Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > 4.5 The role of the state in the Macroeconomy > Flashcards

4.5 The role of the state in the Macroeconomy Flashcards

1
Q

Capital government expenditure

A
  • protects consumers, promotes competition and enhances the integrity of the system by preventing market rigging.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

transfer payments

A
  • government payments for which there is no corresponding output, where money is taken from one group and given to another, for example benefits and pensions.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

current governemnt expenditure

A
  • The government also has to spend money on interest payments for national debt.
  • general government final consumption plus
    transfer payments plus interest payments.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Changing composition and size of public expenditure in most mixed and free market economies

A
  • The lower the average income of the country, the lower is likely to be the percentage of GDP spent by the government.
  • This is mainly due to lower tax revenue in poorer countries
  • higher income countries demand more services fromr the government
  • aging population
  • global financial crisis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Changing composition and size of public expenditure in developing economies

A
  • will be significant differences
  • different attitudes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Impacts of public expenditure on growth and productivity

A
  • free market economists argue it is wasteful and causes inefficiency
  • government is able to enjoy economies of scale
  • provides infrastructure for economy to work efficiently
  • education creates human capital neccesary for growth
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Impacts of public expenditure on living standards

A
  • the government corrects market failure and provides public goods
  • reduces absolute poverty
  • output overall is reduced
  • principle agent problem
  • democracy means technically people choose
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Impacts of public expenditure on crowding out

A
  • the government has to borrow from individuals and businesses so money they spend is above their tax revenues
  • the government competes with private sector for finance - leads to higher interest rates, which will discourage firms from investing and individuals from buying credit
  • FM economists argue investment will be more efficient in the private sector
  • felt most at full employment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Impacts of public expenditure on level of taxation

A
  • levels of tax must be high in order for spending to be sustainable.
  • oil rich countries are an exception.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Impacts of public expenditure on equality

A
  • increase equality
  • provides minimum standard of living
  • ensures everyone has access to absic goods
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

progressive tax

A

where those who are on higher incomes pay a higher marginal rate of tax; they pay a higher percentage of their income on tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

regressive tax

A

where the proportion of income paid in tax falls as the income of the taxpayer rises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

proportional tax

A

where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

impacts of tax changes - incentives to work

A
  • higher tax discourage individuals from working
  • could encourage migration
  • may lead to the poverty trap
  • income tax is the one that will have the most effect
  • higher taxes could mean people work longer hours in order to maintain their income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

impacts of tax changes - tax revenues

A
  • laffer curve
  • Revenue from indirect taxes can be uncertain as they depend on consumer
    spending patterns.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

laffer curve

A

a rise in the tax rate does not necessarily increase
tax revenue.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

impacts of tax changes - income distribution

A
  • progressive tax system will increase the equality of income distribution as more
    money is proportionally taken from the rich than from the poor.
  • regressive one will
    decrease income equality
  • One problem with using tax to redistribute income is that it does not give the poor anything, so the system needs to be supported with benefits.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

a move from indirect taxes to direct taxes will do what

A

promote equality as direct taxes tend to be progressive and indirect taxes regressive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

impacts of tax changes - real output

A
  • A rise in direct taxes will reduce the level of disposable income an individual has, which will cause a fall in their spending and thus a fall in AD. - It could also cause a fall in leftover profits for businesses and therefore a fall in investment. The effect this has on output will depend on where the economy is: whether it is at full employment or not.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

impacts of tax changes - employment

A
  • higher indirect taxes and NICs increase costs for firms and this will decrease SRAS. This impact will again depend on where the economy is producing.
  • It can be argued that income taxes cause a disincentive to work and therefore reduce LRAS as the most skilled workers go overseas and more people become inactive.
21
Q

impacts of tax changes - price level

A
  • taxes can impact LRAS, SRAS and AD. Therefore, these changes will impact price depending on where the economy is producing.
  • Indirect taxes, particularly VAT, often cause cost push inflation.
22
Q

impacts of tax changes - trade balance

A
  • A rise in taxes will decrease income and consumption,
    meaning consumers spend less on imports. The trade balance will improve in the short run.
  • In the long run, lower AD will reduce businesses’ need to invest and this could reduce competitiveness meaning that exports decrease.
23
Q

impacts of tax changes - FDI flows

A
  • low taxes encourage business to invest
  • race to the bottom - where countries have to continue to lower their taxes in order to make them the lowest to encourage investment; the eventual result is a fall in revenues for all countries
24
Q

Automatic stabilisers

A
  • mechanisms which reduce the impact of changes in the
    economy on national income; government spending and taxation are automatic
    stabilisers.
  • cannot prevent fluctuations, can only reduce cost
25
Q

discretionary fiscal policy

A

the deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary
policies.

26
Q

national debt vs fiscal deficit

A

The national debt is the sum of all government debts built up over many years whilst
a fiscal deficit is when the government spends more than it receives that year.

27
Q

cyclical deficit

A
  • the part of the deficit that occurs because government spending and tax fluctuates around the trade cycle.
  • When the economy is in recession, tax revenues are low and spending is high creating a larger deficit.
28
Q

structural deficit

A

The structural deficit is the fiscal deficit which occurs when the cyclical deficit is zero; it is long term and not related to the state of the economy.

29
Q

actual deficit

A

the structural deficit plus the fiscal deficit.

