3.1 - fiscal policy Flashcards
Balanced gov budget
Gov spending = tax revenue
Budget surplus
Gov spending < tax rev
Budget deficit
Gov spending > tax rev
How much the gov has borrowed
Cyclical budget position
Size of fiscal deficit is influence by state of the economy
Structural budget position
Not related to the state of the economy
Includes an ageing population
Public debt
Total debt the gov owes
Direct taxation
Tax paid by an individual directly to the gov
E.G Income tax
Indirect taxation
Charged as a % of the price of a G+S
E.G VAT / customs rev
Progressive taxation
Higher income = higher % taxation
Used to reduce inequality of wealth
Regressive taxation
Takes a higher % of income from people with less income
E.G VAT
Proportional taxation
Takes the same % of income regardless of how much earned
Discretionary fiscal policy
When the gov takes action to influence AD
E.G increasing interest rates / lowering tax
Contractionary fiscal policy
Done by decreasing gov spending / incr taxes
Reduces budget deficit - leads to higher inflation
Expansionary fiscal policy
Done by increasing gov spending / reducing taxes
Done for SR economic growth
Leads to budget deficit
Why does expansionary fiscal policy lead to a macroeconomic policy conflict
Leads to lower unemployment + increasing economic growth but leads to demand pull inflation
Auto fiscal stabilisers
Aim to reduce effects of boom / recession in economic cycle
Limit the fall of economic growth during recession
Crowding out
Government spending fails to increase AD due to higher G leading to equivalent fall in private sector spending / investment
Causes of crowding out
Needing to raise money for increasing AD
Attracts people to sell bonds
Demand for loanable funds rises
Savers encourages to buy
Laffer curve
Cut in taxes would increase tax revenue earned by gov
Do not know exact value of T*
Strengths of discretional fiscal policy
Leads to economic growth
Reduction in unemployment
Improved infrastructure
Weaknesses of discretionary fiscal policy
Could lead to crowding out
Takes time to implement
Expensive
Strengths of auto fiscal stabilisers
Provide safety for households / firms during economic recessions
Help reduce severity of changes in econ cycle
Weaknesses of auto-fiscal stabilisers
Lead to budget deficits
Expensive
Take time to implement
