fiscal policy

Question 1

3 types of government spending

Answer 1

• current spending (stuff consumed today like wages)
• capital (investment, infrastructure)
• transfer payments (will get no return from - benefits)

Question 2

roles of government spending

Answer 2

• regulation of AD to achieve objectives
• providing public goods and services
• reducing inequality and redistributing income
• preventing market failure and pushing positive externalities

Question 3

difference between merit goods and positive externalities

Answer 3

positive externality: positive spillover effect on a third party
merit good: a goof that will bring benefit to consumer in the future

Question 4

government failure

Answer 4

when government intervening makes a problem worse

Question 5

why is G in the UK rising

Answer 5

• aging population - more pensions
• banks need bailout
• pandemic spending
• defense spending more in recent years
• energy subsidies in an energy crisis and cost of living crisis
• net zero goals - spending on transport and renewable energy solutions

Question 6

GDP and G correlation

Answer 6

• not a distinct correlation - G is more so used as a response to market failure
• depends how effective spending is

Question 7

Taxation definition

Answer 7

a compulsory levy by a government to individuals or firms

Question 8

tax evasion

Answer 8

illegal - not paying taxes

Question 9

tax avoidance

Answer 9

legal - finding loopholes to paying tax

Question 10

aims of taxation

Answer 10

• raise government revenue
• reducing market failure
• reducing income inequality
• macroeconomic objectives being met

Question 11

types of taxes (EVALS)

Answer 11

• direct or indirect
• expenditure, income or capital
• progressive, proportional or regressive

Question 12

direct vs indirect taxes

Answer 12

direct - liability lies on consumer or firm
indirect - liability shifted to a third party

Question 13

examples of direct and indirect taxes

Answer 13

direct: income tax, NICs, corporation tax
indirect: VAT

Question 14

categories for ‘what is being taxed?’

Answer 14

• income - MOST UK TAXES
• expenditure - TAX BASE BROADENED IN UK TO MORE OF THIS
• capital

Question 15

nature of tax: difference between progressive, proportional or regressive

Answer 15

ART = T/Y
MRT = ΔT/ΔY
progressive: art < mrt
proportional: art = mrt
regressive: art > mrt

Question 16

average rate of tax formula

Answer 16

tax / income (T/Y)

Question 17

marginal rate of tax formula

Answer 17

change in tax / change in income (ΔT/ΔY)

Question 18

difference between art and mrt

Answer 18

A taxpayer’s average tax rate (or effective tax rate) is the share of income that they pay in taxes. By contrast, a taxpayer’s marginal tax rate is the tax rate imposed on their last dollar of income.

Question 19

4 principles of taxation

Answer 19

• equitable - people’s ability to pay
• convenient - cheap and easy to collect
• certain - difficult to evade the tax
• (!!) efficient - does the tax change behaviours?

Question 20

recent tax changes in the UK

Answer 20

• 40% income tax bracket narrowed to £25000
• tax allowances frozen - personal allowance of £12,500 and next bracket of £50,000 - CAUSES FISCAL DRAG WHEN THERE IS INFLATION
• significant rise in corp tax - 19% - 25% (Apr 2023)
• 2% fall in NICs in Spring Budget 2024 - 10% to 8%

Question 21

Demand-side economic effects of a tax cut

Answer 21

↑dispo Y, ↑consumption:
- ↑AD, ↑rGDP
- ↑Tax (VAT) or down
- ↑ PL (demand pull inflation)
- ↑budget deficit (lower tax rev)
- ↑investment, ↑profits, ↑employment (labour is derived demand)

Question 22

evals for demand side effects of tax cut

Answer 22

-effects on the price level depend on the output gap - close to full employment will have a larger impact on the PL and lower effect on rGDP

-depends if the tax is seen to be permanent or temp - if people anticipate a raise soon after, will likely not change their behaviour (time lag)

depends where the tax cut was placed

Question 23

supply side effects of a tax cut

Answer 23

opportunity cost of work = leisure
income effect: as wages increase, less incentive to work - afford to work less
substitution effect: more wage, more incentive to work
as there are 2 simultaneous effects, the NET EFFECT IS UNCERTAIN

Question 24

laffer curve

Answer 24

shows TR peaks at midpoint of mrt