chapter 26 - fiscal policy Flashcards
definition of:
fiscal policy
use of taxes and government spending to affect macroeconomic objectives
definition of:
government budget
frees to its financial plans in terms of planned revenues and expenditure
definition of:
balanced budget
when gov balances its spending and its revenues
definition of:
budget deficit
when gov spend more than earning revenues
definition of:
budget surplus
when gov earns more revenue than its spendings
why does gov spend?
- inject money into spending in macroeconomic objectives
- spend on policies to reduce negative externalities
- to achieve supply side
- to subsidise industries that need financial support
effects of gov spending
- higher demand - higher economic growth - but inflation
- higher spending on welfare schemes - higher living standard
- higher spending on public goods - higher productivity and growth
definition of:
tax
gov levy on income or expenditure
what happens if high taxation?
- high tax on demerit goods - lower consumption
- export become less price competitive
- higher tax on rich to fund welfare schemes for poor
definition of:
tax burden
the amount of tax households and firms have to pay
definition of:
direct taxation
tax paid by income and wealth of individuals and firms
definition of:
indirect tax
expenditure taxes imposed on spending on goods and services
advantages of direct taxation
- higher revenue
- reduce inequalities in wealth and income
disadvantages of direct taxation
- reduce incentive to work
- reduce enterprise incentive
- tax evasion
advantages of indirect taxation
- cost effective to collect
- flexible to change the indirect tax rate
- expanded tax base
- can achieve macroeconomic aims