chapter 26 - fiscal policy Flashcards

1
Q

definition of:

fiscal policy

A

use of taxes and government spending to affect macroeconomic objectives

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2
Q

definition of:

government budget

A

frees to its financial plans in terms of planned revenues and expenditure

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3
Q

definition of:

balanced budget

A

when gov balances its spending and its revenues

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4
Q

definition of:

budget deficit

A

when gov spend more than earning revenues

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5
Q

definition of:

budget surplus

A

when gov earns more revenue than its spendings

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6
Q

why does gov spend?

A
  • 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
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7
Q

effects of gov spending

A
  • higher demand - higher economic growth - but inflation
  • higher spending on welfare schemes - higher living standard
  • higher spending on public goods - higher productivity and growth
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8
Q

definition of:

tax

A

gov levy on income or expenditure

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9
Q

what happens if high taxation?

A
  • high tax on demerit goods - lower consumption
  • export become less price competitive
  • higher tax on rich to fund welfare schemes for poor
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10
Q

definition of:

tax burden

A

the amount of tax households and firms have to pay

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11
Q

definition of:

direct taxation

A

tax paid by income and wealth of individuals and firms

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12
Q

definition of:

indirect tax

A

expenditure taxes imposed on spending on goods and services

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13
Q

advantages of direct taxation

A
  • higher revenue

- reduce inequalities in wealth and income

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14
Q

disadvantages of direct taxation

A
  • reduce incentive to work
  • reduce enterprise incentive
  • tax evasion
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15
Q

advantages of indirect taxation

A
  • cost effective to collect
  • flexible to change the indirect tax rate
  • expanded tax base
  • can achieve macroeconomic aims
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16
Q

disadvantages of indirect tax

A
  • regressive
  • tax evasion
  • inflationary
17
Q

definition of:

progressive taxation

A

high income earners charged higher rate of tax

18
Q

definition of:

regressive taxation

A

high income earner charged with low rate of tax

19
Q

definition of:

proportional taxation

A

percentage paid stays the same, irrespective of taxpayer’s I level of income

20
Q

principle of taxation

A
equitable 
convenience
flexibility (adapt change in economic environment without rewriting tax legislation)
certainty (when where how to pay)
efficiency (achieve macroeconomic aims)
economical (easy and cheap)
21
Q

impact of taxation on price and quantity?

A
  • supply curve shift leftward - higher production cost
  • selling price increase - reduce quantity produced and sold
  • lower tax revenue
22
Q

impact of taxation on growth?

A

lower incentives to work

23
Q

impact of taxation of inflation

A

tax reduce purchasing power - helps reduce likelihood of inflation

24
Q

impact of taxation on business location

A
  • rates of corporation tax and income tax affect business location
  • high corporate tax reduce foreign direct investment
25
Q

impact of taxation on social behaviour

A

lower consumption of demerit goods

26
Q

impact of taxation on distribution of wealth

A

wealthier pays higher tax to fund for welfare schemes for the poor

27
Q

definition of:

tax avoidance

A

legal act of minimising payment of taxes

28
Q

definition of:

tax evasion

A

illegal act of not paying the correct amount of tax

29
Q

definition of:

expansionary fiscal policy

A

used to stimulate economy by increase expenditure and reducing taxation and implemented during recession; increasing budget deficit

30
Q

effect of expansionary fiscal policy

A
  • lower tax - increase in disposable income - higher aggregate demand
  • lower corporate tax - higher incentive for firms to invest further - increase -output and productive capacity
  • lower income tax - encourage people to work
31
Q

definition of:

contractionary fiscal policy

A

used to reduce level of economic activity by reducing expenditure and increasing taxation and implement during economic; budget surplus

32
Q

effect of contractionary fiscal policy

A
  • higher tax - reduce aggregate demand - reduce employment and reduce growth in output
  • high corporate tax - control firms trading activities
  • high income tax - low consumption - reduce inflationary pressures