lesson 13, whatever it is Flashcards
What is the purpose of fiscal policies?
To manage economic stability and growth
Fiscal policies are government strategies aimed at influencing economic activity through taxation and spending.
Distinguish between demand management and supply side effects of fiscal policies.
Demand management focuses on influencing total demand for goods/services, while supply-side effects aim to enhance productive capacity
Demand management may involve adjusting taxes and government spending to influence consumer demand.
What are discretionary fiscal policies?
Policies that are actively changed by the government to influence the economy
Examples include changes in tax rates or government spending plans.
What are non-discretionary fiscal policies?
Policies that are automatically adjusted based on economic conditions
Examples include automatic stabilizers like unemployment benefits.
What is the AD-AS model?
A diagrammatic approach used to discuss aggregate demand and aggregate supply in relation to fiscal policies
This model helps visualize the effects of fiscal policy on the economy.
What is a government budget?
The government’s proposed revenue and spending for a financial year
This is passed by Parliament and presented by the Finance Minister.
What is tax revenue?
The main source of funding for the government, derived from taxes collected
This revenue is crucial for financing public goods and services.
What is the purpose of taxation?
- To finance government spending
- To redistribute income
- To combat inflation
- To reduce consumption of undesirable goods
- To protect local industries
- To reallocate resources
Taxation serves multiple roles in the economy.
Define progressive tax.
A tax system where the tax rate increases as the taxable amount increases
Example: Singapore’s Personal Income Tax.
Define regressive tax.
A tax system where the tax rate decreases as the taxable amount increases
Example: Singapore Goods and Services Tax (GST) affects lower-income individuals more.
Define proportional tax.
A tax system where the same tax rate is applied regardless of income level
Examples include flat tax systems like Russia’s Personal Income Tax.
What are direct taxes?
Taxes where the burden falls directly on the taxpayer and cannot be shifted
Examples include corporate income tax and personal income tax.
What are indirect taxes?
Taxes where the burden can be shifted to others
Examples include value-added taxes (VAT) and excise duties.
List advantages of direct taxes.
- Source of revenue for the government
- Elasticity in tax rates
- Equitable based on income
- Built-in stabilizer
Direct taxes are designed to be fair and adjustable.
List disadvantages of direct taxes.
- Reduces disposable income
- Administrative costs
- Complicated tax returns
These factors can discourage compliance and create inefficiencies.
List advantages of indirect taxes.
- Reduces consumption of undesirable goods
- Easy to collect
- Revenue from tourists
- Spread out tax payments
Indirect taxes can be less visible to consumers.
List disadvantages of indirect taxes.
- Tends to be regressive
- Loss of economic welfare
- Inflationary influences
Indirect taxes can disproportionately affect lower-income individuals.
Calculate chargeable income: Total income - Total relief.
Chargeable income = Total income - Total relief
This formula is used to determine taxable income.
What is a budget surplus?
When government revenue exceeds expenditure
Surpluses can be used for savings or future investments.
What is a budget deficit?
When government expenditure exceeds revenue
Deficits may require borrowing or reducing spending.
True or False: A recurring budget deficit can negatively impact economic confidence.
True
Recurring deficits can lead to reduced consumer and business confidence.
What is fiscal policy?
Fiscal policy is the means by which a government adjusts its spending levels and tax rates to influence and stabilize a nation’s economy.
What are the two main fiscal tools?
- Government Spending
- Taxation
What is the impact of changes in taxes on the economy?
Changes in taxes affects consumption and investment.
What does an increase in government spending directly affect?
AD and real GDP.
What is discretionary fiscal policy?
Deliberate changes in the tax and spending of the government for purposes of expanding or contracting the level of aggregate demand.
What is non-discretionary fiscal policy also known as?
Automatic stabilizers.
What do automatic stabilizers do during a recession?
Increase government deficit.
What are some examples of non-discretionary fiscal policy?
