ECON
econtol anjing beban
dibikin miska
Government roles
Government- A group that overseas as community,esteblishing rules, and administering public policy.
Government are both producers and employer
P- produces goods(merit/public)
E-workers and managers to opperate state owned enterprises
Gov | Main Roles / Policies |
|---|---|
Local | - Collects local business taxes |
National | - Sets national business taxes |
International | - Manages trade with other countries |
AIMS OF THE GOVERNMENT
-FULL EMPLOYMENT/LOW UNEMPLOYMENT
-ECONOMIC GROWTH
-PRICE STABILITY
-REDISTRIBUTION OF INCOME
-BALANCE OF PAYMENT
LOW UNEMPLOYMENT
People who are willing and able to work can find employment
Economically active( looking for j*b)
Economically inactive (those who are dependent on labor force)
Labor force
-the total number of people who are either employed or actively seeking employment
Unemployment rate
Unemployment rate/Labor force x100
Working-age population = 1,000
Employed = 600
Unemployed (looking for work) = 100
Labor Force = Employed + Unemployed = 600 + 100 = 700
Unemployment Rate=100/700×100=14.3%
High unemployment is costly → fewer taxes collected, more government spending on welfare, lower production, reduced purchasing power.
Trade-off: Full employment may cause inflation if demand rises too much.
PRICE STABILITY
Avoiding prolonged inflation and deflation
Inflation = Sustained rise in the general price level of goods/services.
Deflation = Sustained fall in general prices.
High inflation reduces the value of money and purchasing power.
Deflation can lead to unemployment and lower output.
Government aim: keep inflation low and stable to ensure confidence, planning, and stable wages.
PRICE STABILITY VS LOW UNEMPLOYMENT
When unemployment falls, more people have jobs and income.
This increases aggregate demand (AD) → firms produce more.
if AD grows too quickly, it causes demand-pull inflation (prices rise because too much money is chasing too few goods).
Conflict: Achieving very low unemployment often leads to higher inflation, making price stability difficult.
ECONOMIC GROWTH
Increase in the output of goods/services (measured by GDP).
Encouraged by: low taxes, support for private businesses, development of high-tech industries.
Actual growth: short-term, demand-side (shifting AD).
Potential growth: long-term, supply-side (shifting AS).
Economic Growth vs Price Stability
Strong growth often increases demand for resources (labour, raw materials).
This can lead to cost-push inflation (higher wages, higher production costs).
Also, more consumer spending may increase demand-pull inflation.
Conflict: Sustained high growth makes it difficult to keep prices stable.
REDISTRIBUTION OF INCOME
Government reduces inequality through taxation and spending.
Rich taxed more → poor supported via housing, healthcare, and education.
Risks: discourages enterprise, may slow growth, may cause unemployment if firms relocate.
Redistribution of Income vs Economic Growth
Redistribution requires higher taxes on the rich and businesses to fund welfare (healthcare, housing, benefits).
But high taxes may:
Reduce incentives to work, save, or invest.
Discourage entrepreneurs from starting/expanding firms.
Push businesses abroad (to lower-tax countries).
Redistribution vs Price Stability
Welfare spending and income support increase aggregate demand.
Higher demand can push up prices → inflation.
Conflict: Reducing inequality may undermine price stability.
Balance of Payments Stability (BOP)
BOP = financial record of all transactions with the rest of the world.
Current account records exports and imports of goods/services.
Stability = value of exports ≈ value of imports (avoid deficit/surplus).
If imports > exports → deficit (living beyond means).
Links with other aims
Growth ↑ → imports ↑ → deficit.
Full employment ↑ → wages ↑ → inflation ↑ → exports less competitive.
Full Employment vs Balance of Payments Stability
When employment rises, incomes rise → higher domestic consumption.
More imports are purchased, creating a trade deficit.
At the same time, higher wages make exports more expensive → less competitive abroad.
Conflict: Full employment can worsen the balance of payments.. Economic
Economic Growth vs Balance of Payments Stability
Economic growth = higher output, higher incomes, more consumption.
As people’s income rises, imports increase (buying foreign goods).
This can create a current account deficit (imports > exports).
Additionally, higher growth may raise costs and wages, making exports less competitive.
