3.1 Fiscal Policy Flashcards
What is a fiscal policy?
Involves all the manipulation of government spending and/or the overall level of taxation in an economy over a given period of time
What is an expansionary stance?
Government spending is higher than tax revenue
(Budget deficit)
What is a deflationary stance ?
Government spending is lower than tax revenues
(Budget surplus)
What is exhaustive spending and non exhaustive spending?
Exhaustive spending is public sector spending on goods and services (affects AD directly)
Non exhaustive spending is public spending on transfer payments (affects AD indirectly: government spending on transfer payments such as benefits, subsidies are accounted for their affect on consumption and investment (C and I but not G)
Classification of government spending
-current expenditure
-capital expenditure
-transfer payments
-debt interest payments
What is current expenditure ?
An acquisition by the government of goods and services for current to directly satisfy the individuals or collective needs of the community
(For example, salaries of public workers)
What is capital expenditure ?
Government spending on goods and services intended to create future benefits. (Such as infrastructure, transport, new school/hospital)
———-> effects AD and LRAS
What are transfer payments?
Money transferred by the government to individuals in the form of benefits (JSA, state pensions)
What are debt interest payments ?
These are made to the government creditors, holder of the government debt (the amount the government need to pay to holders of government bonds)
What is a direct tax?
Direct tax is imposed on income (more formally, taxes imposed on the income of individuals and firms; they include income tax and corporate tax)
What is an indirect tax?
Indirect taxes are taxes imposed on the expenditure of individuals and firms on goods and services, the include excise duty, tax on specific products and VAT
What is a progressive tax?
Is a tax system which takes a higher proportion (%) of income in tax as income increases.
What is a proportional tax
A proportional tax takes the same proportion of income in tax at all income levels
What is a regressive tax ?
A regressive tax is one which takes a lower proportion (%) of income in tax as income increases.
How to calculate average tax?
Average tax rate = (total tax paid/total income) x 100
The average tax rate is the proportion (%) of total taxable income paid in tax
What is the marginal tax rate ?
The marginal all tax rate is the proportion of tax paid on each extra additional pound earned.
What is a coupon rate?
The coupon rate is the percentage of the face value (maturity value) of the bond
Equation of bond yield (%)
(Annual coupon payment/the current market price) x 100
Bond yield are inversely proportional to market prices
What are automatic stabilisers ?
This is where the revenue from some taxes and some form of government expenditure change automatically to help stabilise fluctuations in economic activity
when economic activity increases, automatic stabilisers tend to dampen down increases in aggregate demand; tax revenue increases and government expenditure falls as a proportion of GDP
when economic activity falls, automatic stabilisers tend to reduce the decrease in aggregate demand; tax revenue falls and government expenditure rises as proportion of GDP
How effective are government stabilisers ?
-depends on the extent to which you have a progressive tax system
-depends on the specific tax thresholds and tax rates used a more progressive income tax is more likely to result in greater automatic stabilisation effects.
The higher the tax free threshold the more progressive the tax system is likely to be
Discretionary fiscal policy
Are changes to taxes and spending that may be implemented by the government in responses to changing economic activity, to help achieve a specific policy objective.
What is a structural budget deficit?
A structural budget deficit is the underlying fundamental imbalance in total government receipts and expenditures, where govern,ent expenditure (G) is greater than taxation revenue (T). It is not affected by the economic cycle.
thus, the structural budget deficit is the element of the budget deficit which remains even when the economy is operating at full employment level.
Cyclical element of budget deficit?
The part of budget deficit which falls in the boom phase of the economic cycle and rises in the slowdown/recession phase of the economic cycle. The cyclical deficit is related to the size of the output gap.
Overall budget deficit
The overall budget balance is the sum of the cyclical and structural parts.
