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a-level economics year 1 > Budget, Fiscal policy MM > Flashcards

Budget, Fiscal policy MM Flashcards

1
Q

What are the 3 main types of policy?

A

1) Fiscal policy
2) Monetary policy
3) Supply-side policies

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2
Q

What is fiscal policy concerned with?

A

Direct government intervention- influencing AD with G&T

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3
Q

What is monetary policy?

A

A form of indirect intervention- carried out by the central bank, not gvnmt- uses interest rates or QE to influence AD

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4
Q

What affect will higher G or lower T have on AD?

A

Increase AD

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5
Q

What affect will lower G or higher T have on AD?

A

Reduce AD

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6
Q

What affect does a
decrease in interest rates have on AD?

A

Increase AD due to lower cost of borrowing

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7
Q

What are supply-side policies?

A

Created by gvnmt in order to influence AS

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8
Q

How could supply side policies increase AS?

A

Policies decrease costs of production

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9
Q

What is a budget?

A

A financial plan/outline of expected spending and expected revenue for the next financial period

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10
Q

What are the 2 types of taxes?

A

1) Indirect taxes
2) Direct taxes

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11
Q

What are indirect taxes?

A

Taxes on goods and services (e.g. sugar tax)

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12
Q

What are direct taxes?

A

Taxes on income- specifically to the individual or business

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13
Q

What are the 3 approaches to taxation?

A

1) Progressive
2) Proportional
3) Regressive

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14
Q

What is proportional taxation?

A

Everybody pays the same % of their income in tax

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15
Q

What is regressive taxation?

A

When higher income groups pay a lower % of their income in tax- hits poorer groups the hardest

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16
Q

What is progressive taxation?

A

Ensures higher earner pay a higher % of their income

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17
Q

What is the marginal rate of tax?

A

The rate of taxation we pay on the last £ we earn

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18
Q

What are regressive taxes normally?

A

Indirect taxes (& vice versa)

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19
Q

What 2 categories is government expenditure divided into?

A

1) Current
2) Capital

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20
Q

What is current government spending & an example?

A

Expenses of running a country from day-to-day e.g. paying wages of public sector workers

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21
Q

What is capital government expenditure and an example?

A

Expenses on improving the facilities to the public e.g. building better schools

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22
Q

Is capital expenditure just as important as current expenditure?

A

Yes

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23
Q

What can you do easily to capital expenditure?

A

Delay- in hard economic times it is often cut before the current expenditure

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24
Q

What is inflation?

A

A sustained increase in PL

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25
Q

What are the 3 key things in a budget?

A

1) G
2) T
3) Balance expected between G & T

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26
Q

What are the 3 possible outcomes to any budget?

A

1) Balanced budget
2) Budget surplus
3) Budget deficit

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27
Q

What is a balanced budget?

A

Where G=T- near on impossible

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28
Q

What is a governments realistic goal with a budget?

A

Make the gap between G & T as close to 0 as possible

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29
Q

What is a budget surplus?

A

Where T is greater than G (T>G)- government raises more in taxation than it spends in G

30
Q

What is wrong with budget surpluses?

A

Difficult to justify politically

31
Q

What is a budget deficit?

A

Where G is greater than T (G>T)- the government spends more in G than it earns in taxation (most common)

32
Q

What is the most common outcome of a budget?

A

Budget deficit

33
Q

Why does the UK spend more than it earns in tax?

A

1) Political judgements
2) Amount of demands placed on governments leads to constant ↑ in G e.g. ageing population ↑ NHS spending

34
Q

How to governments finance a budget deficit?

A

Public-sector borrowing- Government bonds (low risk investment) loaned to government in return for an agreed rate of interest

35
Q

What are government bonds (gilts)?

A

A low risk investment in order to reduce a budget deficit

36
Q

What are the 3 elements to the budget?

A

1) G (government expenditure)
2) T (taxation revenue)
3) The difference between those

37
Q

What is the definition of fiscal policy?

A

involves the government changing the levels of taxation and government spending in order to influence AD & the level of economic activity

38
Q

What does expansionary fiscal policy involve/ lead to?

A

↑ AD so ↑ G & ↓ T which ↑ consumer spending due to higher RDI which leads to the government ↑ borrowing

39
Q

What deflationary (tight) fiscal policy involve/lead to?

A

↓ AD so G is cut and T ↑ which↓ consumer spending due to less RDI

40
Q

In what period is a expansionary fiscal policy used?

