PPE MACRO Income Tax 25 MARKER

Question 1

What are the 2 definitions for Income tax 25 Marker?

Answer 1

Income Tax

GDP

Question 2

Define Income Tax

Answer 2

Tax levied directly on personal income

Question 3

Define GDP

Answer 3

The monetary value of all goods and services in an economy

Question 4

What is the first point FOR income tax as the best way to improve economic performance in both the long run and short run?

Answer 4

Expansionary policy

Question 5

Draw an AD/AS graph showing expansionary policy

Answer 5

Notes

Question 6

Explain the expansionary policy graph

Answer 6

A reduction in income tax is likely to raise consumer confidence in spending power, more money being spent into the economy shifts AD right to AD1, this is an example of the , increasing price level, introducing inflation and economic growth as GDP shifts right from Y to Y1

Question 7

What is the second point FOR income tax as the best way to improve economic performance in both the long run and short run?

Answer 7

Incentives to work

Question 8

Draw an AD/LRAS graph showing an increase in workforce

Answer 8

notes

Question 9

Explain the Increase in workforce graph

Answer 9

An increased workforce is created due to the multiplier effect. A higher level of consumer income resulting in increased consumption raises the demand for goods and services, therefore more opportunities for employment are created to satisfy the needs and wants of consumers. Unemployment would then decrease (currently 5% in the UK) as The LRAS shifts right to LRAS1, achieving economic growth with managed/no inflation shown by a decrease in price level from PL to PL1, creating a positive output gap while further increases in AD would not be inflationary

Question 10

What is the first point AGAINST income tax as the best way to improve economic performance in both the long run and short run?

Answer 10

BoP deficit

Question 11

Explain the BoP factor

Answer 11

Increased performance in the UK economy improves the standard of living through economic growth and demand for imports- more disposable income
BoP= deficit as exports are less competitive, UK goods are more expensive, higher spending on imports = deficit (X-M)

Question 12

Draw a AD/AS graph showing the effects of a deficit in BoP

Answer 12

notes

Question 13

How would the Gov have to balance the budget deficit?

short run

Answer 13

As Tax decreases, Gov spending would also have to decrease to keep the deficit to a minimum as further Gov spending will increase the deficit again due to a reduction in revenue

Question 14

What is the SECOND point AGAINST income tax as the best way to improve economic performance in both the long run and short run?

Answer 14

Inflation

Question 15

Explain the effect inflation factor

Answer 15

Reduced income tax- Ad shifts right- PL rises- sustained rise in price level= inflation- goods and services become unaffordable to some- increased homelessness- interest rates increase- more people save- reduced AD shifts left in the long run to return prices to normal level

Question 16

Evaluation: Yes/No?

Answer 16

I believe that reducing income tax isn’t the best way to improve performance as the points against have a much larger impact than the points for.
The factor which has the most impact would be inflation as its likely to affect a wider range go consumers, employed as well as unemployed

Question 17

Evaluation: Depends on?

Answer 17

• Time taken to effect the UK economy e.g. 18 months
• Depends on where we are in the output gap
• Other factors of AD e.g. fiscal/monetary policy effecting short run AD/AS
• Supply-side policies LRAS