E4 Macroeconomics Flashcards
explain the ROLES OF GOVT
collect TAX → fund SPENDING → EG, LS, PE, redistribute income
REGULATION → correct market failure (PE, NE, monopoly, environment)
what are the MACROECONOMIC GOALS of govt?
EGlow UElow IFBP (balance of payment/current account)income redistributionenvironment
define ECONOMIC GROWTH
how can govt achieve it?
annual increase in output/GDP
through increase AD or AS
define INFLATION, DEFLATION, DISINFLATION
IN-: sustained INCREASE in price level over a period of time
DE-: sustained DECREASE in price level over a period of time
DISIN-: price level still INCREASE but SLOWER
causes of INFLATION?
income, tax, IR, confidence → AD → demand-pull inflation
income, tax → COP → cost-push inflation
define UNEMPLOYMENT
willing + able + actively looking, but can’t find a job
effects of UE
no income → AD → poverty + health problem → LS → crime, drug... → NE → G spending on UE benefit + healthcare + correct NE → budget deficit!
define REDISTRIBUTION OF INCOME
how can govt achieve it?
take money from rich, transfer to poor
tax → G spending (welfare, benefits, merit/public g/s)
define BALANCE OF PAYMENT
how can govt achieve it?
difference in payments into & out of a country over a period of time
through price stability, tariff, subsidy, quota
define ACTUAL and POTENTIAL growth
ACTUAL: OUTPUT increases (inside → on PPC curve)
POTENTIAL: PC increases (PPC curve shifts outwards)
how do you calculate AD?
C + I + G + (X-M)
calculate and define UNEMPLOYMENT RATE
(unemployed / labor force) x 100%
% of labor force who are willing+able+actively looking but can’t find jobs
define govt BUDGET, budget DEFICIT and budget SURPLUS
budget: govt’s financial plans for revenue and spending
deficit: revenue < spending
surplus: revenue > spending
define FISCAL policy
using TAX and G SPENDING to influence economic activity and achieve economic goals
REASONS for govt SPENDING?
💵Redistribute income (welfare, benefits)
👍PE/SB (merit, public)
CONS of govt SPENDING?
budget deficit
funded by increased tax
DP inflation
define DIRECT TAX and INDIRECT TAX
DIRECT: on individual/firms (eg. income, profit, wealth)
INDIRECT: on consumption (eg. GST, VAT)
define TAX RATE
% of income paid as tax
pros and cons of DIRECT TAX?
+ progressive
+ high revenue
- reduce incentive
pros and cons of INDIRECT TAX?
- regressive
- low tax revenue
+ discourages demerit g/s
define PROGRESSIVE, REGRESSIVE, and PROPORTIONAL tax
PROGRESSIVE: higher income higher tax rate
PROPORTIONAL: same tax rate for everyone
REGRESSIVE: lower income higher tax rate
what’s the difference between tax EVASION and tax AVOIDANCE?
evasion - illegal (eg. under-declaring profit)
avoidance - legal (eg. non-smokers don’t pay tobacco tax)
reasons for TAXATION
💰Fund G spending → redistribute income
🚬Discourage c/p of demerit goods → correct NE
🚢Discourage import (tariff) → correct CA deficit, protect domestic firms
qualities of good tax
Efficient/Effective Flexible Fair Convenient Certain
define MONETARY POLICY
using IR, XR and MS to influence economic activity and achieve economic goals
define IR
reward for saving + cost of borrowing
define SUPPLY-SIDE POLICY
aims to increase AS + PC → EG
includes E&T, subsidy, investment, deregulation, privatization…
define GDP and real GDP
GDP: total output
REAL GDP: total output adjusted to inflation
how do you measure GDP?
income + spending + output
define RECESSION
fall in real GDP over more than half a year
caused by decrease in AD/AS
define EMPLOYMENT
work + receives payment
define FULL EMPLOYMENT
lowest UE possible
define LABOR FORCE
working age + able + willing to work
calculate LABOR MARKET PARTICIPATION RATE
what can this be influenced by?
labor force / working age population
influenced by wage, women’s participation, ppl who continue even higher education
define CYCLICAL unemployment
caused by lack of AD
define STRUCTURAL unemployment
caused by immobility of labor
define FRICTIONAL unemployment
caused by ppl change between jobs (temporary)
how do you calculate INFLATION?
CPI
(average P current year) / (average P base year) x 100
