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What is a direct tax?
A tax on income and/or wealth - ie Income tax/inheritance tax
What is an indirect tax
A tax on spending - ie VAT/duties
when is there a Govt. budget deficit
when Govt. spending > revenue
when is there a Govt. budget surplus
when Govt. spending < revenue
what are some of the UK’s macroeconomic objectives
Low unemployment
inflation at 2%
economic growth
rising living standards
what does fiscal policy mean
fiscal policy is the use of government revenue collection and expenditure to influence a country's economy
what is Expansionary fiscal policy for
Higher employment and economic growth
what does expansionary fiscal policy include
reducing taxes
increasing government spending
what is contractionary fiscal policy for
sound government finances or to combat inflation
what does contractionary fiscal policy include
increased taxes
decreased government spending
what is aggregate demand
the total demand for goods and services in a market
how is aggregate demand calculated
AD = C+I+G + (X-M)
C - consumption
I - investments
G - Government spending
X - Exports
M - Imports
what effect does raising income tax have on the labour market
less of an incentive to work
more economically inactive people
decreased labour supply
what is a demerit good
a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable
How can the government help to redistribute wealth
benefits
spending on healthcare/education
increasing taxes for more revenue to redistribute
what are the consequences of wealth redistribution measures
encourages tax avoidance
pushes people to emigrate
an increase in corporation taxes discourages investments
what is monetary policy
A policy that aims to control the supply of money in an economy to meet objectives. It manipulates money supply and interest rates.
who controls monetary policy
the Bank of England (BoE)
what does expansionary monetary policy look to achieve
Economic growth and low unemployment
what does contractionary monetary policy look to achieve
Price stability and a Healthier balance of payments
how does expansionary monetary policy work
interest rates are reduced which leads to increased spending, output and employment
how does contractionary monetary policy work
increased interest rates lead to reducded spending as the reward for savings increases
what is Quantitative Easing
The increasing of money supply from a central bank
how does Quantitative easing work
the central bank buys bonds off other banks
this gives banks loads of liquidity
interest will be low so the banks will lend more
this leads to increased borrowing n consumption
why might reducing interest rates not increase spending
there is limited supply of things to spend on OR consumers are predicting a rise again
why might a reduction in interest rates NOT increase borrowing
low consumer confidence
what is a supply side policy
policies that look to increase the productive potential of an economy
what does a Govt. hope to achieve with SSPs
an improvement in the quality of quantity of the FoP
What supply side policies exist
Investing in Education and Training
Limiting trade union power
reducing direct taxes
reducing benefits
Privatization
Development of infrastructure
What happens when the Govt. spends on education and training
a workers’ human capital (quality) improves
a better quality worker is more productive
an increase in output
productive potential increases
what is a trade union
an organised association of workers in a specific trade/industry formed to protect and promote their collective interests
how does limiting trade union power work
reducing union power leads to less strikes
less disruption to supply
increase in production and so supply
OR
reducing union power reduces the costs for firms so there’s more money to reinvest into the FoPs
How does reducing direct taxes impact economically inactive people
they may feel more encouraged to work if taxes are lowered as they take more of their pay home. So the labour force grows increasing supply
How does reducing direct taxes impact employed people
workers will be encouraged to work harder for more pay and work longer and seek promotion
why might reducing direct taxes not boost supply
benefits may be high
dependant on demand
not enough opportunities
how does reducing benefits boost supply
benefits are cut
lower income households have less money
more of an incentive to find work
more people in employment
how does reducing direct taxes impact businesses
corporation tax is reduced
businesses have more money
incentive to invest in the FoPs
TNCs will be attracted to a place with low tax and productive capacity will increases
what is privatisation
the transfer of assets from the public sector to the private sector (usually whole businesses or industries)
how does privatisation boost supply
private companies will compete
increased job opportunities
private companies are profit driven
what is infrastructure
the physical and technical networks and facilities that support a country’s economy.
how does investing in infrastructure boost supply
infrastructure is developed
movement of the FoPs improves
Efficiency of the FoPs improves
productive potential increases
what are the costs of supply side policies
time lag
costly
Equity issues
Unintended effects
