Government policy and Economy Flashcards
What are the two methods the government uses to control the economy?
Fiscal policy, and
Monetary policy
What does high tax reduce?
Consumers disposable income
What does low tax encourage?
Consumer spending
What do high taxes for businesses mean?
After tax profits are reduced
How do tax rates affect their decisions
Because businesses want to minimise costs so they relocate to countries with low tax rates
What does increasing income tax do?
It reduces spending power, cuts demand and lowers economic activity
What does the effect of a tax cut on sales depend on?
Income elasticity of the good or service
What are the two things fiscal policy does?
Sets tax rates and the amount of government spending.
What does an increase in VAT result in the short term?
It tends to cause inflation because the higher tax means goods and services cost more.
What does an increase in VAT result in the long term?
It decreases consumer spending and prices have to fall, so it causes deflation
How will a increase in welfare benefits affect the economy
It will increase spending
How quick is the impact of government spending on infrastructure?
Very slow
What is expansionary fiscal policy?
It is fiscal policy to increase demand for goods
When is expansionary fiscal policy used?
Economic downturn
How is expansionary fiscal policy done?
Cut taxes
What is contractionary fiscal policy
It is fiscal policy to reduce demand for goods and services
When is contractionary fiscal policy used?
When production capacity is at 100% or at a high risk of high inflation
How is contractionary fiscal policy carried out?
Raising taxes and/or cutting spending.
What is monetary policy?
Tweaking the interest rate to control inflation and exchange rates
What happens when interest rates are high?
Foreign investors want to save money in UK banks
How do foreign investors save money into UK banks and what does it result in?
They buy Pounds, which boosts demand resulting in exchange rates going up
What happens when interest rates are low?
Investors prefer to save abroad, so they sell their pounds and exchange rates fall.
What are the aims of monetary policy? 4
Control inflation.
Control the overall rate of economic growth.
Manage unemployment levels.
Influence foreign exchange rates.
What is protectionism?
When government protects domestic businesses and jobs from foreign competition?
How do governments protect businesses?
Giving subsidies, imposing tariffs on imports
Advantages of protectionism? 2
Countries develop variety of new industries
Allows small businesses to grow
Disadvantages of protectionism 2
Price of imported goods rise
Other countries might restrict trading in theirs
Advantages of open trade 3
Countries specialise in what they’re good at.
Countries benefit from economies of scale
More choice and lower prices
Disadvantages of open trade 3
Fewer local jobs as multinationals expand abroad.
Employee skills concentrated around certain jobs.
Child labour to compete.
