Economic Policy and Policy Instruments Flashcards
What is an economic policy?
Different ranges of action a government may take when controlling the economy
Name 3 economic policies
- Monetary Policy
- Fiscal Policy
- Supply Side Policies
What is nationalisation?
When government takes ownership of a company
What is policy instruments?
Tools a government uses to help achieve its macroeconomic objective
What is government expenditure?
Amount of money a government spends on goods and services, to improve an economy
What are fiscal policies?
Decisions about government spending, taxation and levels of borrowing which affect aggregate demand in an economy
What is contractionary fiscal policy?
Government is reducing AD by increasing taxes or cutting expenditure
Illustrate contractionary fiscal policy on a curve
When is contractionary fiscal policy used?
Used when AD is too high
e.g. during a boom, economy at near full employment, output & inflation rising
What is expansionary fiscal policy?
Government increases AD by reducing taxes or increasing expenditure
Illustrate expansionary fiscal policy on a curve
When is expansionary fiscal policy used?
Used when there’s not enough AD in the economy
e.g. during a recession, when output low & unemployment is high
Name 5 uses of government expenditure
- Defence
- Education
- Emergency services
- Foreign aid
- Social decurity
What is taxation?
Money collected by the government to improve the economy
What is direct tax?
Tax directly from earnings and profits
Name 5 types of direct tax
- Income tax
- Corporation tax
- Capital gain tax
- National insurance tax
- Inheritance tax
What is income tax?
On amount earned by an individual
What is corporation tax?
Taken from profits made by limited companies
What is national insurance tax?
Income tax that’s used for pensions, benefits & NHS
What is inheritance tax?
On money that’s inherited from people that die
What is capital gain tax?
On financial gains made when selling assets at a profit
What are examples of assets? (3x)
shares, houses, cars
What is indirect tax?
Tax on expenditure
Name 7 types of indirect tax
- Value added tax (VAT)
- Vehicle excise duty
- Duties
- Business rates
- Custom duties
- Stamp duties
- Council tax
What is VAT on?
On goods and services sold in economy
What are duties?
Heavy taxes on select range of goods
e.g. petrol, tobacco, alcohol
What are business rates taxes?
Collected by local authorities and contribute to provision of local community services
What are custom duties?
Levied on imports
What is vehicle excise duty?
Paid by owners of vehicles every year
What are stamp duties?
Paid when buying certain assets
E.g. houses and shares
What is council tax?
Paid to local author to help pay for local services
e.g. on houses
What is environmental tax?
Taxes designed to protect the environment
Name 3 types of environmental tax
- Landfill tax
- Climate change levy
- Aggregates levy
What is landfill tax?
Imposed on disposal of waste in landfill sites
What is climate change levy?
To help UK meet its commitment to reduce greenhouse gases
e.g. suppliers of coal
What are aggregates levy?
Tax on sand, gravel and rock that is dug from ground
What is monetary policy?
A government uses interest rates and the money supply to influence aggregate demand in an economy
What are interest rates?
Costs of borrowing money & reward of saving money
When interest rates fall, how does this affect consumption?
- Interest rates fall = demand for loans will increase
- Consumers borrow more money ← it’s cheaper = increasing AD
When interest rates fall, how does this affect investment?
- Interest rates are low = firms will borrow more money ← loans will pay less interest
- Used money to invest into their business = increases AD
When interest rates fall, how does this affect exports and Imports?
- Link between interest rate & exchange rate
- Interest rates are low = exchange rates are low
- Means price of exports are cheaper - AD increases
- & imports decrease
What is tight monetary policy?
Higher interest rates & lower money supply = reduce AD
When is tight monetary policy used?
- During inflation
What is loose monetary policy?
Lower interest rates & growing money supply = increase AD
When is loose monetary policy used? (3x)
- To reduce unemployment
- Promote economic growth (helps to move out of recession)
- Get out of current account defict
What are supply side policies?
Government measures designed to increase aggregate supply in the economy
Name 3 things supply side policies aim to do
- Improve labour flexibility
- Promote competition (through privatisation, deregulation and helping small firms)
- Increase both public and private sector investment
Labour Market: How can AS increase?
If labour productivity is higher
Name 4 ways you can increasing labour productivity
- Improve Flexibility
- Restore Incentives
- Improve Labour Quality
- Increase the Workforce
Explain how you can improve the flexibility of labour
New laws can weaken trade unions & workers can adopt more flexible working practices
Explain how restoring incentives can increase labour productivity (3x)
You can reduce:
- Corporate Tax
- More profits = more willing to supply
- Income Tax
- More motivated to work
- Increase minimum wage
- Increasing unemployment or incentive to work
Explain how you can improve labour quality (2x)
- Government can invest in education with more vocational courses
- More business investment in training
Name 2 way we can increase the workforce
- Encourage immigration
- Raise the retirement age
Name 4 ways we can help improve efficiency in product markets
- Privatisation
- Deregulation
- Providng Subsides
- Helping Small Firms
What is privatisation?
When the government transfers a business from public to the private sector
Explain how privatisation improve efficiency in product markets (2x)
- Breaks up state monopolies & promotes competition which should improve efficiency, raise quality and lower prices
- Encourages more AS ∵ more private firms
- = supply more goods and supplies (want to make profit)
What is “Red Tape”?
Legal paperwork a lot of business have to do to start up
Explain how deregulation can help improve efficiency in product markets
Many governments have removed rules/regulations that discourage business activity and prevent competition = increases AS
Explain how providng subsides can increase AS
Helps business lower the cost of production = can produce more at a lower cost = increasing AS
Explain how governments can help small firms (3x)
- Lowering taxes on small firms
- Setting up advisory centres
- Reducing ‘red tape’
Capital Markets: AS will increase if there’s more ________ in economy
investment
Explain how the government can increase AS in the public sector
Government can invest more in infrastructure = increases transport of goods and services
Describe how investment can be encouraged in the private sector (3x)
- Economy = stable
- Interests rates are low
- Finaical incentives exists for potential investors
