5.2 Fiscal Objectives Flashcards
What is a fiscal policy made up of?
The use of government spending (G) and taxation (T)
What is the government budget?
A plan of future government spending mostly from taxation revenue
What is a government budget surplus?
Occurs when government spending (G) is less than government income (T)
What is a government budget deficit?
Occurs when government spending (G) is more than government income (T)
What is a balanced government budget?
Occurs when government spending (G) is equal to the government income (T)
What does a government use a government budget surplus on?
To spend on the direct provision of public goods and reducing market failure of merit goods
What does a budget deficit lead to?
An economic recession
What does a budget surplus lead to?
An economic boom
What is national debt?
The total amount of money owed to creditors from the government
What is an indirect tax on?
On expenditure of goods and services
What is an direct tax on?
On incomes
What are the two types of indirect taxes?
Specific and Ad-Valorem
What’s a specific tax?
A tax per unit sold of a good that doesn’t change based on how expensive the goods is, only the type of good
What’s a Ad-Valorem tax?
A tax as percentage of the price of the good
What a regressive tax?
A tax that takes a higher proportion of the incomes of the poor
What a progressive tax?
A tax that take a higher proportion of the income of the rich
What a proportional tax?
A tax that takes a equal proportion of the incomes of the rich and the poor
What are the reason for taxation?
- Generate tax revenue
- Decrease consumption of demerit goods
- To redistribute income to reduce income inequality
- To reduce imports to protect domestic industries
Why can high national debt be beneficial to an economy?
Government will have lots of money to spend on fiscal policy
Why can high national debt be bad to an economy?
Government will have to pay it back with high interest amounts
What are the two types of government spending?
Capital spending and current spending
What is an example of capital spending?
- Infrastructure
- Street lighting
- Military defence
- Public roads
What are examples of current spending?
Day to day operational expenses
- salaries for government employees
What are the main reasons for government spending?
- Provision of public goods
- To increase AD and create jobs
- Subsides
- Government Aid
What is the aim of a contractionary fiscal policy?
To reduce AD in the economy and in doing so contract the economy
How can contractionary fiscal policies be done?
Through increasing taxation and/or reducing government spending
What is the aim of a expansionary fiscal policy?
To increase AD in the economy an in doing so expand the economy
How can expansionary fiscal policies be done?
Through decreasing taxation and/or increasing government spending
Which government macroeconomic objectives does a expansionary fiscal policy help?
- Sustainable Economic growth
- Low unemployment
Why do expansionary fiscal policies increase demand-pull inflation?
An increase in AD leads to a rise in the price level shown in the AD/AS model
Why do expansionary fiscal policies worsen BOPS?
Due to lower unemployment, incomes rise which leads to higher consumer spending (C) which increases imports which leads to a BOP instability
Which government macroeconomic objectives does a contractionary fiscal policy help?
- Low and stable inflation
- Stable balance of payments
Why do contractionary fiscal policies lead to an economic recession?
An decrease in AD leads to a lower GDP which means incomes are lower, less consumer spending (C) and there is overall an economic recession
Why do contractionary fiscal policies lead to an high inflation rate?
An decrease in AD will lead to a lower price level shown on the AD/AS analysis
