Unit 4(4.1-4.5) Flashcards
what is the role of the government as a producer
produces merit goods,public goods, welfare services, public services and infrastructure
what is the role of the government as an employer
provides employment to people who work to provide the goods and services the government produces
roles of the government other than producer and employer
support agriculture and other such industries
help vulnerable groups of people
manage the macroeconomy
manage the trade in goods and services with other countries
what are the 4 macroeconomic aims of the government
economic growth
price stability
low levels of unemployment
balance of payments stability
what is economic growth
an increase in the GDP
what is price stability
low levels of inflation are targeted by the government
what is low levels of unemployment
high employment leads to high levels of output and welfare services dont need to be given out
what is balance of payments stability
imports and exports should be balanced
if too much is imported, economy can run out of foreign currency which means the currency falls and imports become more expensive
if too much is exported, currency can rise against other currencies and make exports more expensive
what conflicts between macroeconomic aims exist
full employment vs price stability
economic growth and full employment vs balance of payments stability
economic growth vs full employment
explain the conflict between full employment and price stability
low rates of unemployment creates higher incomes and demand which can cause demand pull inflation
explain the conflict between economic growth, full employment and balance of payments stability
as income rises due to economic growth and low unemployment, people can import more foreign goods which causes a deficit in the balance of payments
what is budget
a financial statement that shows the governments revenue from taxes and other incomes, and expenditure
why do governments spend
they spend on public goods and services out of a social and economic responsibility
this is because govt spending is also a part of aggregate demand
reasons for government spending
supply public and merit goods
welfare payments
achieve supply side improvements
reduce negative externalities
subsidise certain industries
redistribute income
aid economic growht
what are the effects of government spending
leads to higher demand and economic growth
can cause inflation
investment in infrastructure can lead to increased productivity and growth
increase living standards and reduce inequality
too much public investment can reduce private investment
what are taxes
the governments main source of revenue
why are taxes levied
source of govt revenue
redistributing incomes
reduce consumption and production of demerit goods
protect domestic industry
manage the economy
how are taxes used to redistribute incomes
taxes are levied on those who earn higher incomes
this money is then used to fund welfare schemes
how do taxes protect domestic industry
they are levied on foreign goods that make them more expensive and let domestic products competitive
how do taxes manage the economy
lower taxes increase aggregate demand and supply which allows for growth during high inflation
govts can increase taxes to reduce demand
what are direct taxes
taxes on income. burden of paying falls directly on the individual
advantages of direct taxes
high revenue for the government
can reduce inequalities in income and wealth
disadvantages of direct taxes
reduces work incentives
reduces enterprise incentive
many people to try escape paying, means government has to use resources to catch them
what are indirect taxes
taxes on goods and services sold
indirectly takes money as tax from consumer expenditure
advantages of indirect taxes
low cost of collecting taxes
expanded tax base
can discourage specific goods
easy to alter with effects more immediate
disadvantages of indirect taxes
raises prices of goods, causing inflation
tax will fall heavier on poor people than rich
can cause illegal smuggling of goods
what are progressive taxes
taxes which burden the rich more than the poor because rate of taxation increases as income increases
what are regressive taxes
rate of taxation falls as income rises
burdens the poor more than the rich
what are proportional taxes
rate of taxation remains equal as income rises or falls
burdens all equally
what are qualities of a good tax system
equity
all information made available to payer
cost of collecting is less than tax itself
tax levied at convenient time
flexible
easy to understand for everybody
impacts of taxation
main impact depends on what the government uses the money for
less disposable income
can reduce incentive to work or make workers work harder
producers have less incentive to produce
what is fiscal policy
government policy which adjusts government spending and taxation to influence the economy
what fiscal policy does the government employ when theres budget surplus
expansionary fiscal policy where government spending is raised and taxes are cut
what is the impact of expansionary fiscal policy
stimulates growth and employment
what fiscal policy does the government employ when theres budget deficit
contractionary fiscal policy where govt spending is cut and tax rates are increased
used to control inflation
what is money supply
the total value of money available in an economy at a point of time
what are interest rates
the cost of borrowing money
impact of higher interest rates
higher interest rats will discourage borrowing and investments
encourages saving rather than consuming
impact of low interest rate
encourage borrowing and investments
encouraging spending rather than saving
what is monetary policy
governemnt policy that controls money supply
usually conducted by the central bank
what is expansionary monetary policy
where the government increases money supply by cutting interest rates leading to more spending than saving
effect of expansionary monetary policy
more money will be circulated
economic growth and an improvement in balance of payments
employment will rise
what is contractionary monetary policy
government decreases money supply by increasing interest rates.
effect of contractionary monetary policy
encourages saving rather than spending
businesses will be reluctant to invest
lower money supply, slows down economic growth and reduce inflation
can cause unemployment
what are supply side policies
microeconomic policies aimed at increasing supply and productivity in an economy that leads to long term economic growth
what is public sector investments in supply side policies
investments in transport and communication can facilitate faster growth
what is improving education in supply side policies
improves the quality and quantity of labour to increase productivity
how is spending on health a supply side policy
improves health of the population, increasing productivity
investment on housing in supply side policies
geographical mobility is increased, helping increase output
privatisation in supply side policies
can increase efficiency and increase output
income tax cuts in supply side policies
increasing income can increase peoples willingness to work and earn more
subsidies in supply side policies
financial grants given to producers to produce more and increase supply
deregulation in in supply side policies
allows businesses to operate easier and produce more output
removing trade barriers in supply side policies
by reducing import duties, more resources and goods are available to the economy.
can also incentivise export of goods, increasing production
labour market reforms in supply side policies
making laws that reduce trade union power would reduce business costs and increase output
advantage of supply side policies
the direct effect of economic growth.
reduces unemployment
trade reforms will improve balance of payments
disadvantage of supply side policies
reliance on public expenditure and tax cuts means the government will run large budget deficits
deregulation and privatisation reduces government intervention and can cause market failure
