Taxes and macro objectives Flashcards
How does a rise in taxes affect unemployment
If income tax rises, then it leads to an increase in voluntary unmployment as its easier to claim welfare benefits as incentive to work decreases, because a larger proportion of your pay is being taken by the governement.
How does a rise in taxes affect growth
Growth decreases because incentive to work decreases therefore productivity decreases which means that less goods or services produced by workers. Also firms have less incentive to produce because AD decreases as disposable income decreases.
How does a rise in taxes affect BOP
BOP will get more positive as imports decrease this is because, people have less disposable income as more tax. Therefore they import less goods and services.
Exports rise because inflation decreases, therefore they are internationally more competitive in terms of pricing of goods.
How does a rise in taxes affect inflation
Inflation decreases - deflation- because people have less DP therefore AD decreases as consumption decreases.
Give a counter arguement to why taxes may not affect unemployment
People may still have to work despite higher taxes, if the cost of living is too high so their welfare benefits would not allow them to pay their costs of living.
Give a counter arguement to why taxes may not affect growth
However even if less goods and services, tax generated by the governement can be used to invest in public sector such as education thus leading to an increase in productivity again and fostering economic growth.
Give a counter arguement to why taxes may not affect BOP
Imports may still increase as demand for necessities will not decrease such as medicine.
Give a counter arguement to why taxes may not affect Inflation
Even though AD decreases and so inflation decreases, AD can still increase if other factors of AD increases like governement spending therefore increasing inflation again.
