Macroeconomics part 9- Revisiting Fiscal and Supply Side Policies Flashcards
What is the laffer curve?
- n shaped curve
- Shows that as tax rate increases, so does tax revenue up to a point, then it decreases
- This is because if the tax rate is so high, then people will choose not to work because the opportunity cost is so high
- A reduction on taxes on the left side could potentially still increase tax revenue, if there is an increase on spending taxes
Features of a flexible labour market:
- Workers can switch between jobs and industries- training schemes
- Flexible hours worked- zero hour contracts
- Flexible wage rates- local wage awards
- Geographical mobility- single market and free movement of labour
What are the features of the single market?
Free movement of:
- Labour
- Capital
- Goods
- Services
How can the government increase output?
- Privatisation
- Deregulation
- Encourage enterprise
- Encourage business investment
- Trade union reform
- Increase spending on education and training
- Lower income tax
- Reduce benefits
- Introduce minimum wage
- Free childcare
How does privatisation increase output?
Private companies are more efficient and have to compete
How does deregulation increase output?
Enables greater competition
Benefits of supply side policies:
- Lower inflation
- Lower unemployment
- Improved economic growth
- Improved balance of trade and payments
How do supply side policies reduce inflation?
They shift AS to the right which reduces the price level
How do supply side policies improve the balance of trade and balance of payments?
They make firms more productive and competitive so they are able to export more
Examples of supply side policies:
- Privatisation
- Deregulation
- Reducing income taxes
- Education and training
- Cut welfare benefits
- Free child care
- Flexible labour market
- Encourage entrepreneurs
The crowding out debate definition:
The argument that if the government spends money on investment projects, the private sector won’t do it and spend money because they government will have already done it.
Why does increasing government spending arguable not increase AD?
- Changes the makeup of it
- Because if G increases, tax will have increased, decreasing the amount of spending consumers and business can do
- The crowding out debate
Why do we have taxes?
- Raise revenue to fund government spending
- To control the level of AD and output
- To correct market failure
- A progressive tax system can be used to achieve equality in income and wealth
- Can correct externalities
Principles (canons) of taxation:
- Economical
- Equitable
- Convenient
- Certain
- Efficient (does the tax achieve the purpose it was intended to achieve?)
- Flexible
Hypothecation:
When taxes are earmarked for a specific purpose
