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Summary AS Notes Economics Unit 2 Macroeconomic Policy
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AS Notes Economics Unit 2 Macroeconomic Policy Revision Notes
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austerity cutting government spendingFisal Policy
demand side policy associated with taxing and spending
according to Keynesian when government changes level of taxation and
government spending it influences aggregate demand and level of
economic activity
Sources
of government revenue
Taxation
Borrowing
Sale ofassets Privatisation Sale of licences ex 3G in2008
selling to market forces
cyclical deficit
happens when economy slowed down and governmentspends more because of slowdown
related to economic cycle
occurs during a negative output gap
Trade Cycle
during low productivity high unemployment
P
so government has to pay more in unemployment benefits Real
GDP
or positive
output90
9am
cause the economy to go into deficit unpationary
surplus
budget
structural deficit
happenswhen government is alwaysspendingmorethan collecting thfgaical Eight
deficit
deficit
not related to the state of the economy negative output 90
structural deficit will not disappear when the M
deflationary 90
o
economy recovers can occur during a positive output Time
gap when revenues are high
During positive output gap government should run
a a budget surplus
where they have to increase taxes and decrease government spending
During a negative output gap government should run a budget deficit
where they have to cut taxes and increase government spending
However when government runs a budget deficit national debt rises
due to increased borrowing
Features of a good tax system
Equity
Horizontal equaty Vertical equity
taxpayers in similar Taxes paid increase with the amount of earned
financial conditions income those who have the ability to pay
should pay similar more taxes should contribute more than
amounts in tax those who are not
, Adequacy
taxes must provide enough revenue to meet the basic needs
of society
Transparency
taxpayers and leaders can easily find information about the tax
system and how money is used will be able to see how much
tax each person pays
Administrative ease
means tax system is not too complicated or costly for either taxpayers
or tax collectors Rules are simple forms are not too complicated
Cost of collecting taxes is small
Funding a budget deficit
Through selling bonds
Holder receives a guaranteed interest payment until the full value
of the bond is repaid
Flax tax system
tax system with a constant marginal role
Tax is easier to collect
Higher incentive for people to work
Rise in inequality
Note Budget deficit was renamed instead of Public Sector Borrowing Requirement
PSBR to avoid confusion with net borrowing
Public Sector Net BorrowingCPSNB is the difference between governmentspending andit'sincome
Expansionary fiscal policy Contractionary fiscal policy
Taxation government spending Taxation government spending
so involves decreasing taxes so involves increasing taxes
and increasing government and decreasing government
spending spending
Hence increasing consumers Hence reducing consumers
spending power ADT spending power ADD
Worsen current account
as money could be spent on imports
Fiscal Drag
situation where combination of inflation and growth in earnings push
more taxpayers into higher tax brackets
increasing government tax revenue without government raising tax rates
reducing AD d inflation
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