Macroeconomics, Part 9- Macroeconomic Policy Flashcards
Fiscal policy definition:
Involves the use of government spending, direct an indirect taxation and government borrowing to affect the level and growth and aggregate demand, output and jobs.
How does fiscal policy work?
There is a planned income and spending. If the planned spending is higher than the planned income then that money has to be got from somewhere.
Where does the money for the deficit from the planned expenditure come from?
- Borrowed
- Assets are sold
- Surpluses from previous years are used
Why does the government use taxation?
- Influence AD
- Reduce negative externalities and other market imperfections e.g. tax monopoly profits
- Raise government revenue for spending
- Protect jobs in the UK
- Redistribute income
What are the key roles for fiscal policy?
- Financing government spending
- Changing final income and wealth
- Providing a welfare state safety net
- Managing the economic cycle
- Improving long run competitiveness
- Tackle important market failures
What are examples of current spending?
- Salaries of NHS employees
- Drugs used in healthcare
- Road maintenance
- Army logistics supplies
What are examples of capital spending?
- Construction of new motorways
- New equipment in the NHS
- Flood defense schemes
- Extra defense equipment
Bond yield definition:
The rate of interest paid on government debt
Budget (fiscal) deficit definition:
The difference between what the government receives in revenue and what it spends
Cyclical fiscal deficit definition:
The size of the deficit is influenced by the state if the economy: in a boom tax receipts are relatively high and spending on unemployment benefit is low
Direct taxation definition:
Taxes on income, profits and wealth, paid directly by the bearer to the tax authorities
Indirect taxation definition:
Taxes on expenditure (e.g. VAT). They are paid to the tax authorities, not by the consumer, but indirectly by the suppliers of the goods or services
National debt definition:
The total amount owed by the government which has accumulated over the years
Structural fiscal deficit definition:
The part of the deficit that is not related to the state of the economy. This part of the deficit will not disappear when the economy recovers
What are the two types of fiscal policy?
- Expansionary: to increase the size of the economy
- Contractionary: to decrease the size of the economy
What are the expansionary fiscal policy measures? (To increase AD)
- Decrease tax
- Increase government spending
- Increase tax allowance
What are the three types of budget?
- Surplus
- Neutral
- Defecit
What is a surplus budget like?
When planned tax revenue is greater than planned spending, There is a withdrawal from the economy. It is contractionary fiscal policy
What is a neutral budget like?
When planned tax revenue is equal to planned spending. The economy stays the same in size
What is a defect budget like?
When planned tax revenue is less than planned spending. There are injections into the economy and it grows in size.
What are business rates?
A tax that business pay to their local council. It is like council tax and is for the same purpose
What is a progressive tax?
Where as people earn more, the rate of tax on each extra pound goes up. e.g. income tax
What is a proportional tax?
When an increase in income, leads to the same % increase in tax. e.g. national insurance
What is a regressive tax?
Where the rate of tax falls as income rises. i.e. the average rate of tax is lower for those on higher incomes. e.g. excise duties on tobacco and alcohol
