Fiscal policy Flashcards
What two things does the fiscal policy do
It’s sets tax rates and the amount of government spending
What does raising tax rates do
Reduce spending in the economy
What does lowering tax rates do
Gives business more profit and encourage business activity like expansion and new start ups
What does raising business tax do
Reduces economic output
In the short term, what does an increase in VAT tend to cause and why
Tends to cause inflation, because the higher tax means the business will increase the price of the good in order to still generate profit
What are transfer payments
Welfare payments made to benefit recipients such as stare pension and other benefits
What is current spending
Spending on stare provided goods & services such as education and health
What is capital spending
Infrastructure spending such as spending on new roads, hospitals and prisons
Government spending is also a means of….
Redistributing income within society e.g to reduce the scale of relative poverty
Taxation is required by an government to
Raise revenue - finance government spending
Manage demand in the economy - to help meet the governments macroeconomic objective
Change the distribution of income and wealth
Address market failure and environmental targets - taxes may help correct market failure
What is meant by monetary policy
Involves the use of interest rates and changes to money supply to achieve relevant economic objectives
