Chapter 5 Flashcards
Explain two reasons why governments in for economic growth
- increase standard of living
- people will enjoy better healthcare and better education
- increase demand of labor
- unemployment will decease achieving aim of full employment
Analyze why governments want to keep inflation low
Increase business continuity leading to higher investment and economic growth
Lower inflation may increase exports and decrease imports improving a current account(Part of balance of payment)
Low inflation will encourage my saving as value of money will not decrease more funds will be available for investment
Full employment vs Low inflation
- inc income levels
- inc sp on g&s
- inc demand pull inflation
- harder to attract skilled labor
- inc wages
- inc CoP
- inc cost push inflation
Analyze why government imposes taxes
- To redistribute income more equally by imposing progressive tax, imposes higher tax rates on rich
- discourage consumption of the demerit goods eg cigarettes as taxes will increase prices of cigarettes and reduce demand
- To discourage imports by imposing tariffs on imports so price of imports increase leading to lower demand and higher demand on domestic goods increasing BoP stability
- main sorce of rev
Define indirect taxes and give an example
Tax imposed on spending example sales tax(VAT) or tariffs or excise duty
Define regressive tax
Tax rate decreases as income level increases
Analyze how A Cut in tax rates could increase tax revenue
- A cut income tax can increase incentive to work and increase productivity so unemployment decreases in the tax revenue increases
- A cut in the Corporation tax increase incentive to invest increasing profits leading to higher tax revenue
- increased consumer spending on goods and services plus firm investment leading to higher revenue from indirect tax example VAT
Identify 2 fiscal policy measures
Government spending and tax
Analyze the impact of A cut in interest rates on saving and investment
- Decreasing interest-rate will decrease the cost of borrowing some firms will be able to invest more due to higher borrowing
- decrease in interest rate will decrease in income on saving Decreases
- consumers will spend more so firms will respond by increasing investment as they expect higher profits
Define supply side policy
Long-term measures to increase productive capacity by inc quality and quantity of FoP leading to an outwards shift in PPC
Eg education and training, increase subsidies, privatization
State & Explain supply side policies
-Education and training:
increase skill and productive capacity
-Deregulations:
Removing Rules and regulations, reducing costs of production for firms and increasing efficiency
-Subsidy: encourage firms to inc sp on R&D
-Privatization: selling state owned assets to private
-Lower power of trade union
-reduce unemp benefits
-lower direct taxes: inc incentive to work & invest
Gov budget
financial plan for expected gov rev and expenditure
What causes national debt
a budget deficit, gov needs to borrow
Reasons for gov sp
- to inc AD
- sp on public goods, to help reduce market faliure
- to redistribute income by sp on subsidies, unemp benefits & pension
Tax burden
Amount of tax that households & firms must pay
Capital gain tax
tax on profit made by selling assets for a higher price
Excise duty
taxes charges on specific goods, charged in addition to VAT
Principles of taxation
- equitable (takes into consideration ability of tax payer)
- economical (easy & cheap to collect)
- convenience (convenient to tax payer)
- certainty(knowledge to limit tax evasion)
- efficiency(few negative side effects)
- flexibility(easy to changes when economic activity changes)
Tax avoidance
legal, not buying good or service
Tax evasion
illegal, not paying correct amount of tax
Disadv of exp fiscal policy
- may cause budget deficit
- if AD inc more than output, would cause D pull inflation
- if there are low confidence levels cons sp decreases
- sp on imports could inc, worsen current acc position
Disadv of contractionary fiscal
-would decrease AD, could lead to a recession
Money supply
amount of money in the economy at a certain time
EG vs Low inflation
cut in interest rate to inc EG
- would reduce saving, income on saving decreases
- cheaper costs of borrowing
- inc firm investment & consumer sp
- inc AD
- leading to D pull inflation
EG vs BoP stability
Income levels inc
-may inc consumer sp on imports
-firms may inc investment
-inc imports of raw material and capital goods
EG may lead to inflation
- making exports less price competitive
If imports inc more than exports it would lead to a deficit
Full employment vs BoP stability
Inc income levels -inc sp on imports More competition on labor -cost push inflation -exports less price competitive
what would make sustainable EG
EG will inc employment
- as output inc
- firms bring on more labor
- decrease unemployment
- inc sp on g&s
- firms respond by inc output further
