4.2/4.3 Fiscal policy and government macroeconomic aims

Question 1

What is the first Macroeconomic aim?

Answer 1

Economic growth is a central macroeconomic aim for most governments many developed nationals have an annual growth target rate of 2-3%. This is sustainable growth growth at this rate is less likely to cause excessive demand pull inflation. Economic growth has positive impacts on confidence consumption investment employment income living standards and government budgets

Question 2

What is the second Macro economic aim?

Answer 2

Low unemployment- if there is low levels of unemployment the government will bring in more money from taxes . There will be more consumers with income to spend so more money is reinvested into the economy and there will be more money in the economy. There will be less crime incentive as more people will have a source of income. Also the government will not need to spend as much on welfare payments

Question 3

What is economic growth?

Answer 3

In the short run, an increase in the output of an economy, and in the long run, an increase in the productive potential of an economy

Question 4

What is the unemployment rate?

Answer 4

The percentage of the labour force who are willing and able to work but are without jobs.

Question 5

What is the numerical target for unemployment be in the UK?

Answer 5

between 4 and 5 %

Question 6

What is inflation?

Answer 6

A sustained increase in the average price of goods and services

Question 7

Where is the third Macroeconomic aim?

Answer 7

Most economies have a target for inflation rate of 2% a low rate of inflation is desirable as it is a symptom of economic growth as consumers will have more purchasing power. A low and stable rate of inflation is important as it allows firms to confidently plan for future investment of capital this helps to increase economic growth and it offers price stability for consumers also reduces borrowing and intrest rates

Question 8

What is balance of payments?

Answer 8

The record of a countries economic transactions with other countries

Question 9

What is the 4th Macroeconomic aim

Answer 9

Redistribution of income and wealth- High levels of income and inequality creates social unrest and can lead to uprisings, Perfect income equality is not desirable as it removes the incentive to work and study. Government aim to redistribute income by taxing the wealthy and providing welfare payments to the poor Unchecked capitalism (like in the free market) has a natrual high income inequality the wealthy are able to keep buying factors of prodution. Also the concentration of ownership becomes more narrow with fewer individuals owning world wealth government intervenes because of this

Question 10

What is fiscal policy?

Answer 10

decisions on government spending and taxation taken to influence total aggregate demand in the economy.

Question 11

What is expansionary fiscal policy?

Answer 11

Rises in government expenditure and cuts in taxation designed to increase aggregate demand

Question 12

What is contractionary fiscal policy?

Answer 12

cuts in government expenditure and rises in taxation designed to decrease aggregate demand

Question 13

Why do governments spend?

Answer 13

Public expenditure represents a significant portion of the total aggregate demand in many economies - to provide public goods, and to stimulate the economy

Question 14

How does current expenditures link to why Governments spend?

Answer 14

These include the daily payments required to run the government and public sector wages and salaries of public employees like teachers police it also includes payments for goods and services like medicines for hospitals

Question 15

How does capital expenditures link to reasons government spend?

Answer 15

These investments in infrastructure capital equipment hospitals and school trains and aircraft

Question 16

How does transfer payments link to reasons government spend?

Answer 16

Payments made by the government for which no goods or services are exchanged like unemployment and disability benefits subsidies to producers and consumers. This type of government spending does not contribute to GDP as income as it is only transferred from one group of people to another

Question 17

What is income tax?

Answer 17

taxes on wages, salaries dividends and interest

Question 18

What is corporation tax?

Answer 18

taxes on companies profits

Question 19

What is capital gain tax?

Answer 19

Tax on the profit of asset when they are sold for a higher price than what they were bought for

Question 20

What is inheritance tax?

Answer 20

Tax on wealth which is passed on when a person dies

Question 21

What is VAT tax?

Answer 21

Tax on the purchases of most goods and services

Question 22

What is excise duties?

Answer 22

Tax on alcohol, petrol and tobacco

Question 23

What are tariffs?

Answer 23

Tax on imports

Question 24

How does correcting market failure link to why the government tax?

Answer 24

In the free market there is a less than optimal allocation of resources from society’s point of view. the government aims to subsidies merit goods and tax demerit goods to result in a more efficient allocation of resources

Question 25

How does earning government revenue link to reasons why the government tax?

Answer 25

Governments need money to provide essential services, public and merit goods revenue to found this is raised through taxation

Question 26

How does promoting equality link to why the government taxes?

Answer 26

The wealthy are taxed to provide funds that can be utilised in reducing the opportunity gap between the rich and the poor.

Question 27

How does supporting firms link to why the government taxes?

Answer 27

In a global economy governments choose to support key industries so as to help them remain competitive and taxation provides te funds to do this

Question 28

How does supporting poorer households link to why the government taxes?

Answer 28

Poverty has multiple impacts on both the individuals and the economy, intervention seeks to redistribute income tax the rich a give to the poor reducing the impacts of poverty.

Question 29

What are direct taxes?

Answer 29

A tax that cannot be shifted by the person legally liable to pay the tax onto someone else

Question 30

What is an indirect tax?

Answer 30

A tax that can be sifted by the person legally liable to pay the tax onto someone else

Question 31

Examples of direct tax

Answer 31

income, corporation capital gains inheritance tax

Question 32

Examples of indirect tax

Answer 32

VAT excise dutars tariffs

Question 33

What is progressive tax?

Answer 33

As income rises the percentage of their income paid in the tax rises

Question 34

What is proportional tax?

Answer 34

As income rises the percentage of their income paid in tax stays the same

Question 35

What is regressive tax?

Answer 35

As income rises, the percentage of their income paid in tax falls

Question 36

What is budget deficit?

Answer 36

public expenditure is more than public revenue

Question 37

What is budget surplus

Answer 37

public revenue is more than expenditure

Question 38

What is balanced budget

Answer 38

public revenue and expenditure is the same

Question 39

How does Direct tax affect consumer spending?

Answer 39

Income tax is an example of a direct tax which is took of the consumers income this gives them less disposable income meaning that they cannot spend as much on luxury’s and may have to cut down on necessities if the rate of income tax is increased this prevents the consumer from spending more money

Question 40

How does indirect tax affect consumer spending?

Answer 40

An example of an indirect tax is VAT which is a tax on products or services when sellers add value onto them this directly effects the consumer as the VAT tax is usually pushed onto the consumer meaning that if it is addictive and or a necessaries consumers will still continually buy the product meaning they will have less disposable income. VAT makes products more expensive