30
Q

A structural surplus occurs

A

A structural surplus occurs when at the peak of the boom, there is an actual fiscal
surplus whilst a structural balance occurs when at the peak of the boom, the actual
fiscal balance is 0.

31
Q

if the government has a structural deficit

A
  • It is likely that national debt will grow over time as the government has to consistently borrow money to finance spending.
  • It is argued that structural deficits need to be eliminated but this is difficult since it is impossible to know what part of the deficit is structural and
    what part of it is cyclical, just as it is impossible to know the size of the output gap.
32
Q

factors influencing the size of the fiscal deficit

A
  • the trade cycle
  • unforeseen events
  • interest rates
  • privatisation
  • government aims
  • high revenues from oil
  • number of dependents
33
Q

factor influencing the size of national debts

A
  • If the government is continuously running a deficit, then the national debt will
    increase overtime.
  • There is a consensus view that fiscal deficits over 3% will lead to growing national debt as a proportion of GDP.
  • It is only when the government runs a budget surplus that the size of the national debt decreases.
  • ageing popualtion
34
Q

The significance of fiscal deficits

A
  • High levels of borrowing may raise interest rates
  • will lead to crowding out
  • servicing their national debt
    through interest repayments, which has a high opportunity cost.
  • generational burden and can cause intergenerational inequality
  • inflation
  • reduced credit rating for the government
  • enough foreign currency
  • benefit growth
35
Q

Macroeconomic policies in a global context - use of policies

A
  • Fiscal policy, monetary policy, supply side policy, exchange rate policy and direct controls in order to achieve a number of goals.
  • Direct controls include
    minimum or maximum prices/wages, quotas on imports, limits on currency or regulation
36
Q

Macroeconomic policies in a global context - reduce fiscal deficits and national debts

A
  • policy of austerity since 2010 to reduce fiscal deficits
  • increase taxes
  • FME argue it would cut put waste
  • rely on autmoatic stimulus
  • default on their loans
37
Q

Macroeconomic policies in a global context - reduce poverty and inequality

A
  • redistribution from rich to poor in necessary
  • progressive tax system - will equally distribute income
  • government expenditure as a form of benefits and transfer payments
  • provide goods and services
  • can attempt to reduce wage differentials - NMW
  • access to education
  • can introduce prince controls on essential goods
  • trickle down economics
  • The law of diminishing marginal utility suggests that redistribution increases
    total utility and therefore is a better allocation of resources.
38
Q

Macroeconomic policies in a global context - changes in the rate of interest rate and supply of money

A
  • for domestic reasons to control inflation or global issues such as lower exchange rate
  • no relationship between the supply of money and inflation
  • globalisation of the financial market
  • manage demand side inflation
  • quantitve easing
39
Q

Macroeconomic policies in a global context - international league

A
  • taking actions to increase any of the factors
  • supply side measures
  • exchange rate policies
  • join the WTO or sign trade organsiations
40
Q

Macroeconomic policies in a global context - external shocks

A
  • commodity price shock - The government could use expansionary policy to reduce the impact of a fall in GDP or they could use deflationary policy to reduce the impact on inflation.
  • financial crisis - where the government can use expansionary policy to
    increase AD
41
Q

Transnational companies

A
  • huge gains to an economy
  • can have a negative economic and social impact
  • have history influencing politicians
  • some developing countries to allow TNCS to set up without a joint venture
42
Q

measures to reduce power of TNCs - regulation of transfer pricing

A
  • If taxes are higher in the first country than the second country, they can set a low
    price on the product made in the first country.
  • The overall aim is to increase their
    profit made in the low tax country and decrease it in the high tax country and so
    overall reduce their tax bill.
  • arms length principle
43
Q

transfer pricing

A

one way for firms to engage in tax avoidance

44
Q

measures to reduce power of TNCs - ability to control global comapnies

A
  • difficult or individual governments to control TNCs.
  • solutiuons to taxation require worldwide agreements
    or individual governments to control TNCs
  • any solution which would benefit a country like the UK would lead to great
    losses for countries like the Bahamas, Ireland and Luxembourg. There is also
    division within countries
45
Q

problems facing policy makers

A
  • inaccurate information
  • risks and uncertainties
  • external shocks
46
Q

problems facing policy makers - inaccurate information

A
  • Short term information, such as GDP figures for the
    previous month, are often inaccurate and so may mean that the government is
    unable to see if there are problems within the economy. - Trying to cut down on tax
    evasion and avoidance is difficult as the government does not have the full picture on the level of avoidance, who it is that is avoiding the tax and the best way to reduce it.
47
Q

problems facing policy makers - risk and uncertainties

A
  • The government cannot accurately predict the future
    and so it is difficult for them to know whether extra spending is necessary etc.
  • They can’t know the full impact of their decisions as consumers often react unexpectedly and this could undermine government policy. - Managing risk is an essential part of good decision making.
48
Q

problems facing policy makers - external shocks

A
  • The government is unable to control and prepare for these
    external shocks; the best they can hope to do is lessen their impact.
  • Since every situation is different, it may be difficult to know the best method to solve the problem.
  • Policies employed by policy makers may not have their intended impacts and it may
    undermine current policies in place, for example Brexit has delayed government plans to balance the budget.

Economics (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions