unit 4 subtopic A

Question 1

what are the 6 key economics objectives of the government and how are they measured

Answer 1

economic growth- GDP
full employment- unemployment rate
price stability- inflation rate, CPI
balance of payments stability- current account as a % of GDP
fair distribution of income- gini coefficient/income quintile ratio
sustainable economic development

Question 2

what does the government use fiscal policy for

Answer 2

fiscal policy- influencing taxing and spending (AD) through:
- employment rate
- inflation
- influencing taxes

Question 3

define company tax, excise duty, superannuation funds tax, fringe benefits tax, goods and services tax, income tax, customs duty

Answer 3

company tax- taxes on company profits
excise duty- duty levied on inelastic/harmful goods like fuel, alcohol and tobacco products
superannuation funds tax- tax paid on your superannuation
fringe benefits tax- tax paid by employees when non-pay-rise-related benefits are given to employees
GST- tax on goods and services fixed at 10% (except fresh food, education, health)
income tax- tax payed by workers
customs duty- duty levied on imported goods like clothing, footwear, vehicles

Question 4

distinguish direct tax, indirect tax, and other revenue

Answer 4

direct tax- tax from the firm or person, cannot be passed onto anyone else
indirect tax- tax on aspects of economic activity other than income, can be passed on to others
other revenue- includes sale of government assets, dividends from government business enterprises

Question 5

explain the three tax systems

Answer 5

proportional- tax is a consistent % of income
progressive- increasing proportion of wage as it grows (personal tax)
regressive- decreasing % of wage as it grows (GST)

Question 6

what is the difference between equity and equality

Answer 6

equality- everyone gets the same thing
equity- everyone gets the same result

Question 7

why are Adam Smith’s principles of taxation

Answer 7

equity- rich should pay more than the poor
collection- cost of collection should be low
certainty- taxpayers should understand tax
convenience- there should be minimal inconvenience to the taxpayer

Question 8

what is bracket creep/fiscal drag

Answer 8

as inflation occurs and wage increases taxpayers will pay higher tax brackets while paying higher prices for goods and services

Question 9

what is the difference between current, capital, and transfer expenditure

Answer 9

current expenditures- spending on G&S for current use to directly satisfy individual or collective needs
capital expenditures- spending on G&S for future benefits (infrastructure, transport, health, research)
transfer payments- transfers of money (social security payments, pensions, unemployment benefit)

Question 10

what are the two extreme economic systems and what is mixed economy

Answer 10

command/centrally planned economies- government makes decisions
free market economies- consumers makes decisions
mixed economy- balance of both

Question 11

what is the difference between structural discretionary fiscal policy and cyclical non-discretionary fiscal policy

Answer 11

structural discretionary fiscal policy- deliberate decisions by the government
cyclical non-discretionary fiscal policy- automatic stabilisers

Question 12

what are the 3 budget outcomes and 3 stances

Answer 12

budget deficit- GE is greater than taxes collected
budget surplus- taxes collected are greater than GE
balanced- taxes collected=GE

expansionary stance- headed toward a budget deficit compared to last year
contractionary- headed towards a budget surplus compared to last year
neutral- same position as last year

Question 13

when should a budget surplus be used in the business cycle and what is the impact

Answer 13

during an upturn/peak to dampen the economy, will have a contractionary impact on production, employment, and inflation as tax collected is larger than government expenditure

Question 14

when should a budget deficit be used in the business cycle and what is the impact

Answer 14

during a downturn/bust to stimulate the economy by increasing production, employment, and inflation

Question 15

how do automatic stabilisers work during inflationary gaps and deflationary gaps?

Answer 15

during inflationary gaps households earn more income, progressive tax system kicks in, more tax is collected. also, unemployment falls, and householders no longer require welfare, causing less GE

during deflationary gaps households earn less, less tax is collected. also, unemployment increases and more households require welfare and GE rises

Question 16

what are the 3 ways a budget deficit financed and what are the pros and cons

Answer 16

borrowing from the RBA- can cause inflationary pressures due to increased money flow
selling government (treasury) bonds to the public- increases government debt but does not increase money flow
borrowing internationally- stimulates aggregate demand (injection of foreign savings) but creates foreign debt and interest payments

Question 17

explain crowding out

Answer 17

when the government borrows loanable funds(savings), increased competition for funds will cause an increase in interest rates so the private sector borrows less and saves more and economic growth is hindered