Conflict: Rapid growth worsens the balance of payments position.
FISCAL POLICY
Government budget: plan for revenue (taxes) and expenditure (spending).
Tax revenue sources:
Income tax, corporation tax, sales tax, excise duties, import tax, capital gains tax, inheritance tax, carbon tax.
Budget outcomes:
Balanced budget → revenue = spending.
Surplus → revenue > spending.
Deficit → spending > revenue.
Tax systems:
Progressive tax → higher % from rich.
Proportional tax → same % from all.
Regressive tax → higher % from poor.
Expansionary Fiscal Policy
Definition: Rises in government expenditure and/or cuts in taxation designed to increase Aggregated demand.
Goal: Encourage growth, reduce unemployment, fight recession.
Effects:
More disposable income → higher consumer spending.
More demand → businesses hire more workers.
Economy grows faster.
Example: Cutting income tax and increasing infrastructure spending during a recession.
Expansionary Fiscal Policy → Macroeconomics
Economic Growth: ↑ Govt spending & ↓ taxes → ↑ Aggregate Demand (AD) → higher GDP.
Employment: Higher demand → firms hire more workers → ↓ unemployment.
Inflation: Risk of demand-pull inflation if economy nears full capacity.
Balance of Payments: More demand may ↑ imports → trade deficit worsens.
Income Distribution: If taxes are cut for lower incomes or welfare spending rises → more equal distribution.
Contractionary Fiscal Policy
Definition: Cuts in government expenditure and/or rises in taxation designed to reduce aggregated demand
Goal: Reduce inflation, prevent overheating.
Effects:
Less disposable income → lower consumer spending.
Businesses reduce output and hiring.
Prices stabilize.
Example: Raising taxes and reducing subsidies when inflation is too high.
Contractionary Fiscal Policy → Macroeconomics
Economic Growth: ↓ Govt spending & ↑ taxes → ↓ AD → slower GDP growth.
Employment: Lower demand → firms cut output → ↑ unemployment (short term).
Inflation: Helps reduce demand-pull inflation (stabilizes prices).
Balance of Payments: ↓ demand → ↓ imports → trade deficit may improve.
Income Distribution: If taxes rise (especially regressive ones like sales tax) → inequality may worsen.
Direct vs Indirect Taxes
Aspect | Direct Tax | Indirect Tax |
|---|---|---|
Definition | Taxes on income and wealth | Taxes on expenditure |
Examples | - Income tax | - Value Added Tax (VAT) |
Impact if High | If too high, reduces disposable income and can discourage working/investing | If too high, raises prices → burden on consumers → may cause inflation |
Who Pays More | The person or firm directly | Collected by firms but passed on to consumers (firms → government) |
Benefits | - Burden only on income/wealth | - Doesn’t directly reduce income |
Types of Taxes in Fiscal Policy
Tax Type | Definition | Direct / Indirect | Progressive / Regressive / Proportional |
|---|---|---|---|
Income Tax | Tax on wages, salaries, and investment income | Direct | Usually Progressive (higher earners pay a higher % of income) |
Sales Tax (VAT/GST) | Tax on goods/services at point of sale | Indirect | Regressive (poor spend larger share of income on taxed goods) |
Import Tax (Tariff) | Tax on imported goods | Indirect | Regressive (raises prices, affects all consumers equally regardless of income) |
Inheritance Tax | Tax on wealth passed on after death | Direct | Progressive (only wealth above a threshold is taxed more heavily) |
Corporation Tax | Tax on profits of firms | Direct | Often Proportional (flat % of profit), though can be Progressive in some countries |
Excise Duty | Tax on specific goods (alcohol, tobacco, fuel) | Indirect | Regressive (hits low-income groups harder since it’s per unit not based on income) |
Stamp Duty | Tax on legal documents (e.g., property purchase, shares) | Direct | Often Progressive (higher-value transactions taxed at higher rates) |
Customs Duty | Tax on goods when transported across borders | Indirect | Regressive (fixed % of goods, not income-based) |
Capital Gains Tax | Tax on profit from selling assets (e.g., property, shares) | Direct | Progressive (higher gains taxed at higher rates) |
Windfall Tax | Tax on unexpected or excess profits (e.g., oil companies during price surge) | Direct | Progressive (targets firms with abnormally high profits) |
Carbon Tax | Tax on emissions of carbon dioxide (pollution) | Indirect | Regressive (energy costs affect low-income households more) |
Tax Base
Definition: The total source of income, assets, or spending that can be taxed.
