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A Level Exonomics - Macro > 5.1 Fiscal Policy > Flashcards

5.1 Fiscal Policy Flashcards

1
Q

Fiscal policy definition

A

Deliberate changes to government spending and/or taxation in order to influence aggregate demand

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2
Q

What is expansionary fiscal policy?

A

Increase in AD

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3
Q

What is contractionary fiscal policy?

A

Reduction in AD

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4
Q

Why may governments use expansionary fiscal policy?

A
  • increase economic growth
  • reduce unemployment
  • increase inflation
  • redistribute income
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5
Q

Why may a government use contractionary fiscal policy?

A
  • reduce inflation
  • reduce budget deficit
  • redistribute income
  • reduce current account deficit
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6
Q

Direct tax definition

A

A tax that is levied on incomes or profits and is taken away before the individual ever receive it

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7
Q

Indirect tax definition

A

A tax placed on expenditure and can be passed onto another individual

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8
Q

Progressive tax definition

A

A progressive tax has an increase in the average rate of tax as income increases. As income increases the proportion of income taxes increases.

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9
Q

Example of progressive tax

A

Income tax

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10
Q

Proportional tax definition

A

A proportional tax has a fixed rate for all tax payers regardless of income

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11
Q

Regressive tax definition

A

A tax that increases in relative size on lower income earners

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12
Q

Ad valorem tax definition

A

A tax based on a percentage of added value on top of the original price

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13
Q

Unit tax definition

A

A tax where a fixed amount is placed on the item sold

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14
Q

Advantages of income tax

A
  • seen as fair as based on earnings and progressive

- progressive nature can be used to alleviate relative poverty

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15
Q

Disadvantages of income tax

A
  • acts as a disincentive to work

- progressive system makes it more complex

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16
Q

Advantages of VAT

A
  • does not affect work incentive

- hard to avoid

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17
Q

Disadvantages of VAT

A
  • regressive in many cases

- changes in VAT rate can be inflationary

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18
Q

What are excise duties?

A

These are additional indirect taxes placed on alcohol, tobacco and fuel. They are unit taxes

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19
Q

Advantages of Exercise duties

A
  • can change patterns of expenditure (e.g different rate taxes used for petroleum and diesel, say you to buy the less bad item)
  • can be used to discourage consumption of demerit goods
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20
Q

Disadvantages of Exercise duties

A
  • may lead to unemployment in those industries
  • regressive in some cases
  • can lead to ‘black markets’ where consumers get the product through alternative means to avoid the tax
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21
Q

What is council tax?

A

Council tax is administered by the local government and is based on the value of property

22
Q

Advantages of council tax

A
  • seen as fair as based on wealth of household

- raises money for local services

23
Q

Disadvantages of council tax

A
  • ‘bands’ are very out of date
  • may be difficult to pay for those who are ‘asset rich and cash poor’
  • lower revenues for poorer areas
24
Q

Advantages of corporation tax

A
  • based on success of companies, does not hit less successful companies
25
Q

Disadvantages of corporation tax

A
  • may deter foreign direct investment
  • encourages tax avoidance
  • may discourage business investment
26
Q

The reasons why governments levy taxes

A
  • to raise revenue to finance gov spending
  • to change patterns of economic activity
  • to discourage consumption and production of certain products
  • to redistribute income
27
Q

Hypothecated tax definition

A

A tax levied to raise money for a specific purpose

28
Q

Horizontal equity definition

A

Where people with similar income levels pay similar amounts of tax

29
Q

Vertical equity definition

A

Where the tax paid is based on the ability to pay

30
Q

What are the principles of taxation

A
  • economical
  • equitable
  • efficient
  • convenient
  • certain
  • flexible
31
Q

Describe economical in the principles of taxation

A

Relative to the revenue the tax generates, the tax should be inexpensive to collect

32
Q

Describe equitable in the principles of taxation

A

The tax should be fair and should be based on people’s ability to pay
- equity can be measured in terms of horizontal and vertical equity

33
Q

Describe efficient in the principles of taxation

A

The tax should have few side effects or unexpected consequences

34
Q

Describe convenient in the principles of taxation

A

The tax should be easy and convenient to pay

35
Q

Describe certain in the principles of taxation

A

A taxpayer should be able to work out broadly the amount of tax that they will pay

36
Q

What are the types of public expenditure

A
  • current government expenditure
  • capital government expenditure
  • transfer payments
37
Q

What is the current government expenditure and give an example

A

Current government expenditure is spending which recurs. This is on goods and services which are consumed and last for a short period of time.
- for example = drugs for the health service

38
Q

What is the capital government expenditure and give an example

A

Capital government expenditure is spent on assets, which can be used multiple times
- for example = roads or building a school

39
Q

What are transfer payments and give an example

A
  • they are welfare payments from the government. They aim to provide a minimum standard of living for those on low incomes. No goods or services are exchanged for transfer payments
  • for example = job seekers allowance and child benefits
40
Q

How does fiscal policy affect aggregate supply?

A
  • indirect taxes lead to higher cost of production = reduces the incentive for firms to supply output at any given price level
  • supply-side fiscal polices
41
Q

Supply-side fiscal policies definition

A

Policies that involve changes in fiscal policy that are designed to improve the LRAS of the economy

42
Q

What are the common supply-side fiscal policies?

A
  • government spending on improvements to the economy = infrastructure, education, health
  • tax incentives or cuts = increase investment into the economy from MNCs
  • reducing direct taxation = incentives to work more
43
Q

How does the fiscal policy link to microeconomics?

A
  • government spending on subsidies can encourage consumption of merit goods
  • indirect tax can be used to discourage consumption and production of certain goods
  • increase in regressive taxes or cutting benefits gov spending affects income and poverty
44
Q

Fiscal stance definition

A

The extent to which fiscal policy is likely to add to or subtract from aggregate demand

45
Q

Cyclical budget deficit definition

A

The portion of any budget deficit that changes when the rate of economic growth changes

46
Q

Structural budget deficit definition

A

The portion of a budget deficit that remains even if the economic growth is at its normal long-run rate

47
Q

National debt definition

A

The stock of all outstanding government debt that has yet to be repaid

48
Q

How does government spending exceed government taxation?

A

The government issues bonds to finance spending

49
Q

Relationship between budget balance and national debt

A
  • a budget deficit means the government has to borrow to make up the extra = increase in national debt as gov bonds are issued
50
Q

What is the office for budget responsibility

A

Set but by the government in 2010 to provide independent analysis of fiscal policy

51
Q

What is the reason why the OBR was set up?

A

To make it harder for the government to implement changes in fiscal policy which might be politically rather than economically motivated

52
Q

What are the main functions of the OBR?

A
  • economic forecasting
  • evaluating fiscal policy
  • analysis of the sustainability of public finances
  • evaluation of fiscal risks
  • analysis of tax and welfare costing

A Level Exonomics - Macro (23 decks)

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