Fiscal Policy Flashcards
1
Q
What is fiscal policy?
A
when the government changes its taxes and government spending to influence the economy
2
Q
Cons of increasing income tax
A
- downward multiplier effect
- tax evasion/avoidance = less rev
- laffer curve
3
Q
Pros of increasing income tax
A
- less consumption = decrease AD = controlled inflation
- more government revenue
4
Q
Pros of decreasing income tax
A
- increase disposable income = consumption
- mutliplier effect
5
Q
Cons of decreasing income tax
A
- less gov rev
- less gov spending = decrease AD
6
Q
Pros of higher benefits
A
- increase consumption and AD (mutliplier)
- reduce income inequality
7
Q
Cons of higher benefits
A
- decreased incentive to work (benefits trap)
- worsened budget deficit
8
Q
Pros of lower benefits
A
- improved budget deficit
- escape benefits trap (increased incentive to work)
9
Q
Cons of lower benefits
A
- decrease consumption and AD (negative multiplier)
- increase income inequality
10
Q
Pros of higher corp tax
A
- improved budget deficit
- increased government spending, AD (multiplier)
11
Q
Cons of higher corp tax
A
- less profit, less investment, decreased productivity (LRAS)
12
Q
Pros of lower corp tax
A
- lower costs, SRAS right, increase real GDP
- increase investment (AD and multiplier) and thus productivity
13
Q
Cons of lower corp tax
A
- less tax revenue
- worsened budget deficit
- profit not necessarily used to invest
14
Q
Crowding out
A
- for projects, government demands factors of production
- increased demand increases prices and interest rate (due to increased borrowing)
- decreases firms supply and makes investment more expensive
- SRAS shifts in
