Unit 4: Government and the Macroeconomy Flashcards
Define circular flow of income
It shows the movement of income and money around the economy.
Define injection
When income is added to the circular flow of income
G
X
I
Define withdrawal
When income is removed form the circular flow of income
S
T
M
List the 5 macroeconomic goals of government
Economic growth Reduce unemployment Stable prices Balance of payments stability Redistribution of income
List some conflicts between macroeconomic aims
Economic growth - stable prices
Full employment - stable prices
Economic growth - balance of payments stability
Economic growth - redistribution of income
What is fiscal policy
government spending and taxation
Define current expenditure
- is for short term, includes wages of public sector workers, state pensions, welfare payments
Define capital expenditure
- is for long term, includes investments on public infrastructure
define tax burden
the total tax revenue as a proportion of the national income of a country
Why taxes are used?
to raise revenue
to manage the macroeconomy - increase taxes, reduce demand and inflation
to reduce inequalities
to protect the environment - increase taxes on production activities that create pollution
What should a good tax be?
Fair and equitable ( same amount of tax for ppl with same incomes )
Non-distortionary, should be stable from year to year to allow firms and people to plan, should not be set very high to reduce incentives of firms
easy to pay & calculate
Define progressive tax system
income tax increases as income increases
Define regressive tax system
income tax decreases as income decreases
define proportional tax system
income tax is the same for all level of incomes
direct taxes
taken directly from individuals or firms
ex. income tax, cooperation tax, inheritance tax
indirect taxes
taken indirectly from incomes when spent on goods and services
ex. VAT, tariffs , excise duties
What is expansionary fiscal policy
to increase aggregate demand
- cutting taxes
What is contractionary fiscal policy
- to decrease aggregate demand
- increase taxes
Problems with fiscal policy
taxation reduce incentives for firms ( production cost increases)
- increase inflation , cost - push inflation
- increases unemployment
What is monetary policy
money supply and interest rates
What is expansionary monetary policy
reduce interest rates, reduces saving, increases consumer spending and investment
increase money supply through quantitative easing
What is quantitative easing
government creates electronic money by adding 0 to their account
uses it to buy bonds from firms
this means more cash to loan
increase borrowing, spending, increase aggregate demand
What is contractionary monetary policy
increase interest rates, borrowing expensive , reduce disposable income, saving increases
cutting money supply - reduces the amount of money banks have so that there is less money to lend to customers , decrease aggregate demand, increase unemployment
What are supply side policies ?
To increase aggregate supply and economic growth targeted tax cuts selective subsidies Improve edu and training minimum wage laws competition policy remove trade barriers privatisation
