Theme 4.5 - The role of the State in the macroeconomy

Question 1

4.5.2 - What is progressive taxation?

Answer 1

where those who are on higher incomes pay a higher marginal rate of tax, they pay a higher % of their income in tax. Direct taxes tend to be progressive eg income tax

Question 2

4.5.2 - What is proportional tax?

Answer 2

where the proportion of income paid on tax remains the same whilst the income of the taxpayer changes

Question 3

4.5.2 - What is regressive tax?

Answer 3

where the proportion of income paid in tax falls as the income of the taxpayers rises. Most indirect taxes are regressive eg VAT

Question 4

4.5.2 - What are the impacts of tax changes?

Answer 4

• Incentive to work
• Tax revenue
• Income distriubtion
• Real output and employment
• Price level
• Trade balance
• FDI flows

Question 5

4.5.2 - How does tax changes impact the incentive to work?

Answer 5

higher taxes on high income earners could encourage them to move aboard
- high marginal rates of tax will discourage individuals from working

Question 6

4.5.2 - How does tax changes have an impact on tax revenue?

Answer 6

The Laffer curve shows that a rise in tax ration does not necessarily increase tax rev
- T is the optimal tax level maximising rev on the tax rev diagram

Question 7

4.5.2 - How does tax changes impact income distribution?

Answer 7

progressive tax systems increase equality while regressive decrease income inequality

Question 8

4.5.2 - How does tax changes impact real output and employment?

Answer 8

rise in direct tax = decrease in disposable income = fall in AD
rise in indirect tax = increase in cost = decrease in SRAS

Question 9

4.5.2 - How does tax changes impact price level?

Answer 9

taxes can impact LRAS, SRAS and AD = impact on price

Question 10

4.5.2 - How does tax changes impact trade balance and FDI flows?

Answer 10

TB - rise in tax = decrease in income and C = decrease in imports

FDI - low tax on profit and investment = encourages businesses to invest

Question 11

4.5.3 - What is fiscal deficit and national debt?

Answer 11

Fiscal deficit is when the government spends more than it receives that year

National debt is the sum of all government debts built over many years

Question 12

4.5.3 - What is cyclical and structural deficit?

Answer 12

Cyclical - the part of the deficit that occurs due to gov spending and tax fluctuates around the trade cycle - recession= tax rev low and spending high = large deficit

Structural - fiscal deficit which occurs when the cyclical deficit is 0, long term and not related to the state of the economy

Question 13

4.5.3 - What are automatic stabilisers?

Answer 13

Mechanisms which reduce the impact of changes in the economy on national income, government spending and taxation are auto stabilisers - cannot prevent fluctuations

Question 14

4.5.3 - What is discretionary fiscal policy?

Answer 14

The deliberate manipulation of gov expenditure and taxes to influence the economy

Question 14

4.5.3 - What is discretionary fiscal policy?

Answer 14

The deliberate manipulation of gov expenditure and taxes to influence the economy

Question 15

4.5.3 - What factors influence the size of national debts?

Answer 15

• Ageing populations tend to contribute to a high national debt
• Continuously running a deficit

Question 16

4.5.3 - What factors influence the size of a fiscal deficit?

Answer 16

• Trade cycle
• Unforeseen events
• Interest rates
• Privatisation
• Government aims
• High revenues from oil
• Number of dependents in a country

Question 17

4.5.3 - What is the significance of the size of the fiscal deficit and national debt?

Answer 17

• High levels of borrowing may raise interest rates increasing high price of money = crowding out of the economy
• High FDs and NDs benefit today at the expense of future gens and can cause intergenerational inequality
• High FDs can cause inflation
• High levels of debt tend to result in a reduced credit rating for the government
• Gov borrowing can benefit growth if used for capital spending

Question 18

4.5.4 - What macroeconomic policies can be used by governments?

Answer 18

can use fiscal policy, monetary policy, supply side policy, exchnage rate policy and direct control in order to achieve a number of goals

Question 19

4.5.4 - What can be used to reduce fiscal deficits and national debts?

Answer 19

• demand stimulus by high spending - causes economic growth - higher tax rev
• Rely on automatic stabilisers to allow economy to grow
• gov default on loans but econ cost so large that can do when only option

Question 20

4.5.4 - What can be done to reduce poverty and inequality?

Answer 20

• progressive tax system - produce more equal distribution of income after tax
• benefits and transfer payments - universal benefits (child benefits etc) or means tested benefits
• provision of goods and services
• national minimum wage or equal pay legislation or trade union friendly legislation
• improvements in access to education and training opportunities

Question 21

4.5.4 - What can be done to reduce international competitiveness?

Answer 21

• supply side measures - improve productivity and flexibility eg tax and deregulation
• exchange rate policies
• sign trade agreements or join WTO

Question 22

4.5.4 - What can be done to counter changes in interest rates and supply of money?

Answer 22

• fall in bank rate = increase supply of money as more demand for loans
• central banks should allow inflation caused by supply side shocks but manage demand side inflation
• QE

Question 23

4.5.4 - What measure can be used to control global companies operations?

Answer 23

TNCs can bring huge gains but also have negative econ and social impacts

• regulation of transfer pricing - tax avoidance - in the UK companies which don’t allocate sufficient profits are challenged by HMRC and has led to billions of pounds earnt in taxes
• Ability to control global companies - difficult for individual governments to control TNCs

Question 24

4.5.4 - What are the problems facing policy makers?

Answer 24

• Inaccurate info - short term info eg GDP often inaccurate so gov unable to see problems
• Risks and uncertainties - cannot accurately predict future so difficult to know whether extra spending necessary
• external shocks - gov unable to control and prep for external shocks - best can hope for lessened impacts