Chapter 13 - Fiscal & Supply-Side Policies Flashcards
13.1 Fiscal Policy:
a) What is fiscal policy? WHat can fiscal policy influence? Explain what two things can be used in order to influence consumer behaviour.
b) In order to understand demand-side fiscal policy we must look at balanced budgets, budget deficits and budget surpluses.
Explain all 3 key terms listed above!
c) How can a budget defecit be altered (i.e. what can a gov. do in order to make its budget position better?) ?
d) What is demand-side fiscal policy?
e) What is defecit financing? How long does it roughly last and how is it done + what’s its purpose?
a) Fiscal policy is the government’s usage of government spending and taxation in order to achieve the government’s policy objectives. It aims to achieve its overall objective by using taxation and public spending. Fiscal policy can be used to influence AD. On a MICRO level, governments shall use taxation and subsidies to influence consumer behaviour.
b) 1. Balance Budgets = Is achieved when government spending equates government revenue (revenue earnt through TAXTATION).
2. Budget Defecit = Is a financial position in which government spending EXCEEDS government revenue!
3. Budget Surplus = Is a financial position in which the governement revenue EXCEEDS government spending! Oddly, we must note that a government shouldn’t see itself in a bedget surplus all the time as the point of its revenue from taxtation is that it is then to be spent on the public - i.e. through eductation, healthcare, welfare sectors. IN the last 50 years, the Uk government has seen 3 times where its been in a budget surplus.
c) They can either cut public expenditure or they can simply raise taxes.
d) Demand-side fiscal policy is used to increase or decrease the levels of AD thorugh changes in gov. taxation.
e) Defecit financing is deliberately running a budget defecit then borrowing to finance the defecit. A gov. deliberatley runs this for several years by setting public spending higher than taxation and other sources of gov. revenue! The aim is to achieve full employment by taxing the public less + stabalising the economic cycle, without at the same time creating inflationary pressures! IT IS USED AS A DEMAND MANAGING INSTRUMENT!
13.1
We shall now discuss demand-side fiscal policy.
a) Before we do this we must analyse the AD equation. Write out the equation. Government spending is one of the components (G) of aggregate demand. How? Link it to exapnsionary fiscal policy.
b)
c) How can the opposite be achieved - opposite of expansionary fiscal policy?
a) Equation: AD = C + I + G + (X - M). An increase in gov. expenditure, and/or a cut in taxation, INCREASES the size of the budget defecit (or reduces the size of the budget surplus). Either way an INJECTION occurs into the circular flow of income. This results in an increase in aggregate demand. AD curve moves to the right.
b) However, the extent to which expansionary fiscal policy increases real output (on the x-axis - from y1 to y2 for example), or create excess demadn which leads to demand pull inflation (whereby price increases from p1 to p2 as the AD curve shift to the R-side) depends on the shape of the SRAS curve, which also depends on how close the economy is to its ‘normal capacity’. One that point is close, the greater the inflationary effect of expansionary fiscal policy and the smaller the increase in real national output - because beyond y3 (i.e. ‘normal capacity’ ) the economy cannot grow due to lack of spare capacity.
c) The opposite can be achieved by using contractionary fiscal policy which increases taxation and reduces gov. spending. This decreases household income as well as profits earnt by a firm which in turn shifts AD to the LEFT.
13.1
a) What does the LRAS curve illustrate? Describe the key differences between the LRAS and the SRAS curve. How can the LRAS curve shift - give 3 examples that determine where it’s positioned. Furthermore, what does the LRAS curve show about the economy regarding the economy’s total output? WHy is the curve vertical?
b) What is SPARE CAPACITY?
a) The LRAS curve depicts the total quantity of goods and services that an economy can produce in the LONG - RUN when all factors of production are utilised fully and there are NO short - run constraint.
Unlike the SRAS curve, which can shift due to factors like changes in wages or prices of raw materials, the LRAS curve is VERTICAL because, in the LR , the economy’s output is determined by factors such as technology, resources, and labour force, rather than the price level. In other words the LRAS curve shows the economy’s potential output or full employment output. This output is INDEPENDENT of the price level in the LR.
The position of the LRAS curve can shift over time due to changes in
1. Tech
2. labour force - due to population growth or a rise in immigration
3. Capital accumilation - investments in infrastructure
b) Spare capacity refers to the unused or underutilised resources within an economy or firm that could be employed to increase output. We discuss this especially when talking about the SRAS curve. This is because when an economy has spare capacity, it means it’s NOT producing at its full potential. There are idle resources.
a) What is ‘discretionary fiscal policy’?
a) Discretionary fiscal policy involves making discrete (seperate) changes to gov. spending, taxation, and the budget defecit to manage the level of aggregrate demand.
To achieve full employment, gov ran deliberate budget defecits (setting gov. spending above taxation). This expanded AD, but sometimes too much demadn ‘overheats’ the economy - demand-pull inflation. In these circumstances governments were forced to reverse thrust fiscal policy by cutting public spending and increasing taxation.
13.1
a) Public expenditure and taxation. Taxation does WHAT to finance gov. spending? Why do governments collect taxes?
Public expenditure has been classified into various categories. An important distinction is between investment by the gov. into new capital projects and infrastructure. The other is to meet annual running costs from such projects such as teachers’ salaries. A significant portion of gov. expenditure goes towards unemployment-related benefits and state pension. Unlike spending on capital projects and on the subsequent running costs, transfers do NOT involve a claim by the gov. on national output. A third type of public spending is interest payments on the national debt.
b) List the 3 forms of gov. spending.
c) Public spending on social protection, health and education. The largest areas of public spending have been on social protection. What is social protection and how does the gov. suppport these individuals?
d) In the financial year 2021/22 social protection spending was 28.7 % of the gov’s total managed expenditure (TME). What is TME?
e) What is the OBR?
f) What is the ‘triple lock’?
a) Taxation raises the revenue used finance gov. spending. They collect taxes in order to finance the provision of goods such as roads and schools which otherwise would either be under-provided or not provided at all. It’s also used to transfer income and spending power between the rich and the poor (who are different groups in the economy).
b)
1. Investments into new capital projects and infrastructure.
2. Annual payments/running costs of such projects like teachers’ salaries.
3. Interest payments on national debt.
c) Social protection encompasses the financial assistance and services provided to those in need or at risk of hardship.
d) Total Management Expenditure = The total amount that the gov spends. It splits into the amount that gov. departments have been allocated (e.g. defence).
e) The OBR - office for budget responsibility - is a public body that provides independent economic forecasts and analysis of the public finances as background to the preperation of the UK budget.
f) The triple lock protects pensioners from spending cuts by guarateeing that the state pension rises by whichever is highest out of wages increases.
13.1
a) Now we shall delve into how taxation impacts the pattern of economic activity.
What is a tax? Why is it imposed? Taxes are the ______ source of gov’s revenue. Other forms include income from state ______ offered or interest payments or dividends recieved from the UK gov’s WHAT?
a) A tax is a compulsory levy made by the gov. to pay for its (the gov’s) activities. Taxes are therefore used to finance the different types of public expenditure. Taxation is the PRINICPLE source of gov’s revenue. Other forms include income from the sale of servies offered by the government or interest payments or dividends recieved from UK gov investments.
