Macroeconomics 3.1 Fiscal Policy Flashcards
What is a government budget?
The balance between spending and revenue.
What are the types of taxation?
- Direct
- Indirect
- Progressive
- Proportional
- Regressive
What is current government expenditure?
Spending on day-to-day operations and services.
What is capital government expenditure?
Spending on long-term investments and infrastructure.
Define budget surplus.
When government revenue exceeds expenditure.
Define budget deficit.
When government expenditure exceeds revenue.
What is a balanced budget?
When government revenue equals expenditure.
What are the types of budget positions?
- Cyclical
- Structural
What is national debt?
The total amount of debt accumulated over the years.
What is government debt?
Debt incurred by the central government.
What is discretionary fiscal policy?
Government policy to actively change economic conditions through spending and taxation.
What are automatic stabilisers?
Economic mechanisms that automatically adjust spending and taxation based on economic conditions.
What is crowding out?
When government spending reduces private sector investment.
What does the Laffer curve illustrate?
The relationship between tax rates and tax revenue.
What are average tax rates?
Total tax paid divided by total income.
What are marginal tax rates?
The tax rate applied to the last dollar of income earned.
Evaluate the effectiveness of fiscal policy.
It can achieve macroeconomic objectives but may lead to inflation.
What are the components of aggregate demand (AD)?
- Consumption
- Investment
- Government Spending
- Net Exports
Name two factors affecting household consumption.
- Income levels
- Consumer confidence
Name two factors affecting firms’ investment.
- Interest rates
- Business expectations
What is a negative output gap?
When actual output is less than potential output.
What is a positive output gap?
When actual output exceeds potential output.
What did John Maynard Keynes suggest about the function of an economy?
Government intervention is necessary to manage economic cycles.
When did John Maynard Keynes publish his ideas?
In the 1930s.
How do governments raise revenue?
Through taxation and other revenue-generating activities.
What are two types of revenue?
- Tax revenue
- Non-tax revenue
What is market failure?
When the market does not allocate resources efficiently.
How might a government use revenue raising to correct market failure?
By implementing taxes and subsidies.
What is fiscal policy?
The use of government spending and taxation to influence the economy.
What is current expenditure?
Spending on goods and services consumed within the fiscal year.
What are transfer payments?
Payments made by the government to individuals without any goods or services received in return.
What is capital expenditure?
Spending on physical assets that provide benefits over a long period.
What is the Public Sector Net Cash Requirement (PSNCR)?
The budget deficit that the government needs to finance.
What are the trends in government spending since 1900?
Increased significantly, especially during wars and economic downturns.
What percentage of GDP was spending during WW2?
Approximately 50%.
What is the largest source of government revenue?
Income tax.
What are excise duties?
Taxes on specific goods such as alcohol and tobacco.
What is the largest area of public spending?
Health care.
What proportion of spending are interest payments on debt?
Approximately 6%.
What is the benefit principle of taxation?
Taxes should be related to the benefits received by taxpayers.
What are hypothecated taxes?
Taxes that are specifically earmarked for a particular purpose.
What is a progressive tax?
A tax that takes a larger percentage from higher income earners.
What is a regressive tax?
A tax that takes a larger percentage from lower income earners.
What is a proportional tax?
A tax that takes the same percentage from all income levels.
What is a direct tax?
A tax levied directly on personal or corporate income.
What is an indirect tax?
A tax levied on goods and services rather than on income.
What is the marginal tax rate?
The tax rate on the last dollar earned.
What are the benefits of using demand-side fiscal policy?
- Stimulates economic growth
- Reduces unemployment
What are the drawbacks of demand-side fiscal policy?
- Can lead to inflation
- May increase national debt
What are the benefits of using supply-side fiscal policy?
- Encourages investment
- Increases productivity
What are the drawbacks of supply-side fiscal policy?
- May take time to see effects
- Can lead to inequality
What is the effect of government spending on economic growth?
It can stimulate growth by increasing aggregate demand.
What is the effect of government spending on low and stable inflation?
It can create inflationary pressures if not managed properly.
What is the effect of government spending on full employment?
It can help achieve full employment through increased demand.
What is the effect of a balanced budget?
It maintains fiscal stability and may prevent excessive debt.
What is the impact of rising government debt on macroeconomic performance?
- Increased interest rates
- Potential for reduced public services
What are government unintended consequences?
Unintended outcomes resulting from government policies or actions
These can include economic distortions or social inequities that arise despite the original intent of the policy.
What is the international context in economic analysis?
The global economic environment and how it influences domestic policies
This includes trade relations, foreign investment, and international economic agreements.
What assumptions are typically made in economic analysis?
Simplified beliefs or premises that guide economic models
These can include rational behavior, perfect competition, and other ideal conditions.
What is the key question regarding a shift from direct to indirect taxes?
Evaluate the economic consequences for the UK economy of a significant shift in the burden of taxation from direct to indirect taxes.
This question requires analysis of both benefits and drawbacks of such a shift.
What are the benefits of indirect taxes?
They can be easier to collect and may encourage savings and investment
Indirect taxes can also reduce tax evasion compared to direct taxes.
What are the criticisms of direct taxes?
They can discourage work and investment, and may be viewed as unfair
High direct taxes can lead to tax avoidance strategies.
What are the costs associated with indirect taxes?
They can disproportionately affect lower-income individuals and may reduce consumer spending
Indirect taxes can also lead to higher prices for goods and services.
What benefits do direct taxes provide?
They can be more equitable and provide stable revenue for public services
Direct taxes are based on income, which can reflect an individual’s ability to pay.
What factors do the outcomes of tax shifts depend on?
Time scale, economic conditions, and social equity
The impact can vary significantly in the short term versus the long term.
What are automatic stabilisers?
Changes to government revenue and expenditure that happen without direct intervention
These include mechanisms like unemployment benefits that adjust based on economic conditions.
Explain what is meant by discretionary fiscal policy.
Deliberate changes in government spending and taxation aimed at influencing the economy
This is typically used to address economic fluctuations.
What is the likely effect on an economy of an increase in taxation?
It can reduce consumer spending and slow economic growth
This effect can vary depending on the type of tax and the economic context.
