Demand-side Policies Flashcards
Austerity
Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments.
Automatic stabilisers
Automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a recession.
Budget balance
The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G
Budget deficit
Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.
Budget surplus
Occurs when tax revenues exceed government spending. A surplus can be used to repay some of the national debt.
Central bank policy interest rate
Also known as the monetary policy rate, it is the official lending rate for loans set by a nation’s central bank e.g. the Bank of England or the European Central Bank.
Corporation tax
A tax on the profits made by companies, in the UK the main rate of corporation tax is 19% and is expected to fall to 18% by 2020.
Cyclical budget (fiscal) deficit
The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low.
Discretionary fiscal policy
Deliberate attempts to affect the level and growth of aggregate demand using changes in government spending, direct and indirect taxation and borrowing.
Direct taxation
Taxes levied on streams of income and profits such as income tax and corporation tax.
Exchange rate
Exchange rates are the price of one country’s’ currency in relation to another.
Exchange rate index
The trade-weighted external value of a currency.
Excise duties
Indirect taxes levied on specific goods, typically alcoholic beverages, tobacco and fuels.
Expansionary monetary policy
A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost aggregate demand, output and jobs – includes lower interest rates.
Expenditures witching policies
Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP.
Fine-tuning
Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates / taxation.
Fiscal austerity/Fiscal tightening
Fiscal austerity refers to decisions by a government to reduce the amount of borrowing (i.e. cut the size of a fiscal deficit) over time.
Fiscal deficit
When government expenditure is higher than the revenue from taxes in a given year.
Fiscal policy
A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.
Fiscal stabilty
Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending equal revenue.
Fiscal stimulus
Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity.
Global financial crisis
A severe world-wide economic financial crisis beginning with the collapse of the investment bank Lehman Brothers on 15/9/2008 and resulting in bail outs and other fiscal measures to prevent the collapse of the world financial system. The crisis caused a global economic downturn and the greatest financial crisis since the Great Depression of the 1930s.
Government spending
Spending by government on education, health care and defence & other public services.
Household benefits cap
Welfare reform introduced by the UK government in 2013 – which limits total benefits at £500 per week for a family and £350 per week for a single person with no children.
Import tariff
A tax on imports that may be ad valorem (%) or a specific tax (a set amount per unit imported).
Indirect taxes
Taxes on spending. Examples include excise duties on fuel, cigarettes and alcohol and Value Added Tax (VAT) on many different goods and services. Producers may be able to pass on an indirect tax – depending on price elasticity of demand and supply.
Inflation target
The Bank of England has a CPI inflation target, which is currently 2 per cent.
Interest rate
An interest rate is the cost or price of borrowing, or the gain from lending, normally expressed as an annual percentage amount.
Marginal rate of Tax (MRT)
The rate of tax on the next unit (£1) of income earned. In the UK for example, the basic rate of income tax is 20% on earned income up to the higher tax rate income limit.
Monetary policy
Central bank policies govern the supply of money and the interest rate in an economy in order to influence output, employment and prices. In the UK the policy is administered by the Bank of England.
Monetary policy committee (MPC)
Bank of England committee of nine people (including the Governor) that meets every month to review the economy and set monetary policy interest rates for the UK.
Monetary stimulus
Changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit.
Money supply
The entire quantity of a country’s commercial bills, coins, loans and credit.
Multiplier effect
If there is an initial injection (e.g. a rise in exports), then the final increase in aggregate demand and real GDP will be greater. The size of the multiplier coefficient is affected by the marginal rate of withdrawal / leakage from the circular flow of income.
National debt
A government’s total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time.
Negative interest rate
An interest rate that is below zero. For real interest rates, this can occur when the inflation rate is higher than the nominal interest rate.
Office of budget responsibility
The OBR is a non-departmental public body funded by the Treasury, that the UK government established to provide independent economic forecasts and independent analysis of the public finances.
Patent box
A reduced rate of Corporation Tax applied to profits from patents – designed to stimulate research and innovation and improve the supply-side of the economy.
Personal allowance
The amount of income you can earn before you start paying income tax. It is currently £12,500 in 2019.
Progressive tax
With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn more income, the rate of tax on each extra pound goes up. This causes a rise in the average rate of tax.
Proportional tax
When the marginal rate of tax is constant leading to a constant average rate of tax.
Quantitative easing (QE)
The introduction of new money into the national supply by a central bank. In the UK the Bank of England creates new money to buy financial assets from financial institutions. Total planned QE in January 2017 totalled £445 billion.
Real interest rate
Nominal rate of interest adjusted for inflation.
Re-distribution
Measures taken by government to transfer income from some individuals to others.
Regressive tax
With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes. Examples: Duties on tobacco and alcohol.
Stimulus
Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rate cuts, quantitative easing (QE), direct and indirect tax cuts and government spending increases such as higher infrastructure investment.
Structural budget defecit
The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers.
Subsidy
Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.
Target
A target is an objective of government policy e.g. low inflation.
Taxation
The imposition of taxes on streams of income, commercial activities and wealth by the government.
Tax burden
The tax burden measures total tax revenues as a % of GDP.
Tax competition
Tax competition happens when a national government uses reforms to the tax system as a supply-side strategy to attract investment and jobs into their economy.
Time lags
The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending
Transmission mechanism
How a change in interest rates affects the behaviour of economic agents and ultimately leads to changes in aggregate demand, employment and inflationary pressures.
Unit tax
A specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.
Welfare cap
The welfare cap is a limit on the amount that UK government can spend on certain social security benefits and tax credits - It excludes pensions and Jobseekers’ Allowance.
