4 Government and the macroeconomy Flashcards
1
Q
Direct Intervention of the government
A
Public Services
Welfare Service
2
Q
Indirect Intervention of the government
A
Employment legislation
Consumer protection laws
Environmental protection
Competition law
Intellectual property rights
Subsidies
3
Q
Public services
A
In many countries, the government also directly provides other essential public services, such as postal services, public transport systems, the emergency services. These services are not run in the same way as they would be if private sector firms were seeking to maximise profits.
4
Q
Welfare services
A
In mixed economic systems, the government provides social and welfare services to people in need. These include transfer payments such as unemployment benefits and state pension schemes for the elderly.
5
Q
Tax
A
A compulsory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services, and transactions.
6
Q
Tariff
A
A tax or duty to be paid on a particular class of imports or exports.
7
Q
Direct tax
A
A type of tax directly paid to the government by the taxpayer. It is a percentage levied on a person’s income and wealth, and on the profits of businesses.
8
Q
Indirect tax
A
Taxes are imposed by the government on spending to buy goods and services.
9
Q
Macro-Economic Objectives
A
Indicator - Objective
Trade-Balanced (x-m)
Inflation-Low and stable, 2%
Growth-Strong, Sustained, Sustainable
Employment-Low unemployment, Full employment
Redistribution of income-“FAIR”
Stability-
10
Q
Balance of payments
A
Is a record of a country’s financial transactions with other nations.
This includes the money flows into and out of a country from the sale of exports and the purchase of imports.
If the money inflows exceed the outflows, then a balance of payments surplus exists.
If the outflows exceed the inflows, the country has spent more than it has earned, so a balance of payments deficit occurs.
11
Q
Income equality
A
Is when an income of a country is distributed equally in the economy (not individual income) (gene coefficient)
12
Q
Principles of tax
A
Progressive
Convenient
Efficient
Certainty
Flexible
Equities
13
Q
Deficit
A
Dept
14
Q
Fiscal policy
A
Is the use of taxation and government expenditure strategies to influence the level of economic activity and macroeconomic objectives such as employment, economic growth and the control of inflation.
15
Q
Deregulation
A
Is a supply-side policy of making markets more competitive by removing barriers to entry and other market imperfections.
16
Q
Monetary policy
A
Refers to the use of interest rates, exchange rates and the money supply to control macroeconomic objectives and to affect the level of economic activity.
17
Q
Privatisation
A
Is a supply-side policy of selling off state-owned assets to the private sector.
18
Q
Supply-side policies
A
Are the long-term strategies aimed at increasing the productive capacity of the economy by improving the quality and/or quantity of factors of production.
19
Q
How do governments collect money
A
Tax Revenues
Income Tax
Inheritance Tax
Import Taxes
20
Q
How do governments use money
A
Government Spending
Health Care
Education
Defence
Roads
State Benefits
21
Q
Expansionary fiscal policy
A
(AD Up)
Boost Growth
Reduce Unemployment
Increase Inflation
Redistribute Income
22
Q
Contractionary fiscal policy
A
(AD Down)
Reduce Inflation
Reduce Budget Deficit/National Dept
Redistribute Income
Reduce Current Account Deficit
23
Q
Incentives to work
A
Cuts in income tax can be used to create incentives for people to seek employment and to work harder.
Some economists argue that reducing social welfare assistance such as unemployment benefits can also create incentives for people to seek employment.
Government support for business start· ups can also create incentives for entrepreneurs and business creation.
24
Q
Investment expenditure
A
Government capital expenditure on infrastructure (such as railroads, motorways, schools and hospitals) helps to boost investment in the economy.
25
Human capital expenditure
This refers to government expenditure on staffing by investing in education and training.
26
Recognition lags
There is a time lag in recognising that government intervention is needed to affect the level of economic activity.
This is because governments do not necessarily know if the economy is growing too fast (or declining too quickly).
27
Macro Administrative lags
There is a time delay between recognising the need for fiscal policy intervention and actually implementing appropriate action,
such as approving tax changes or alterations to the government budget.
28
Impact lags
There is a time lag between implementing fiscal policy and seeing the actual effects on the economy.
