Macro 1 Flashcards
Reasons for government to be producer of goods and services (4)
Enables consumers to have access
E.g. Merit goods
Unlikely a good/ service would be provided by the private sector
E.g. Public goods
Private sector is unable to raise funds so provided by government
E.g. Roads
Natural monopoly so government provides it as a national service
Fiscal definition
Concerned with raising money through taxation which can then be spent on various areas of the economy
Ways government spending will reduce inflation (3)
Contradicts fiscal policy
Reduces demand for goods and services so decreases aggregate demand
Decrease in demand reduces prices
Reduces demand pull inflation
Increase unemployment
Downward pressure on wages so lower cost push inflation
Ways government spending will not reduce inflation (3)
Decrease spending on healthcare and education
Reduces quality of labour force
Decreases productivity and so increases wage costs
Cost push inflation
Decrease spending on infrastructure
Increases transport costs
Cost push inflation
Decrease firms’ subsidies
Increases cost of production
Cost push inflation
How can the monetary policy increase price level (3)
Decrease interest rate
Increase borrowing, reducing saving, increase demand
Demand pull inflation
Increase money supply
Increases aggregate demand
Demand pull inflation
Reduce exchange rate Increase price of imported materials Cost push inflation Reduces export prices increases aggregate demand Demand pull inflation
Examples of supply side policies (5)
Improving training and education, increases skills and quality
Privatisation of industry increases efficiency
Subsidies reduces supply costs, encourages production
Cut in direct tax gives incentives to work, increases participation rate
Cut in welfare payments increases incentives to work
Ways direct tax can redistribute income (2)
A progressive tax on income and firms so takes more from the rich and an increasing proportion
Reduces the gap between rich a poor
Tax revenue raised may be used to help poor
E.g. Housing, healthcare, education increases earning potential of poor
Ways direct tax can not redistribute income (3)
Some progressive taxes may be like a flat tax so not that progressive
Influenced by extent of tax avoidance, rich may find ways to avoid tax
High rate may discourage enterprise so decreases output
Increases unemployment so more uneven distribution of income
May be offset by regressive taxes
Ways sales tax can improve economy (2)
Provides more government tax revenue which allows government to spend more
E.g. Raise education standards
Discourages consumption of harmful products that cause external costs
E.g. Reduce healthcare costs on smoking
Ways sales tax does not benefit economy (3)
Falls more heavily on the poor
Increases income inequality
Increases a firms cost of production which increases price of products
Cost push inflation
Reduces spending
Reduces output so increases unemployment
What is a subsidy
A payment by the government to producers to help reduce costs of production
Advantages of subsidies (2)
Producers increase supply causing market price to fall
Consumers will be able to buy products at a lower price which increases demand
Increases standard of living
Reduces cost of production
Reduces cost push inflation
Disadvantages of subsidies (3)
Public money finances them
Can distort competition
Can be used to support inefficient producers who become reliant on the subsidies
Can lead to excess supply
What is a tax
A payment to the government
E.g. Income tax
Reasons for government to impose a tax (apart from redistribution of income) (3)
Finance public goods (e.g. law, defence) and merit goods (e.g. healthcare and education)
Discourages consumption of demerit goods(e.g. tobacco, alcohol) and imports
Reduces consumption and inflation
