2.6.2 Demand-side policies Flashcards
Austerity
Economic policy aimed at reducing a governments deficit (or borrowing)
Austerity can be achieved through increases in government revenues
and/or
A reduction in government spending or future spending commitments
Automatic stabilisers
Automatic fiscal changes as the economy moves through stages of the business cycle
e.g. a fall in tax revenues from the circular flow in a recession
Budget balance
the annual balance between government spending and tax revenue
Budget surplus
when tax revenues is greater than government spending
Budget deficit
when government spending is greater than tax revenue
Monetary policy rate / Central bank policy interest rate
the official lending rate for loans set by a nations central bank
e.g. the Bank Of England or the European Central Bank.
Corporation tax
A tax on the profit made by companies
The current rate is 25%
Cyclical budget (fiscal) deficit
A deficit which occurs due to a recession in the economy
Discretionary fiscal policy
Deliberate attempts to affect the level and growth of aggregate demand
Direct tax
taxes that go straight to the government from whoever is paying the tax, the burden of the tax cannot be passed onto to somebody else
E.G. income tax or corporation tax
Exchange rate
The price of one countries currency in relation to another
Exchange rate index
The trade-weighted external value of a currency
Expansionary monetary policy
a policy that aims to increase the rate of monetary expansion to stimulate the growth of a domestic economy
Expenditure-switching policies
policies that are designed to “switch” expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP
Fine-tuning
Changes and monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices
Fiscal deficit
when government expenditure is higher than tax revenue in a given time period
Fiscal policy
A government policy regarding taxation and public spending
Fiscal stability
A balance between tax revenues and public sector spending
Fiscal stimulus
Government measures and at giving a positive jolt to economic activity
Government spending
Spending by the government and education, healthcare and defence and other public services
Household benefits cap
A cap which limits total benefits at £500 per week for a family and £350 per week for a single person with no children
Import tariff
a tax on imports that maybe ad valorem (%) or a specific tax a (set per unit imported)
Indirect taxes
taxes on spending
E.G. VAT or exercise duties
producers may be able to pass on an indirect tax- depending on PED and PES
Inflation target
The bank of England has a CPI inflation target, which is currently 2%
Marginal rate of tax (MRT)
The rate of tax on the next unit (£1) of income end
Monetary policy
the use of interest rates and money supply to achieve the macroeconomic objectives such economic growth and inflation
Monetary Policy Committee (MPC)
A committee of 9 people (including the governor) that meets every month to review the economy and set monetary policy interest rates for the UK
Monetary stimulus
Changes in monetary policy designed to increase aggregate demand
Multiplier effect
If there is an initial injection, then the final increase in aggregate demand and real GDP will be greater
National debt
A governments, total outstanding debt – effectively what the government still owes from the budget deficit accumulated overtime
Negative interest rate
an interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than the nominal interest rate.
Office of Budget Responsibility (OBR)
A non-departmental public body funded by the treasury who’s purpose is to provide independent economic forecasts and independent of the public finances
Patent box
A reduced rate of corporation tax apply to profits from patents- design to stimulate research and innovation and improve the supply side of the economy
Personal allowance
The amount of income you can earn before you start paying income tax
£12,500
Progressive tax
The marginal rate of tax rises as income rises.
As people earn more income, the rate of tax on each extra pound goes up
Proportional tax
When the marginal rate of tax is constant leading to a constant average of tax
Quantitative easing
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Real interest rate
Nominal rate of interest adjusted for inflation
Redistribution
measures taken by government to transfer income from some individuals
Regressive tax
The rate of tax paid falls as income rises – these taxes hurt people with low income the most
E.G.duties on on tobacco and alcohol
Stimulus
monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation
Structural budget deficit
The part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not appear when the economy recovers.
Subsidy
payments by the government to suppliers that reduce their cost
Target
an objective of government policy E.G. low inflation
Taxation
The imposition of taxes on streams of income, commercial activities and wealth by the government
Tax burden
The amount of tax suffered by an individual or organization
measures total tax revenues as a % of GDP
Tax competition
happens when a national government uses reforms to the tax system as a supply size strategy to attract investment and jobs into their economy
Specific/unit tax
A set tax per unit imposed by the government
E.G.the specific tax (duty) on fuel sold in the UK, did duty on a litre of fuel might be 80p
Welfare cap
A limit on the amount that the UK government can spend on certain Social Security benefits and tax credits
Exclude pensions and jobseekers allowance
