4.2/4.3 Fiscal policy and government macroeconomic aims Flashcards
What is the first Macroeconomic aim?
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
What is the second Macro economic aim?
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
What is economic growth?
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
What is the unemployment rate?
The percentage of the labour force who are willing and able to work but are without jobs.
What is the numerical target for unemployment be in the UK?
between 4 and 5 %
What is inflation?
A sustained increase in the average price of goods and services
Where is the third Macroeconomic aim?
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
What is balance of payments?
The record of a countries economic transactions with other countries
What is the 4th Macroeconomic aim
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
What is fiscal policy?
decisions on government spending and taxation taken to influence total aggregate demand in the economy.
What is expansionary fiscal policy?
Rises in government expenditure and cuts in taxation designed to increase aggregate demand
What is contractionary fiscal policy?
cuts in government expenditure and rises in taxation designed to decrease aggregate demand
Why do governments spend?
Public expenditure represents a significant portion of the total aggregate demand in many economies - to provide public goods, and to stimulate the economy
How does current expenditures link to why Governments spend?
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
How does capital expenditures link to reasons government spend?
These investments in infrastructure capital equipment hospitals and school trains and aircraft
How does transfer payments link to reasons government spend?
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
What is income tax?
taxes on wages, salaries dividends and interest
What is corporation tax?
taxes on companies profits
What is capital gain tax?
Tax on the profit of asset when they are sold for a higher price than what they were bought for
What is inheritance tax?
Tax on wealth which is passed on when a person dies
What is VAT tax?
Tax on the purchases of most goods and services
What is excise duties?
Tax on alcohol, petrol and tobacco
What are tariffs?
Tax on imports
How does correcting market failure link to why the government tax?
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
How does earning government revenue link to reasons why the government tax?
Governments need money to provide essential services, public and merit goods revenue to found this is raised through taxation
How does promoting equality link to why the government taxes?
The wealthy are taxed to provide funds that can be utilised in reducing the opportunity gap between the rich and the poor.
How does supporting firms link to why the government taxes?
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
How does supporting poorer households link to why the government taxes?
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.
What are direct taxes?
A tax that cannot be shifted by the person legally liable to pay the tax onto someone else
What is an indirect tax?
A tax that can be sifted by the person legally liable to pay the tax onto someone else
Examples of direct tax
income, corporation capital gains inheritance tax
Examples of indirect tax
VAT excise dutars tariffs
What is progressive tax?
As income rises the percentage of their income paid in the tax rises
What is proportional tax?
As income rises the percentage of their income paid in tax stays the same
What is regressive tax?
As income rises, the percentage of their income paid in tax falls
What is budget deficit?
public expenditure is more than public revenue
What is budget surplus
public revenue is more than expenditure
What is balanced budget
public revenue and expenditure is the same
How does Direct tax affect consumer spending?
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
How does indirect tax affect consumer spending?
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
