Fiscal Policy Flashcards

1
Q

Fiscal policy

A

The taxation and spending decisions of a government

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2
Q

Expansionary fiscal policy

A

Designed to increase AD

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3
Q

Contractionary fiscal policy

A

Designed to reduce AD

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4
Q

3 main areas of Government expenditure

A

1) Capital expenditure - improving the capital stock of the country
2) Current expenditure - running public services day to day
3) Transfer payments - benefits

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5
Q

Progressive tax

A

A larger percentage of income from high-income

E.g. UK income tax

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6
Q

Proportional tax

A

Same percentage of income from all income groups

E.g. In Russia, there is a flat income tax rate of 13%

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7
Q

Regressive tax

A

A tax that takes a larger percentage of income from low-income groups
E.g.Poll tax

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8
Q

What are the 2 types of tax

A

Direct tax - on the income or profits of the person who pays it
Indirect tax - on the goods and services

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9
Q

Examples of Direct tax

A

Income tax
Corporation tax
Inheritance tax
Capital gains tax

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10
Q

Examples of indirect tax

A

VAT
Excise duties
TV licence
Car tax

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11
Q

What is a budget deficit?

A

Government spending more that they receive in taxes. Borrowing needed

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12
Q

What is a budget surplus?

A

Government spends less than they receive

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13
Q

What is a balanced budget?

A

Government spend the same as they receive in tax

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14
Q

Budget deficits expansionary…

A

…wants to increase AD, borrow to find this

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15
Q

Budget surplus contractionary…

A

…wants to reduce AD e.g.reduce spending

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16
Q

Balanced budget neutral fiscal…

A

…not trying to influence AD

17
Q

Two reasons for why governments operate a budget deficit?

A

1) Cyclical

2) Structural

18
Q

Cyclical

A

The government needs to respond to the economic cycle. Obliged to run a deficit
E.g. to help the economy cope with recessions

19
Q

Structural

A

When the economy is at full employment

Choosing deliberately to run a deficit

20
Q

A good tax must be?

A

Convenient
Must be certain, no surprises
Must be fair/equitable (based on the ability to pay)

21
Q

Automatic fiscal stabilisers

A

In a recession, tax revenue is falling but increased government spending on benefits, will help stabilise the economy

Designed to damp down fluctuations

22
Q

A deficit is…

A

…current, how much the government will borrow this year

23
Q

Debt is…

A

…constant for example - 20 years continuous deficits

24
Q

Austerity

A

Cutting back on public spending - may lead to a recession

25
Solutions if the deficit gets too big
1) Increasing tax levels-very unpopular 2) Austerity - cutting back on public spending, may lead to a recession 3) Boost economic growth e.g. replacing current expenditure with capital expenditure
26
What is national debt?
Is made up of all the money borrowed by the government over the last 50 years or so
27
Problems with expansionary fiscal policy
1) Adding to the National Debt 2) Time lags and inflexible - may take too long to be effective 3) Depends on the multiplier but this is uncertain and unreliable 4) May lead to “crowding out”
28
What is crowding out?
economic theory arguing that rising public sector spending ‘crowds out’ private sector spending.
29
Two ways of causing contractionary fiscal policy?
1) Raising taxes | 2) Reducing G
30
Total government debt must not be more than…
…60% of GDP
31
Government deficit must not be more than…
…3% of GDP except from particular circumstances
32
Reason for fiscal rules
Fiscal rules put pressure on governments to stick to fiscal responsibility. If countries stick to fiscal rules, markets will have more confidence
33
Problems with fiscal rules
Lack of flexibility. Time frame may be unsuitable for the state of the economy
34
Main strength of fiscal policy
Direct. It can be specifically targeted at groups in most need and is fast acting (e.g.Furlough Scheme) more suited for deep recessions or emergencies
35
Main weakness
Government failure! Government often make very bad decisions, sometimes for political, not economic reasons. FP can also be bureaucratic (complex and long)
36
If the government finances its budget defict through borrowing, what could the side effect be?
Is to put upwards pressure on interest rates, which then may cause private sector spending - households consumption and firms investment - to decrease as the cost of borrowing has increased. This process is known as crowding out
37
How would the ‘crowding in’ effect occur?
If the government runs a surplus and therefore puts downward pressue on interest rates. ‘Crowding in’ public sector activity
38
Reasons for contractionary fiscal policy?
- Reduce Budget Deficit/National Debt | - Redistribute income (imposing increase in progressive taxes) reducing income inequality
39
The effectiveness of fiscal policy if already at YFE?
Ofher policies to consider, as Fiscal Policy is a demand-side policy meaning the economy cannot grow any larger but implementing policies that affect AD. Thefore other policies such as supply-side policy which affect supply. This could shidt LRAS right which would expand the economy, due to the increase in productive capacity