Role Of The State Flashcards
Unemployment paradox
low UP is good but causes inflation as shown on the Philips curve
NRU
natural rate of UP when inflation is 0
2 types of indirect tax
specific (fixed)
Ad Valorem (%)
Ad Valorem Tax
% tax (VAT)
Progressive, Regressive and proportional tax
Progressive tax is %increase as income increases.
Regressive is % decreased as income increases such as national income
Proportional is tax is the same amount of tax (corp tax)
Incentives to work
increase in direct tax = lower incentive to work
decrease in indirect tax = increased incentives to work
laffer curve
the graph showing the relationships between tax rev and tax rate
What was the impact of lower income tax on FDI
FDI increased
companies see higher wealth for workers and hence lower pay
move operations there
Who do central banks give money to
High street banks
government
Roles of the central bank
lending to other banks
lending to the government
implementing monetary policy
regulation of banking
NRU
The point on the Phillips curve where there is no inflation from UP
What does Phillips curve suggest about monetary policy
LRPC- inflation always will beat the NRU
Any policy will just create inflation or deflation
Hence policy has no effect
SS policies (changing the supply of labour) can change the RNU
the LRPC shows that UP always returns to the NRU
3 types of public expenditure
current spending
capital spending
transfer payments
Current spending
spending by the govt on the day to day running of a country
reoccurring payments
capital spending
spending on infrastructure
long term projects and anything that the government aims to reap rewards from
Transfer payments
money for nothing
benefits of subsidies
not included in govt spending in AD eq
3 factors affecting public spending
age distribution
income
political causes
age distribution as a factor affecting public spending
Japan has a high age distribution
more money spent on pensions and healthcare
botswana- low life expectancy
young pop- more on ed
Impact of incomes on public spending
higher incomes leads to lower demand for public services
demand wavers response to changes in income and is income inelastic
as people become wealthier demand for public services could decrease
political values as a factor for public expenditure
in Denmark- high trust in the government
population accepts high quality of tax
58% government spending
high tax follows high trust
Areas affected by a change in public spending
productivity and growth
living standards and equality
crowding out
productivity growth as changed by the public sector
increase in spending leads to increase in AD
more dfiunds for the NHS leads to more productivity and skills
increased productivity leads to LRAS shifting right
lower could depending on how efficiently money is spent
Living standards and equality as enhanced by public spending
Higher living standards
leads to welfare and benefits payments which leads to more healthy lifestyles from high earners
this leads to increased inequality
rewarding crowding out
resources were already being used efficiently
this leads to increased opportunity cost for public spending
this is because public expenditure decreasing the cost avalible to the private sector
Types of budgets deficit
cyclical deficiy
structural deficit
financial crowding out
an increase in government beurocracy will increase the demand for money
this will push up the price of money and the IR
This mades it more expensive to borrow
OBR
The orgnaision in charge of organising government spending
all but truss has their budget reviewed
Cylical deficit
deficit based off position in the economic cycle
automatic stabilisers increases govt spenfign at times of recession (benefits)
when tax rev increases and increase in spending also need for more ss policy leads to the budget worsening
Structural deficit
consistant deficit regardless of position in the econoic cycles
National dept
total govt dept built up by govt borrowing over time
How does AD affect the IR and create finantial crowing out
the govt needs to borrow money
this increases the demand for loans
this leads to the interest rate increasing
this is financial crowing out
Impact of an increase in ad
increase in IR
increase Financial crowing out,
Impact of the generations of budget deficit
future generations will have to cut expenditure and increase taxes
