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Macro > Y2 - The role of the state in the macroeconomy > Flashcards

Y2 - The role of the state in the macroeconomy Flashcards

1
Q

What are the three types of public finance?

A
  • Public expenditure
  • Taxation
  • Public sector borrowing
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2
Q

What are public expenditure objectives?

A
  • Manage economy (fiscal)
  • Provide public goods
  • Redistribute income
  • Reduce external costs
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3
Q

Define public expenditure

A

Expenditure by the central government, local authorities and public sector organisations
- Capital (LT investment), current (day-day) and transfer payments (payments with no exchange = JSA)

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4
Q

What are factors influencing the size of public expenditure?

A
  • Level of GDP
  • Demand for public services (income elastic)
  • Size/age of population
  • Political agendas/priorities
  • State of economy (recession = automatic stabilisers)
  • Rate of inflation (more = more)
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5
Q

What are factors influencing changing composition of public expenditure?

A
  • Ageing population
  • Number of school children
  • Rising rents
    = austerity measures will decrease this
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6
Q

What are factors influencing public expenditure as % of GDP?

A
  • Productivity and growth (more = less)
  • Living standards
  • Crowding out
  • Level of tax
  • Equality
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7
Q

Define resource crowding out

A

Economy is at full employment and public sector expansion leads to shortage of resources in private sector

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8
Q

Define financial crowding out

A

When expansion of state sector is financed by more gov borrowing = more demand for loanable funds = higher interest rates and crowds out private sector investment

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9
Q

What are the objectives of taxation?

A
  • Manage economy
  • Raise rev for public expenditure
  • Redistribute income
  • Influence pattern of expenditure
  • Internalise external costs
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10
Q

Define progressive tax

A

Taxes in which the % of income paid rises with income

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11
Q

Define proportional taax

A

Taxes in which % of income paid remains constant as income rises

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12
Q

Define regressive tax

A

Taxes in which % of income paid falls as income rises (VAT)

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13
Q

Describe the graph for the 3 types of tax

A 
y-axis = % income paid in tax, x-axis = taxable income
A = y=x^2 graph (only half for positive x) -- progressive
B = straight horizontal line -- proportional
C = Demand curve -- regressive
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14
Q

Define direct taxes

A

Taxes levied on income and wealth (e.g. income tax, corporation tax, capital gains tax)

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15
Q

Define indirect taxes

A

Taxes on expenditure (e.g. VAT)

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16
Q

What are the effects of changes in direct tax? (7)

A
  • Incentive to work (decrease for employed and unemployed)
  • Tax revenues (laffer curve)
  • Income distribution (more equal = more progressive)
  • Real output/employment (more tax = less AD = less output)
  • Price level (less AD = lower prices)
  • Trade balance (lower disp income = less consumption = less imports = increase trade balance)
  • FDI (less inward FDI)
17
Q

What are the effects of changes in indirect tax?

A
  • Incentive to work = more (if VAT up)
  • Tax revenues (VAT up = more rev)
  • Worse income distribution
  • Less output and employment
  • Higher price level in SR but lower in LR (as AD falls)
  • Little impact on trade balance
  • Less FDI as AD falls
18
Q

What determines the effects of changes in taxation?

A

PED and PES of product

- Inelastic PED = consumers worse off than producers

19
Q

Define fiscal deficit

A

When public spending is greater than the tax revenues (in a particular year)

20
Q

Define national debt

A

The cumulative total of past gov borrowing

- Total sum owed by a gov to holders of gov bonds (outstanding debts accumulated over time)

21
Q

What are the two types of public sector finances?

A
  1. Automatic stabilisers = recession = more unemployed = more JSA = automatically more gov spending and less tax rev
  2. Discretionary fiscal policy = deliberate changes in public expenditure and taxes to influence consumption
22
Q

Define cyclical deficit

A

Proportion of a country’s budget deficit that reflects changes in the economy cycle (finances linked to trade cycle = increase in recession)

23
Q

Define structural deficit

A

Fiscal deficit which remains when the economy is normal and output gap is 0

24
Q

What are the factors influencing size of fiscal deficit?

A
  • State of economy
  • Discretionary fiscal policy
  • Demographic factors
  • Efficiency of tax collection/avoidance/evasion
  • Interest on national debt
25
Q

What are the factors influencing size of national debt?

A
  • Fiscal deficit/surplus
  • Wars (more borrowing)
  • State of economy
  • Gov measures (LT and immediate)
26
Q

What are the problems with persistent deficits?

A
  • Crowding out
  • Fall in confidence = less FDI
  • More interest repayments on national debt
  • Inflation
  • Loss of AAA rating (higher LR interest rates = countries less willing to lend)
27
Q

What are measures to reduce fiscal deficits and national debts?

A
  • Less public expenditure
  • More taxation
  • More policies to increase growth
    HOWEVER = could lead to less AD and less tax rev
28
Q

What are measures to reduce poverty and inequality?

A
  • More education = more employable
  • NMW
  • More progressive taxation
  • More benefits (but lots of problems)
29
Q

What are examples of external shocks?

A
  • Natural hazard
  • Bursting of asset price bubbles
  • Terrorism
  • Bank run
  • Fluctuations in oil/commodity prices
30
Q

What are measures to control TNC’s power?

A
  • Regulate transfer pricing (but v hard)

- Limit gov control on companies (allow monopolies/companies to transfer between different countries)

31
Q

What are some problems for policy makers?

A
  • Inaccurate info (cannot predict future inflation rate/rely on old data)
  • Inability to control external shocks (hard to predict) = manage policies

Macro (10 decks)

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