A

A recession

41
Q

When do automatic stabilisers 1) increase & 2) decrease?

A

When the economy is 1) shrinking & 2) growing

42
Q

What is the structural deficit?

A

The part of the deficit not related to the state of the economy & doesn’t disappear when the economy recovers

43
Q

What is the cyclical budget deficit?

A

Considers fluctuations in tax revenue and spending due to the economic cycle

44
Q

What is an example of a cyclical budget deficit?

A

In a recession, T falls and G increases so the size of the budget increases

45
Q

What are automatic fiscal stabilisers?

A

Changes in the size of a budget deficit caused by changes in the economic cycle

46
Q

What is the key factor to decide what fiscal policy to use?

A

Current position of the economy regarding the business cycle

47
Q

What does the money borrowed to fund a deficit become?

A

Future national debt

48
Q

What does borrowing money to fund national debt cause?

A

Huge opportunity cost- less spending available in future

49
Q

What rules does the IMF recommend about budget deficits?

A

Budget deficit shouldn’t exceed 3% of GDP
National debt shouldn’t exceed 60% of GDP

50
Q

What happens to the national debt if inflation is high?

A

Amount of money needed to be repaid is lower in real terms

51
Q

Why do private sector businesses sell bonds?

A

Fund expansion, diversify and growth

52
Q

What is crowding out?

A

The reduction of private sector investments induced by increased public sector investments

53
Q

What happens if more people invest in government bonds?

A

Private sector investment decreases

54
Q

Why may people invest in government bonds rather than corporate bonds?

A

Government bonds are safer

55
Q

Why may increased government bonds actually decrease AD?

A

Less funds for business to invest (I) so less exports (X) and less employment so RDI (C)

56
Q

Why is private sector investment (I) more efficient than government investment (G)?

A

Government failure- waste money due to no profit incentive

57
Q

What are 2 weaknesses of crowding out?

A

1) If economy is weak & business confidence is low, private sector may not want to expand
2) Outweighed by crowding in effect

58
Q

What is crowding in?

A

When higher government spending leads to an increase in private sector investment

59
Q

What is the laffer curve?

A

A controversial economic theory that suggests tax rates above a certain level will actually reduce tax revenue as households/firms will go abroad

60
Q

What are 4 strengths of fiscal policy’s effectiveness?

A

1) More direct than alternatives
2) Quicker than alternatives due to (1)
3) Can achieve all macro-objectives
4) Works well due to automatic fiscal stabilisers

61
Q

Explain fiscal policy being more direct as a strength of fiscal policy

A

Government themselves create the extra AD & jobs- Can be effectively targeted at correct areas of the economy

62
Q

Explain how achieving all macro objectives is a strength of fiscal policy

A

Expansionary FP may have crowding in & multiplier effect, leading to growth & low unemployment
Deflationary FP can stabilise prices, progressive taxes can keep fair income & subsidies can affect balance of payments

63
Q

Explain automatic fiscal stabilisers as a strength of fiscal policy

A

Naturally adjusts in relation to the economic cycle e.g. in a boom G decreases and T increases

64
Q

What are 4 limitations of fiscal policy?

A

1) Relies on good, sensible, well informed government
2) Crowding out
3) Disincentive effect
4) Expan. Fp increases national debt

65
Q

Explain relying on a good, sensible well informed gvnmt as a limitation of fiscal policy

A

Government failure is an extremely common occurrence e.g. corruption, political priorities, info failure & inefficient procedures

66
Q

Explain crowding out as a limitation of fiscal policy

A

Expansionary FP requires high gvnmt borrowing, leaving less for private sector access- more efficient have less finance & less efficient has more

67
Q

Explain disincentive effect as a limitation of fiscal policy

A

Higher tax makes workers not work, businesses go abroad & reducing size of their operations- over reliance on gvnmt

68
Q

Explain increasing national debt as a limitation of fiscal policy

A

Expansionary FP increases national debt= opportunity cost & has to be repaid in future instead of investing

69
Q

When is expansionary fiscal policy most effective & why?

A

When in a recession (horizontal part of AS)- increases Y and decreases unemployment while maintaining low PL more

70
Q

When is contractionary fiscal policy most effective & why?

A

When at YFE- decreases PL but maintains high real GDP (Y) more

a-level economics year 1 (10 decks)

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