- Corporate and personal income taxes
- Goods and services tax (GST)
- Property taxes
- Stamp duties
- Motor vehicle taxes
- Transfer payments
True or False: Expansionary fiscal policy shifts the AD curve to the left.
False.
What is the goal of expansionary fiscal policy?
To correct a recessionary gap.
What tools are used in contractionary fiscal policy?
- Decrease government spending
- Increase corporate or personal income tax
What happens during strong economic growth regarding tax revenues?
Net tax revenues increase.
What is the effect of higher tax collections during economic growth?
Dampen AD, thereby easing inflationary pressures.
What is a negative output gap?
When the actual output is less than potential output.
What is an inflationary gap?
When the actual output is more than the full capacity output.
What is the result of excess aggregate demand?
Creates a positive output gap.
What type of fiscal policy would be used to address a negative output gap?
Expansionary fiscal policy.
What does contractionary fiscal policy aim to do?
To correct an inflationary gap.
Fill in the blank: Fiscal policy resulting in a shift in Aggregate Demand is also known as _______.
[DEMAND MANAGEMENT policy]
What is one limitation of fiscal policy?
Crowding out effect.
What causes the crowding out effect?
Government competes with private businesses for limited funds, causing interest rates to increase.
What is the recognition lag in fiscal policy?
Time taken to measure the state of the economy.
What type of fiscal policy is appropriate for a government trying to recover from a recession?
Expansionary fiscal policy.
What happens when government spending increases during expansionary fiscal policy?
Aggregate demand increases.
What is the expected outcome of decreasing personal income tax in the long run?
Increases disposable income and productivity of workers.
What should a government do to cool an overheating economy?
Implement contractionary fiscal policy.
What happens to aggregate demand when government spending decreases?
Aggregate demand decreases.
What limits the impact of fiscal policy?
Small multiplier, taxes, savings, and imports are leakages.
What is the Recognition Lag?
Time taken to measure the state of the economy.
What is the Administrative Lag?
Time taken for government to agree on a course of action with the president.
What is the Operational Lag?
Time taken for the full impact of a government program or tax change to have its effect on the economy.
What are the two components of a country’s budget?
- Government expenditure
- Revenue (Tax)
What does Fiscal Policy refer to?
An increase or a decrease in tax and/or government spending.
What is Expansionary fiscal policy used for?
To counter negative shocks to aggregate demand, e.g., correct a recessionary gap.
What may result from Expansionary fiscal policy?
The economy may ‘overheat’ and result in inflation.
What limits the effectiveness of fiscal policy?
- Smaller Keynesian multiplier
- Crowding-out effect
- Time lags
What are the supply-side effects of fiscal policy?
Important effects on employment, potential GDP, and aggregate supply.
Fill in the blank: The budget balance is determined by government expenditure and _______.
[Revenue (Tax)]
True or False: Fiscal policy can only be expansionary.
False
What is the difference between Discretionary and Non-Discretionary fiscal policy?
- Discretionary: Requires new legislation
- Non-Discretionary: Automatic stabilizers
What is a Budget Deficit?
When government expenditure exceeds revenue.
What is a Budget Surplus?
When revenue exceeds government expenditure.
What is the effect of the crowding-out effect on the AD Curve?
It shifts the AD Curve.
What is the role of Automatic Stabilizers in fiscal policy?
They help stabilize the economy without the need for new legislation.
What are Transfer Payments?
Payments made by the government to individuals without any goods or services being received in return.
Fill in the blank: The effectiveness of fiscal policy is limited by time lags such as Recognition Lag, Administrative Lag, and _______.
[Operational Lag]
What is the significance of the AD Curve with fiscal stimulus?
It shows the potential increase in aggregate demand.
What does a recessionary gap indicate?
A situation where actual GDP is less than potential GDP.
What is the conclusion regarding a country’s budget?
It determines whether the country is in a surplus or deficit.