In simple words: who or what is taxed.
Examples:
Income of individuals
Profits of firms (corporation tax)
Goods and services (VAT, excise)
Property and wealth (inheritance tax, capital gains)
Wide tax base = many items/people taxed → allows lower tax rates.
Narrow tax base = few items/people taxed → government may need higher tax rates.
Tax Burden
Definition: The proportion of income, profits, or GDP taken in tax (who really pays).
In simple words: how heavy the tax feels on households or firms.
Examples:
If a person earns $1,000 and pays $200 in tax → 20% burden.
If government increases excise duty on petrol, the burden often falls more on consumers.
High tax burden = higher percentage of income/profits taken by government.
Low tax burden = smaller share taken.
MONETARY POLICY
Definition: Decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregated demand
Money supply = total amount of money in the economy (coins, banknotes, deposits, central bank reserves).
Objectives of Monetary Policy
More stable price level (low inflation).
Adequate foreign exchange reserves (stable exchange rate).
Opportunity for full employment (reduce unemployment).
Sustainable economic growth.
Monetary Policy Measures
Open Market Operations (OMO)
Buying/selling government securities (bonds, treasury bills) to control liquidity.
Buy bonds → ↑ money supply.
Sell bonds → ↓ money supply.
Changes in Interest Rates
Main tool of monetary policy.
↑ Interest rate → borrowing more expensive, saving more attractive → ↓ spending/investment.
↓ Interest rate → borrowing cheaper, saving less attractive → ↑ spending/investment.
Changes in Foreign Exchange Rates
Exchange rate movements affect imports/exports.
Strong currency → imports cheaper, exports less competitive.
Weak currency → imports expensive, exports more competitive.
Reserve Requirement
% of deposits commercial banks must keep with the central bank.
Higher reserve requirement → ↓ lending → ↓ money supply.
Lower reserve requirement → ↑ lending → ↑ money supply.
Liquidity Requirement
Banks must keep some deposits as cash for withdrawals.
Higher requirement → ↓ lending capacity.
Lower requirement → ↑ lending capacity.
Types of Monetary Policy
Expansionary Monetary Policy
increase in the money supply and/or the rate of interest designed to increase aggregated demand
Aim: Boost economic activity.
Tools: Lower interest rates, lower reserve/liquidity requirements, buy bonds.
Effects:
Cheaper borrowing → more spending & investment.
Incomes rise → more demand → ↑ GDP.
Risk: inflation, trade deficit.
Contractionary Monetary Policy
cuts in the money supply or growth of the money supply and/or the rate of interest designed to reduce aggregated demand
Aim: Reduce inflation, control overspending.
Tools: Raise interest rates, increase reserve/liquidity requirements, sell bonds.
Effects:
Borrowing falls → ↓ spending & investment.
Slows inflation.
Risk: unemployment, slower growth.
Effects of Monetary Policy on Macroeconomic Aims
Macroeconomic Aim | Expansionary (Loose Policy) | Contractionary (Tight Policy) |
|---|---|---|
Economic Growth | - ↓ Interest rates → ↑ borrowing and investment | - ↑ Interest rates → ↓ borrowing and investment |
Employment | - ↑ Output → firms hire more workers | - ↓ Output → firms cut jobs |
Price Stability (Inflation) | - ↑ Spending → risk of demand-pull inflation | - ↓ Spending → reduces demand-pull inflation |
Balance of Payments (BOP) | - ↑ Imports due to higher demand | - ↓ Imports due to weaker demand |
Income Distribution | - More jobs → helps low-income groups | - Unemployment ↑ → poor affected most |
Limitations of Monetary Policy
Time lags: Policy takes months to affect the economy.
Confidence: If households/firms lack confidence, lower interest rates may not boost spending.
Foreign direct investment (FDI): Tight monetary policy can discourage investors.
Conflicts with other aims: e.g., reducing inflation may cause unemployment.