A cut in income tax, for example, will take time to have a significant impact on the spending habits of households.
29
Government budget
A financial plan of how much tax revenue will be collected and where it will be spent over a period of time (usually one year).
30
Budget deficit
When government expenditure is greater than government revenue
31
Budget surplus
When government revenue is greater than government expenditure.
32
Types of direct tax
Personal income tax
Corporate income tax
Wealth tax
Capital gains tax
Inheritance tax
Windfall tax
Payroll tax
33
Types of indirect tax
Sales tax
Excise tax
Customs duty (tariffs)
Carbon tax
Stamp duty
34
Progressive tax system
A system where the proportion of income tax increases as income increases.
This means that as someone’s income or profits increase, they will have to pay a higher proportion (percentage) of their income or profit as tax.
35
Regressive tax system
A system where the proportion of income tax decreases as income increases.
This means that as someone’s income or profits increase, they will have to pay a lower proportion (percentage) of their income or profit as tax.
36
proportional tax system
A system where the proportion of income deducted as tax stays the same whatever the income level of the individual or the profits of a business.
37
Tax base
Tax based on the total amount of assets, property and revenue a government can tax.
38
Tax burden
The total amount of tax that individuals and firms pay to the government.
It is expressed as a percentage of the economy's total gross domestic product (GDP).
39
Money supply
The total amount of money circulating in an economy at any one given time.
Money involves the currency (notes and coins), and money in deposit and current accounts.
40
Monetary supply
Controlling the money supply in an economy by changing interest rates and the amount of currency in circulation.
41
Interest rates
Determines the price of borrowing money or the return from saving money in the bank.
42
Commercial banks
Banks that offer services such as providing loans and depositing money facilities to the general public and businesses.
43
Exchange rate
The price of one currency in terms of another.
44
Expansionary monetary policy
A monetary policy tool that influences the level of total demand in the economy by decreasing the rate of interest and increasing the supply of money to expand economic activity.
45
Contractionary monetary policy
A monetary policy tool that influences the level of total demand in the economy by increasing the rate of interest and decreasing the supply of money to contract economic activity.
46
A healthy bank system should be
Confidence and liquidity
47
Liquid assets
An asset that can be converted into cash quickly and with minimum impact to price recieved
48
Open market operations
this is when the federal reserve buys or sells short-term government bonds
49
Quantitative easing
when central banks buy up longer-term assets from banks
50
Excess reserves
The amount that banks are free to loan out
51
Reserve requirements
the percent of deposits that banks must hold in reserve
52
Discount rate
the interest rate that the central bank charges commercial banks
53
Labour force
Unemployed+employed
54
Discouraged workers
People that chose not to work
55
Four categories of employment
Employment
Self-employed
Unpaid family workers
Govfunded trading schemes
56
What is considered a full employment
3-4% unemployment
57
Structure of economy
As economies grow they move away from primary sector to a tertiary or secondary one
58
The proportion of women employed means
A greater percentage of women working means more people in the economy
59
Informal and formal economies
movement to an economy which is taxed meaning more wealthfare
60
The proportion of workers in the public and private sector depends on
Flexibility in employment
Part-time versus full-time workers
Self-employed vs employed
Labour force participation: economically active individuals
61
Labour force participation rate
(labour force÷working age-pop) x 100
62
What factors increase L.F.P.
Wages
Social attitude
Health care
Social attitude for disabled
The proportion of people going into higher education
63
How do we measure unemployment
The claimant count(the money claimed by unemployed people to support them) - International labour organisation servay
64
Unemployment rate
(Number of unemployment ÷ Total labour force) x 100
65
Types of unemployment
Frictional (between jobs)
Seasonal
Structural (mismatch in demand and supply)
Cyclical (not enough demand)
66
Natural unemployment
It is theoretical that when everyone is employed but frictional
67
Consequences of unemployment
Loss of GDP
Loss of tax revenue
The increased cost of unemployment benefits
Loss of income for individuals
68
Supply-side policy
A macroeconomic concept refers to total supply within an economy and the government policies that would affect it.
Supply-side policies aim to increase the quality and quantity of the factors of production in the long term.
