance tax (like income tax) but revenue used for pensions
Corporation tax are on profits of private companies
Capital gains tax is on assets such as shared.
Inheritance tax paid on money that is inherited by people who die
What is indirect tax and where do they come from
Tax levied on spending
Sales tax such as VAT
Duties are heavy tax on selected items
Custom are tax on imports
Council tax is collected by local authorizes to pay community service
Stamp duties when paying for certain assests
What is government expenditure
Total planned and amount to be spent in each category each year.
Such as healthcare, education, social protection, defense
Mandatory- automatic payments
Discretionary is new spending
What is deficit and surplus
1 when the government plants to spend more than they receive in tax revenue this means they may need loans
2 when the government plan to spend less than they receive this can be to pay off any government debts.
Impact of deficit and surpluses
Deficit is that national debt will get bigger so more and more revenue has to be spent on paying back debt which can lead to opportunity cost
Surplus would be that it can be spent to lower tax in the economy or public services
Impact on macroeconomic objectives
Used to influence aggregate demand in the economy
Reduction in tax and spending more to stimulate the economy
This is called expansionary fiscal policy
Contractionary is taxing more and spending less
Impact on inflation
Contarctionary can be used to reduce inflation by increasing tax, there will be less aggregate demand in the economy because less disposable income for people
Impact on economic growth
Expansionary can be used to stimulate economic growth.
Increasing government spending will increase AD and decrease in tax means people will have more money to spend
Economic growth can also come from extra government expenditure such as new schools
Impact on Unemployment
Expansionary can be used to reduce it
Will help stimulate demand but to help aid the demand more workers are needed to produce more output so government can spend on construction projects to create jobs
Current account deficit
If there is large deficit, contractionary can reduce AD to reduce demand for imports
Impact on environment
Taxes such as landfill can reduce environment damage
Or subsidies can be used to encourage sustainable activities
