Role of the state in macroeconomy Flashcards
Budget deficit
When government spending exceeds government tax revenue
Crowding out
Government want to spend more
There is an increased demand for savings
Demand curve shifts outwards
The interest rates rise
The value for loans rise
Less investment
Less growth
There is also less resources for the private sector, increased public spending, crowds out public expenditure, may lead to no actual increase in AD
Laffer curve
Increasing taxes will increase tax revenue
Up until the efficient tax rate
Then the tax rate will begin to fall
Evaluation -
Disincentive to work, as tax rates begin to rise
Capital government expenditure
Government spending on infrastructure
Roads, schools, hospitals
Transfer payments
Benefits and pensions
Current government expenditure
Interest payments
Why does government expenditure vary?
If a country is poor, lower incomes, lower tax revenues, less government spending
Gvt spending and productivity
More spending, economies of scale, higher outputs, higher productivity
Better quality of capital and labour, better skills, better quality, better productivity
Gvt spending and living standards
More benefits, less poverty, better standards of living
Gvt spending and tax
More government spending, high tax, may be a disincentive for people to actually work
Gvt spending and inequality
Increased transfer payments, redistribution of income, increased equality, reduces poverty
Progressive tax
Higher incomes higher proportion of tax paid
Regressive tax
Higher incomes lower proportion of tax paid
Proportional tax
As income changes the amount paid in taxes stays the same
VAT
Tax and incentives to work
If peoples benefits are higher than their wages as a result of income tax, less likely to work
As taxes rise, people are less likely to work anyways
