Fiscal policy Flashcards
What is fiscal policy?
Changes in taxation and government spending to meet the macroeconomic objectives
What is the key source of government revenue?
Taxation
What is current spending?
Government spending on the day-to-day running of the public sector
What is capital spending?
Government spending to improve the productive capacity
What are transfer payments?
Government payments to individuals for which no service is given in return
What is a balanced budget?
Government receipts = government spending
What is a budget deficit
Government spending > government receipts
What is a budget surplus?
Government receipts > government spending
What is demand side fiscal policy?
Changes in the level or structure of government spending and taxation aimed at influencing the components of AD
What is discretionary fiscal policy?
The deliberate manipulation of government spending and taxation to influence the economy
What is expansionary fiscal policy?
Increasing levels of government spending relative to tax
What is contractionary fiscal policy?
Increasing levels of tax revenue relative to government spending
If the government increases expenditure on roads, what will happen? Why?
Multiplier effect
This will generate income for households
Workers will spend their money in the economy
Providing additional income stream
What does the size or value of the multiplier effect depend on?
The size of the injections or withdrawals from the circular flow of income
What is supply-side fiscal policy?
Changes in the level of government spending and taxation designed to improve the supply-side of the economy
What are the supply-side effects of fiscal policy? (5) (LCERI)
Labour market incentives Capital spending Entrepreneurship Research and development Improvements in human capital
How does fiscal policy affect labour market incentives?
Income tax cut = workers are able to take home more pay per hour = incentive to work harder
How does fiscal policy affect capital spending?
Increase in government spending = more investment
How does fiscal policy affect entrepreneurship?
Government spending might be used to fund an expansion in the rate of new business start ups
How does fiscal policy affect research and development?
Government spending can be used to encourage an increase in research and development
How does fiscal policy affect improvements in human capital?
Government spending on education and training programmes = better quality of workforce
What is the unemployment trap?
Where individuals receive more in benefit payments than they would be paid if they were in a job
