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
Trade balance and taxes
Decrease income, less imports, improvement on the balance of payments
Automatic stabilizers
Mechanisms which reduce the impact of changes in the economy (such as benefits, during a recession, to encourage consumption, and spending within the economy)
Benefits
Income tax
National debt
Sum of all the government debts built up over many years
The public sector net cash requirement
Total amount of money that the government needs to borrow to fulfil its spending plans
Cyclical deficit
This occurs because government spending and tax fluctuate around the trade cycle
Structural deficit
This occurs at the peak of the boom and stays in the long run
What factors influence the size of the fiscal deficit?
Business cycle, government spending rises, due to an increase in the automatic stabilizers such as government benefits, welfare benefits etc
Recessions, less spending, more saving, more government spending, bail out money etc
Interest rates, rise, increase in current expenditure payments
Privatization, will reduce the deficit in the short run, influx of money, this will increase revenue for the government
What factors influence the size of national debts?
Ageing populations, asian countries, gvt runs a deficit to fund pensions and other transfer payments
What are the different types of policies governments can use to influence the economy?
Fiscal policy
Monetary policy
Supply side
Exchange rate
Stabilizers
Direct controls
What policies are the government using to reduce fiscal deficits and national debt?
