3.2.3-How the Government Manages the Economy Flashcards
What is a Balanced Budget?
Government income = Government expenditure
What is a Budget?
Government income & government expenditure for a 1 year period
What is a Buget Deficit?
Where government spending exceeds tax revenue
What is a Budget Surplus?
Where tax revenue is greater than government spending
What is Contractionary?
Attempts to slow down the economy, not to make it smaller
What are Direct Taxes?
Taxation on income and wealth
What is Expansionary?
Attempts to stimulate/grow the economy
What is Fiscal Policy?
Use of taxation and government spending to influence the economy
What is the Government Budget?
Government’s plan for spending and tax
What is National Debt?
The cumulative amount of money owed by a country
What does Stimulate mean?
Encourage economic activity
What is the Base Rate?
The interest rate set by the Bank of England that influences market interest rates
What is Monetary Policy?
Central bank’s use of interest rates, money supply or exchange rates to influence the level of aggregate demand in the economy
What is Money Supply?
The sum of the notes, coins and deposit in banks & financial institutions
What is Deregulation?
The removal of regulations or restrictions on a particular business
What is Privatisation?
The process of transferring public sector organisations to the private sector
What is are Supply Side Policies?
Government policy to enable an increase in the quantity or quality of goods and services produced in an economy
What are Trade Unions?
An organised association of workers formed to protect and further their rights and welfare
What are the largest areas of Government spending?
- Social protection
- Healthcare
- Education
- Defence
- Transport
What are the main sources of taxation?
- Income tax
- National Insurance contributions
- VAT
Why would government impose taxation?
- To pay for public sector services
- To discourage certain activities
- Redistribution of income
What are some examples of direct taxes?
- Income tax
- National insurance
- Corporation tax
- Capital gains tax
What are some examples of indirect taxes?
- VAT
- Council tax
- Stamp duties
- Business rates
- Inheritance tax
What are the arguments for using indirect taxation?
- Changes in indirect taxes can change the pattern of demand by varying relative prices
- Indirect taxes can be used as a means of making the pollutor pay and ‘internalising external costs’
- Indirect taxes are less likely to distort the choices between work and leisure
- Indirect taxes can be changed more easily than direct taxes
- Indirect taxes are less easy to avoid
- Indirect taxes provide an incentive to save savings and provide finance for investment
What are the arguments against using indirect taxation?
- Many indirect taxes are regressive-make distribution of income more unequal
- Higher indirect taxes can cause cost-push inflation
- If indirect taxes are too high-creates an incentive to avoid indirect taxes through boot-legging
- Revenue from indirect taxes can be uncertain
Who sets interest rates?
The central banks
What is the main interest also called?
Tbe bank/base rate
What are the different central banks?
- Bank of England (UK)
- European Central Bank (EU)
- Federal Reserve (US)
What part of the BOE sets interest rates?
The MPC (monetary policy commitee)
What does the Base rate affect?
The interest rates in which money is lended to commercial banks
What can changes in interest rate affect?
Aggregate demand
What does lowering the base rate accomplish?
Expansionary monetary policy
What does the government use interest rates to affect?
- Inflation
- Money supply
- Exchange rates
What is quantatitive easing?
The government buying back government bonds from banks releasing money into the economy and stimulating growth
What is the main issue with quantitive easing?
Banks may not lend out money they are given
What are different impacts of Supply Side policies?
- Anti trade union legislation to help labour markets work more freely increasing labour productivity
- Increase in quantity of education increasing quality of workforce and making markets more competitive
- Increasing total output in areas of the economy
What are different examples of supply side policies?
- Privatisation
- Deregulation
- Education and training
- Policies to boost Regions with high Unemployment
- Infrastructure
- Lower business taxes
- Lower income taxes
- Reducing benefits
- Investment in infrastructure
- Restricting power of trade unions
What are the limitations of supply-side policies
- Infrastructure takes time to construct and costs a lot of tax-payers money
- Training and education takes a long time to filter through
- Deregulation-firms will take time to be established