69
The government’s main aim with supply-side policies
Is to support industries through deregulation, lowering taxes and providing subsidies to increase output and increase the total supply in the economy.
70
Supply-side policy measures
Education and training
Research and development
Infrastructure
Small and medium-sized enterprises
Encouraging competition
Incentive-related policies
Labour market reforms
71
Effects of supply-side measures on governments’ macroeconomic aims
Economic growth
Increasing employment levels
Low and stable inflation
Healthier balance of payments
72
Limitations of supply-side policies
The major limitation of supply-side policies is the amount of time it takes for the economy to reap their benefits. It may take decades for a country to enjoy the advantages of better education and infrastructure.
Economic growth may further increase the gap between the rich and poor as supply-side policies do not aim to improve income distribution.
73
Economic growth
An increase in the number of goods and services produced in an economy over a period of time (usually one year). Economic growth is a quantitative measure of a country’s output.
74
Measurement of economic growth
Economic growth is measured using real gross domestic product (rGDP).
GDP = C + I + G + (X – M)
C = consumption
I = investment
G = government spending
(X – M) = net exports (exports minus imports)
75
GDP per capita
GDP per capita is the total value of goods and services produced in an economy divided by the total population of a country. The larger the population, the lower the GDP per capita. It is an indicator of the mean average national income per person.
GDP per capita = total GDP ÷ total population
76
Recession
A period of at least six months of negative economic growth (reducing output) in an economy. Is the opposite of economic growth; it is caused by a decrease in total demand and total supply in the economy over a period of time.
77
Demand side shocks
Sudden changes that increase or decrease demand for goods or services in the economy in the short term.
Falling consumer and business confidence
Higher interest rates, reducing borrowing and investment
Increased rates of unemployment
78
Supply side shocks
Sudden and unexpected changes in the cost of factor inputs, such as oil prices, commodity prices or wages. Shocks may be 'negative' or 'positive'.
Bad weather
Worker strikes
Poor agriculture harvests
79
Consequences of recession
Higher unemployment
Lower wages
Reduced government tax revenues
Increased government spending
Reduced investment
80
Causes of economic growth
Natural resources
The labour force
Infrastructure
Technology
81
Consequences of economic growth
POSITIVE BENEFITS
Improved standards of living and reduced poverty levels
Higher levels of employment
Lower government borrowing and increased tax revenues
Improvements in education and healthcare
NEGATIVE CONSEQUENCES
Negative impacts on the environment
Inflation
Inequalities in income and wealth
Natural resource depletion
82
Demand side policies
A macroeconomic concept that refers to total demand within an economy and the government policies that would affect it.
83
Inflation
Sustained increase in the general level of prices over a period of time.
84
Deflation
Sustained decrease in the general level of prices over a period of time.
85
Disinflation
A fall in the rate of inflation. It means that prices are still rising in the economy, but at a slower pace than the year before.
86
Hyperinflation
A very high increase in the prices of goods and services. The average level of prices rises more than 50% per month.
87
Measurement of inflation and deflation
The consumer price index: The weighted price index of goods and services in the economy over a period of time. It is used to measure the cost of living of an average household.
88
Calculating the price index
(weighted average price in year ÷ weighted average price base year) × 100
89
Causes of inflation
Demand-pull inflation: When inflation is caused due to an increase in total demand in the economy.
Cost-push inflation: Occurs when total supply falls due to an increase in the costs of production for firms or the unavailability of factor resources.
Imported inflation: A general and sustainable price increase due to an increase in the costs of imported products.
90
Causes of deflation
FALL IN MONEY SUPPLY: An increase in the interest rate by central banks will deter consumers from spending, as borrowing becomes expensive. This will lead to a decrease in the level of total demand in the economy. Savings will increase as returns on savings are higher.
DECLINE IN CONFIDENCE: If an economy is suffering from recession, consumer and producer confidence will be lower, leading to a decrease in spending and investment.
LOWER PRODUCTION COSTS: A decrease in the costs of production, such as ending the minimum wage, will increase total supply in the economy. If demand remains unchanged, producers will need to lower the prices of their goods to keep people demanding them.
