Fiscal Policy Flashcards
Fiscal policy definition
Measures by the govt. involving taxation and govt. spending in order to achieve economic objectives
Taxation definition
Money paid by producers and consumers to the govt. aka govt. income
Objectives of tax (4)
- Source of income for govt.
- Reduce prod./consumption of harmhul demerit goods
- Reduce consumption of imported goods
- Reduce income inequality
Types of govt./public expenditure that govt. finances (4)
- Subsidies
- Infrastructure
- Salaries for govt. officals (police/judges/teachers)
- Equipment purchases for govt. services
Progressive Tax definition
Tax system where the tax rate (% tax) increases as income increases
Regressive Tax definition
Tax systtem where the tax rate (% tax) decreases as income increases –> gives incentive to work harder
Proportional Tax definition
Tax system where each income group pays the same tax rate irrespective of their income (also called as flat tax rate)
Direct tax definition
Tax on income or wealth. The person/organisation responsible for paying tax cannot redirect the obligation to pay (tax burden) to another party
Indirect tax definition
Tax on consumption/sales. The seller can redirect the tax burden to the buyer. Ubdurect taxds work regressively.
Govt. budget definition:
The planned revenue and expenditure by the govt. for next year. Usually announced in the year before.
Contractionary fiscal policy (4)
- Raising taxes and reduce public expenditure
- decrease disposable income and financial funds for firms
- reduce C, I, and G hence lower AD
- Lower DP inflation
Expansionary fiscal policy (6)
- Lower taxes and increase public expenditure
- raise disposable income and financial funds for firms
- increase C, I, and G hence increase AD
- more output
- higher GDP and more labour hired
- economic growth and lower cyclicial unemployment
fiscal austerity definition
when the government is having high debts and neends to use contractionary fiscal policy to repay those debts
pay freeze definition
when the government stops giving salary increases (like, annual salary increases)
