Pack 5: Role of the State in the Macroeconomy Flashcards
What is public expenditure?
Spending by government, such as on healthcare education and welfare
What is capital expenditure?
Spending by government on investment goods, e.g. new roads, hospitals or streetlights
What is current expenditure?
Spending by government on goods and services consumed in the short-term, also transfer payments and debt interest
what are transfer payments?
Spending for which there is no corresponding real output, they are welfare payments, e.g. state pensions or child benefits
What is public expenditure made up of?
Capital expenditure + Current expenditure
What are the reasons for changing public expenditure?
~Economic development
~Demographics
~Political ideology
~Trade cycle
~Economic crisis
What are the economic effects of public expenditure?
~Productivity and growth
~Living standards and equality
~Tax revenue and national debt
What is crowding out?
When extra government spending leads to lower private sector spending
What are regressive taxes?
Tax where proportion of income paid in tax falls as income of taxpayer rises
What are progressive taxes?
Tax where proportion of income paid in tax rises as income of taxpayer rise
What is proportional tax?
Tax where proportion paid in tax remains the same as income of taxpayer rises
Whats the benefit of indirect taxation?
It doesn’t effects the incentive to work
What does the Laffer curve show?
The Laffer Curve shows that there is an optimal rate of tax where revenue will be the highest
What is discretionary fiscal policy?
Deliberate manipulation of government expenditure and taxes to influence the economy
What are automatic stabilisers?
Mechanisms reducing impact of changes in economy on national income, in the form of taxation and public expenditure
What is national debt?
Total accumulated borrowing of government which remains to be paid to lenders
What’s a cyclical deficit?
Part of the fiscal deficit which is caused by government spending and taxes changing through trade cycle
What’s a structural deficit?
Part of the fiscal deficit not related to trade cycle and won’t disappear when economy recovers
What is the fiscal deficit made up of?
Cyclical deficit + structural deficit
What factors influence the size of the fiscal deficit and national debt?
~Trade cycle
~Government policy
~Unplanned events
~Debt interests
What’s the significance of the size of fiscal deficits and national debts?
~Financing debt (Opportunity cost)
~Credit rating
~Crowding out
~Foreign direct investments
~Inter-generational equity
What are the uses of government spending cuts?
~Up economic efficiency
~Less distortion of economic incentives
What are the costs of government spending cuts?
~Impact on public services
~Impact on poor + living standards
~Impact on jobs and growth
What is an external shock?
Events from outside domestic economic system, e.g. global financial crisis, up oil prices
What is the difference between demand-side and supply-side shocks?
Demand causes reduction in AD while supply causes reduction in aggregate supply and can lead to stagflation
What is exchange rate policy?
Manipulation of the price of a country’s currency by government or policymakers to achieve macro objectives
What are direct controls?
Government measures that are imposed on the price/quantity of a single product or factor of production, e.g. Maximum price on food or quotas on imports
What is uncertainty?
Situation where there is a lack of knowledge and events, outcomes or consequences are unpredictable
What is risk?
The chance of incurring misfortune or loss
