Fiscal Policy Flashcards
What is the crowding out debate?
Govt spending (national debt) crowds out (squeezes) private investment as the government needs revenue in order to spend.
What is the loan able funds theory?
In this model the supply of funds comes from savings and the demand comes from investment opportunities
Increasing interest rates increases supply of funds
Decreasing interest rates decreases the supply of funds as there will be more borrowing
What is the RPI rate?
Includes mortgage interest payments which means it’s heavily influenced by interest rates.
The government charges us this one
What is the CPI?
Measures take no account of housing costs but factors in all other goods and services
What is CPH?
Includes housing costs but uses an approach called rental equivalence; this is not the mortgage payments but how much householder would pay for equivalent property
why do we have taxes?
- fund the public sector
- protect domestic businesses
- reduce wage disparities
- influence the spending pattern
- can correct other forms of market failure such as monopolies (windfall tax)
what are the canons of taxation?
- economical
- equitable
- convenient
- certain
- flexible
- efficient
what does the efficient canon of taxation mean?
tax must achieve what it is intended to do
what does the equitable canon of taxation mean?
based on the ability to pay and higher earners pay a higher proportion of their income
what is hypothecation?
when taxes are earmarked for a specific purpose
arguments for indirect tax?
- influence spending patterns
- incentive effects (save)
- internalising externalities
- choice
- cheaper to administer
arguments against indirect tax
- inflationary pressures
- crime
- make income distribution more unequal because of their regressive effects
What is the laffer curve? and when is it used?
tax
revenue
l
l n
l ( )
l ( )
l ( )
l_______________________ tax rate
use when evaluating increase or decrease in income tax
What is the theory of second best?
-the idea that when trying to correct one aspect of the market e.g. reducing inflation this may not lead to the best outcome
-The second best theory suggests that if one condition necessary for achieving efficiency cannot be met, it may be necessary to adjust other factors to move towards the next best equilibrium
-For instance, if the government cannot fully remove all forms of market distortion (e.g., monopolies, externalities), it might need to use policy tools in a complementary way to minimize inefficiencies, even if these policies deviate from the first best.
When can the theory of second best be used e.g.?
For example, In evaluating the effectiveness of fiscal policy to reduce inflation, the Theory of Second Best suggests that adjusting taxes or government spending may not be sufficient if other market failures are occurring.
