3.5 Fiscal Policy Flashcards
What is the definition of fiscal policy
Fiscal Policies are the policies of government spending and tax rates to influence economic activity
What is a budget deficit/surplus
the difference between tax revenue and government expenditure
What is Government Debt
The total amount owed by the government at a given point in time
What is the difference between indirect and direct taxes?
- indirect taxes are taxes on spending while direct taxes are taxes on earning
- e.g direct is corporation tax, and indirect is VAT
What is the difference between a progressive and regressive tax?
- Progressive taxes (income tax) is a tax that increases as income increases and will provide more balance and equality
- Regressive taxes (VAT) are taxes that are the same no matter what income
How are budget deficits financed ?
- since in a budget deficit, the amount of tax revenue is less than spending, it is financed through public sector borrowing/sale of government bonds
What is expansionary fiscal policy?
- Expansionary Fiscal Policy is generally a cut in taxes or an increase in government spending or both
- The cut in taxes means that people have more disposable income and can spend more, increasing AS and AD leading to SREC
- More government spending means that existing workers may be payed more or new workers will be hired into the public sector, less unemployment/more money, can lead to SREC
How does Expansionary Fiscal Policy affect unemployment?
- Expansionary Policy may reduce unemployment as consumers have more disposable income and therefore they will spend more, so firms will hire additional labour to help produce the extra output
- It will also reduce unemployment as more public sector workers will be hired
What are some evaluation factors for expansionary fiscal policy?
- may not reduce unemployment if capital is substituted for labour to produce additional output
- may not lead to more AD and AS if people have low faith in the economy and save instead of spend
- could lead to demand-pull inflation is economy has reached it’s productive capacity
- Depends on whether consumers spend extra income on imports rather than locally produced goods
- depends on the size of the tax cut and amount of government spending
What is contractionary fiscal policy?
- contractionary fiscal policy is generally an increase in taxation or a decrease in government spending or both
- increasing taxation means individuals have less disposable income and therfore AD and AS decrease, leading to less SREC
- decreasing government spending means that existing public sector workers may have a decrease in wage and less will be employed
What effect does contractionary fiscal policy have on inflation? + eval
- contractionary fiscal policy may curb demand-pull inflation as consumers have less income to demand products so AD will fall under the productive capacity of the economy
- however this will depend on whether the inflation is cost push or demand pull
- will also depend on the level of consumer confidence as if consumer confidence is high and they keep spending using savings
What is the effect of contractionary fiscal policy on unemployment
- contractionary fiscal policy will lead to an increase in unemployment as consumers have less income so therefore they will demand less, leading to lower output and therefore as demand is derived they will have less demand for labour
- It will also increase unemployment as less government spending means that more workers will be laid off in the public sector
What are some drawbacks of fiscal policy?
- Fiscal policy will take time to have an effect, so in the interim many things can happen
- Fiscal Policy can create more inequality between the richest and the poorest
- Fiscal Policy only works if people have faith in the economy
