Fiscal Policy (Macroeconomic) Flashcards
Why is fiscal policy implemented?
Adjust for cyclical changes in the economy by changing aggregate demand
Fiscal Policy changes what?
Aggregate demand (C + I + G + X-M)
What is a Tax Mix?
The balance between direct/indirect tax
What is the Tax Base?
The value of assets, income and economic activity that can be taxed
What is the Tax Burden?
The rates of direct/indirect tax applied.
What are the different types of Government Revenues.
Direct tax, indirect tax, and non-tax revenue
What is a direct tax?
Is a tax paid directly by an individual or organization e.g. income tax, medicare levy, and corporation tax
What is an indirect tax?
Is a tax passed off by the government on goods and services. e.g. GST, and customs
What is an example of a non-tax revenue?
Dividens of Government businesses, & the sale of government assets.
What are the three taxing systems?
Proportional, progressive, and regressive.
What is bracket creep?
Through inflation, people earn more whilst mnaintaing the same real wage, but pay more in taxes.
What is the laffer curve?
Tax rate (y), tax revenue (x). Buldhes at around 60%.
What are the different types of Government Expenditure.
Current spending, Capital spending, and Transfer Payments.
What does Current spending consist of?
They are for the short term and include expenditure on wages and raw materials.
What does Capital Spending consist of?
Also called social capital, they include spending on physical assets like roads, bridges, hospital buildings, and equipment.
What is an automatic stabiliser?
Non-discretionary fiscal policy that automatically adjusts for cyclical changes in the economy.
What does a budget deficit mean?
Receipts < expenses
What does a budget surplus mean?
Receipts > expenses
What are the advantages of a budget surplus?
The extra cash can be used to: (1) pay off debts or (2) be reinvested in other projects. (3) It can even be returned to the public in the form of price or tax cuts.
What are the disadvantages of a budget surplus?
Those savings mean that the wider economy will not benefit from the multiplier effect of government spending.
What is the money multiplier effect
The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital.
What is the formula for the money multiplier effect
(1/MPC) e.g. 1/0.5 -> 10/5 -> 2
What are the effects of a budget deficit?
Spending will likely be cut. Taxes might increase.
What are the (5) issues with fiscal policy -> time lag?
(1) recognition lag, (2) Decision making lag, (3) Implementatino lag, (4) Autonomous expenditure, (5) Induced expenditure