TECHNOLOGICAL ADVANCES: Advances in technology, such as automation and robotics, can cause an increase in total supply. Technological advances will allow producers to lower costs, leading to a decrease in prices.
91
Consequences of inflation
Greater uncertainty
Extra costs to firms
Redistributive effects
Less saving
Damage to export competitiveness
92
Consequences of deflation
Positive consequences:
Increases their purchasing power, allowing them to save more money as their income increases relative to their expenses
Prices to fall over time, especially if incomes remain unchanged or increase at the same time.
Negative consequences
Fall in incomes too.
Resources are not employed fully, and an excess supply of goods and labour causes prices to fall in an attempt to restore balance and get rid of the surplus.
Because firms are always reluctant to lower prices, and workers are unlikely to accept lower wages
Bankruptcies
High levels of cyclical unemployment
Encourages consumers to save money and reduce spending, adding to the problem
Bad for stocks, but it can have a positive impact on some types of bonds
93
Policies to control inflation and deflation
FISCAL POLICY: is a demand-side policy. It is implemented to manipulate the level of total demand and the rate of economic growth in the economy
MONETARY POLICY: is also a demand-side policy. Contractionary monetary policy focuses on decreasing the level of total demand in the economy by increasing interest rates
SUPPLY-SIDE POLICIES aim to increase the long-term economic potential of the economy. They help to reduce the impact of inflation and deflation by improving productivity and total supply. These policies include:
TAX CUTS AND SUBSIDIES: Governments can provide subsidies or tax cuts to firms producing food and fuel to reduce their prices.
LIMITING WAGE INCREASES: Governments can limit the increase in annual wage levels to prevent inflation due to an increase in wages.
94
Inflation rate
CPI current year - CPI of the previous year x 100
95
Creditor
An individual or business you owe money to
96
Debitor
An individual or business that owes you money
97
Reasons for Government Spending
To supply goods and services that are not supplied by the private sector, such as defence; merit goods such as education
To achieve improvements in the supply-side of the macro-economy, like providing subsidies
98
Reasons to Tax
To finance public expenditure; building schools and infrastructure
To discourage certain activities; e.g. taxes on cigarette
To discourage import of goods; tariffs are import taxes and can be levied as a % of value of imports or a set tax on each item
To redistribute income from the rich to the poor
To achieve other macro-economic objectives
99
Effects of fiscal policy on govt. macroeconomic aims
Expansionary fiscal policy can reduce unemployment
Expansionary fiscal policy can increase economic growth
Contractionary fiscal policy can reduce high inflation
100
Effects of monetary policy on govt. macroeconomic aims
Expansionary monetary policy can reduce unemployment
Expansionary monetary policy can increase economic growth
Contractionary monetary policy can reduce high inflation
101
Effects of Supply-Side Policies
-Supply-side policies aim to increase economic growth by raising productive potential of economy
-An increase in the total supply of goods & services will require more labour &other resources to be employed
-It will reduce market prices & provide more goods & services to export
102
Supply-side polices macro aims and effects
Tax Incentives
-Reducing taxes on profits and small firms can encourage enterprise. It can also encourage investments in new equipment.
Subsidies/Grants
-To reduce production costs and help firms fund research and development of new technologies.
Education and Training
-Teaching new/existing workers new skills to make them more productive.
Labour Market Regulations
-Include minimum wage laws to encourage more people into work, and legislation to restrict the power of trade unions.
Competition Policy
-Regulations that outlaw unfair trading practices by monopolies and other large, powerful firms.
Free Trade Agreements
-Removing barriers to international trade allow countries to trade their goods and services more freely and cheaply
Deregulation
-Removing old, unnecessary and costly rules and regulations on business activities
103
Causes of Economic Growth
Discovery of more natural resources
Investment in new capital and infrastructure
Technical progress
Increasing the amount and quality of human resources
Reallocating resources
104
Consequences of Economic Growth
An increase in output can improve living standards of people
Higher output and incomes increase government tax revenue. This can increase govt. spending without increasing tax rates
However, it can increase pollution, lead to depletion of non-renewable resources and damage the natural environment
