Fiscal Policy Flashcards
What is fiscal policy
Fiscal policy is the use of Government expenditure and taxation to influence AD/AS in order to achieve the macroeconomic objectives.
What does higher government spending bring
Higher government spending will create jobs and provide an economic stimulus, also better public services and subsidys
What are the The purpose of taxes
The purpose of taxes are Taxes help to raise finance for G (provide provision of public and merit goods)
Redistribution of income
Achieve macro objectives by AD/AS
Solve market failure such as externalities
What is PSNCR
The amount by which UK government expenditure exceeds its income / tax revenue
What is negative PSNCR
negative PSNCR is a budget surplus which allows the government to pay off some of the debt
What are the 5 main areas governments spend in
social welfare, pensions, Healthcare, Education and defence
What are the 5 areas of tax funding
Income tax, Value added Tax (VAT), National insurance, Corporation tax and excise duties.
What will a rise in taxes do
give a disincentive to work but giving a higher tax revenue
What does a laffer curve show
A laffer curve shows the relationship between tax revenue and tax rate, there is a point in the laffer curve where tax rate is at its peak while still maintaining high tax revenue.
What is current expenditure
money spent on day to day running costs, for example, government spending on wages of public sector workers or buying raw materials.
What is capital expenditure
spending on increasing your fixed assets, for example, building a hospital, buying equipment or building a new road.
What is direct tax
a type of tax which is paid for by an individual directly to the government e.g income tax
What is indirect tax
Indirect tax is charged on producers of goods and services and is paid by the consumer indirectly e.g VAT, excise duties
What are automatic stabilisers
automatic fiscal changes as the economy changes, they help people against changes in the economy
What is expansionary fiscal policy
when the Government tries to increase AD through the use of G and/or T.
What do Keynesian economists believe about fiscal policy
fiscal policy should be used differently in certain times in the economy such as if the economy is in a boom period the government should increase taxes and spend less on the economy, while if the economy is in a recession the government should reduce taxes and spend more on the economy.
What does demand side policy affect
influence AD and will affect output, employment and inflation.
What is the aim for fiscal policy on employment
to reach maximum employment to increase output
how does fiscal policy lower inflation
increasing taxes which decreases investments and consumption and cut spending, but this counter acts the goal of increasing AD.
How does fiscal policy increase the output
an increase in AD which will increase GDP fiscal policy’s can do this as decreasing taxes for consumers and spend more and also increasing employment
What is the purpose of supply side fiscal policy
The purpose of supply side fiscal policy is to increase the productive potential of the economy and to increase trend growth rates
What are the types of supply side policy
Free market and Interventionist
How does an increase in AS affect the economy
Lower inflation, Lower unemployment, Improved economic growth and Improved balance of payments
What is the Keynesian economists view of supply side policy
to increase AS during a depression/recession – the macroeconomic equilibrium will not be affected and there will not be an increase in output or employment.
How will decreasing taxes affect supply
It will increase supply as incentive to work and work harder as less income tax, this can increase employment, also, for firms less corporation tax an increase in investment, therefore produce more, But people may demand more as more disposable income
How will increasing taxes affect supply
Decrease but on the other hand, higher taxes will increase government spending which will be spent on more capital spending increasing efficiency like more roads.
