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Economics > Chapter 13 > Flashcards

Chapter 13 Flashcards

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1
Q

Define fiscal policy

A

Use of gov spending and taxation to achieve governments policy objectives

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2
Q

How is fiscal policy influences AD and AS

A

Fiscal policy affects AD through taxation (reducing AD)

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3
Q

What is the governments budget

A

Gov spending versus taxation

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4
Q

What is meant by

  • balanced budget
  • budget deficit
  • budget surplus
A

G=T
G>T
G

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5
Q

What is meant by eliminating a budget deficit

A

Cutting public spending

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6
Q

What was Keynesians demand side fiscal policy

A

-Deficit financing to inject demand into the economy

Deliberately, gov runs a budget deficit so public sector spending is higher than tax revenue. Borrow money , this is in order to achieve full employment and stabilise economic cycle without inflationary pressures

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7
Q

Define demand side fiscal policy

A

Increase or decrease AD through changes in gov spending and taxation

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8
Q

what happens if there is no fiscal policy in place

A
  • Without regulation markets will have low economic growth

- Lack of AD

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9
Q

Define expansionary fiscal policy

A

Use of fiscal policy to increase AD

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10
Q

Draw expansionary fiscal policy

A

…

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11
Q

Why expansionary fiscal policy may cause inflation

A

Demand pull inflation, depends on how close SRAS is to LRAS. How close SRAS is to normal capacity, can cause inflation.

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12
Q

Define contractionary fiscal policy

A

Fiscal policy to decrease AD

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13
Q

Define discretionary fiscal policy

A

Intentional changes to government spending or taxation to manage AD

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14
Q

Define crowding out

A

When increase in public sector spending displaced private sector spending with little or no increase in AD

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15
Q

Define supply side fiscal policy

A

Used to increase economy’s ability to produce and supply goods

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16
Q

Examples of supply side fiscal policies

A
  • Incentivising to work
  • Incentivising to save
  • Incentivising to retrain
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17
Q

Define supply side policies

A

Government economic policies aiming to make markets more competitive and efficient and shifting LRAS curve to the right

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18
Q

What would a successful supply side policy do

A

Shift LRAS to the right

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19
Q

Why does rising LRAS cause inflation

A

Due to an increase in AD

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20
Q

Define total managed expenditure

A

Total amount that the government spends. Splits into all the compartments

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21
Q

Examples of gov spending

A
  • Public order
  • Housing and environment
  • School
  • Transport
  • Education
  • Social protection
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22
Q

What is the job of Office for Budget Responsibility

A

Advisory public body that provides independent economic forecasts and analysis of the public finances as background to the preparation of the UK budget

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23
Q

What is demand led spending

A

Gov spending literally led by demand such as unemployment benefits, increasing when unemployment rises

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24
Q

Describe what is meant by gov expenditure: transfer payments

A

Tax payers money being transferred to things like benefits

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25
Describe what is meant by gov expenditure: debt interest
Payments by gov to people who have lent to the state
26
Types of taxes in the UK
- Income - National insurance number - Business rates - VAT(indirect) - Council tax
27
Reasons for taxation
-Gov revenue 95% is collected by local government for central gov
28
Difference between direct and indirect tax
Direct: Tax that cannot be shifted, legally Indirect: Tax that can be shifted onto someone else
29
3 types of taxation
Progressive, Regressive and proportionate
30
Define progressive tax
Tax progresses as income rises
31
Define regressive tax
When proportion of income paid in tax falls as income rises
32
Define proportional tax
When the proportion of income paid in tax stays the same as income tax increases
33
Draw the three types of taxation
34
How to see what kind of tax is being exercised
Average rate vs marginal rate
35
How to measure average tax rate
tax paid / income
36
How to measure marginal tax rate
change in tax paid / change in income
37
Define principle of taxation
Criterion used for judging whether a tax is good or bad
38
The ‘principles of taxation’:
- Economy (tax is cheap to collect) - Convenience and certainty (convenient to pay and sure of amount paid) - Equity (Tax systems should be fair) - Efficiency (requires tax to achieve desired objective) - Flexibility (should be able to change)
39
Why is VAT used
To make consumers switch from goods considered undesirable to those that are better
40
Describe taxes on capital and wealth
-Property taxes are the same as that of 1991 | Little interest
41
Why do progressive taxes lead to less efficiency
Less equal so people less incentivised to work more as more money will be taken away
42
What is the supply side view of income taxes
They should be reduced. | More labour, as cost of living on benefits is reduced making these individuals lives very hard
43
Define national debt
The stock of all past government borrowings that have not been paid back
44
Relationship between budget balance and national debt
As budget is more and more unbalanced, with more spending than revenue there is more borrowing so an increase in national debt
45
Difference between stock and flow
Flow is of any one time | Stock adds up
46
Two types of budget deficits
Cyclical- changes with the state of the economy. In a boom, with little unemployment, there is a lot of employment so less spent on unemployment benefits, so decreases. Structural- does not disappear when economy recovers
47
What is the Keynesian view of how to deal with the economic cycle
AD is increase during a trough AD is deflated during a peak This is in order for it to be smooth
48
Define automatic stabiliser
Fiscal instruments such as progressive taxes and income related welfare benefits that automatically stimulate AD in an economic downswing and depress in an upswing, smoothing the economic cycle
49
What do automatic stabilises do
Make the economic cycle less volatile
50
What is the free market view, what should be done/ not be done with the economic cycle
-gov may be wrong with discretionary demand management, especially for political reasons
51
What is financial crowding out
Financing public spending is done by taxation or borrowing. Increase in taxation reduces income so a reduce in private AD. Also increase in gilts is offered but to make it attractive, interest rates rise, so more expensive for firms to borrow and invest. Decrease in overall household consumption
52
Budget surplus and inflation
Decrease in inflation, deflation may occur sue to excessive aggregate demand
53
Difference between reproductive and deadweight national debt
Reproductive: not a burden on future generations Deadweight: is a burden on future generations
54
What is meant by rolling over the national debt
Part of the national debt matures and if there is no surplus the gov must sell new debt to raise funds to repay maturing debt
55
What is a supply side policy
Gov economic policy which aim to make markets more competitive and efficient, increasing production potential and shifting LRAS to the right
56
Is supply side policy free market?
Yes, Keynesian focused on demand side
57
Define supply side improvements
Reforms taken by private sector to increase productivity- reduce costs and become more efficient and competitive. Without gov prompting
58
Define interventionist policies
When a gov intervenes in
59
Define market based supply side policies
Policies free up markets, promote competition
60
Examples of pro free market supply side policies
Privatisation, marketisation, deregulation
61
Explain and draw the laffer curve
As total tax rates increase tax revenue increases to a point, there is no incentive to produce output when there is 100% tax.
62
What is the trickle down effect
Rich benefitting means poor do too
63
Examples of microeconomic supply side policies - industrial policy measures
- Privatisation - Marketisation (no longer financed by taxation) - Deregulation - Subsidising spending on research and development
64
Examples of microeconomic supply side policies- Labour market measures
- Lower rates of income tax - Reducing benefits - Removing power of trade unions - Limiting employers power to employ - Improvements in training labour
65
Examples of microeconomic supply side policies- Financial and capital markets
- Deregulation financial markets (more competition) - Encouraging saving - Reducing public spending to avoid crowding out
66
Free market 3 main ways of stimulating market forces, supply side
- Tax cut, incentive to seek profits and work harder - Privatisation to unleash market forces - Deregulation, increase competition

Economics (15 decks)

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