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Section 9 - Macroeconomic policy instruments - Coggle Diagram
Section 9 - Macroeconomic policy instruments
Fiscal policy
Governmnet spending and taxation
Traditionally used to influence AD
Govts boost dmeand when economy is in recession
Types
Reflationary - boosting AD by increase govt spending or lowering taxes
Deflationary - reducing AD by reducing govt spending or increasing taxes
Reflationary is used during a recession, it increases economic growth and reduces unemployment, but increases price level and worsens BOP as more imports
Deflationary is used during a boom, it reduces economic growth and increases unemployment, but it reduces price level and improves BOP as less is spent on imports
Discretionary policy - Govts deliberately change their spending/ tax because of the economic situation or because they want to improve infrastructure
Limitations
Imperfect information could lead to inefficient spending
Significant time lag
Could lead to crowding out
Might not be effective for increasing demand when interest rates are high
Changed approach
Supply side fiscal policy is used to increase AS, which helps achieve four main objectives
Government spending is directed at specific regions that need help
Fiscal policy can help achieve environmental policy objectives
Progressivetaxation allows weatlh distribution
Taxation
Progressive
Tax rises as income rises
Redistribute income and reduce poverty
Increases equality
Vertical equality
Regressive
Tax falls as income rises
Ecourage supply-side growth
Rich will spend more due to less tax
Incentive to work harder and earn more
Increases inequality
Proportional
Everyone pays the same proportion of tax regardless of income
Reduce incentive to evade and avoid tax
No vertical equality
VAT
Proportional tax
Can also be regressive as percentage of total income rich spend is less than that of the poor, so the percentage of total income the rich spend on VAT is less than it is for the poor
Horizontal equity - people with similar incomes and ability to pay tax should pay the same amount of tax
Vertical equity is when people with higher inomes
pay more tax than those with lower incomes
Government spending
During a recession, governments may increase public spending to encourage growth and reduce unemployment
Governments that want to redistribute income might spend more on benefits
Deficit - what a governmnet borrows in a single year
Debt - total governments debt
A long term budget deficit increases national debt, but a short term deficit will be balanced by a surplus later
Governments
Size of government spending
Larger population - greater levels of government spending
Ageing population - more funding for healthcare
If the government wants to redistribute income, they may spend more on benefits
Fiscal policy a government uses will affect their spending, like during a recession a government may increase spending to encourage growth
Deficit/ debt
Budget deficit - what a government borrows in a single year (they borrow when they want to spend more than their revenue)
National debt - total government debt run up over time
Govt may deliberately run a deficit to boost AD
Short term deficit will be balance by a surplus later
Large deficits
Budget deficit must be paid for by public sector borrowing
Excessive borrowing can cause demand pull inflation as the money supply increases
Borrowing could lead to higher interest rates to curb inflation, which discourage investment
Large debts mean other countries stop lending it money, which restrain its ability to grow
Future tax payers have large interest payments on debt to pay off
Large debts are less attraction to foreign investment
Large surplus
Taxes could be too high and governments aren't spending enough on the economy
Lower economic growth
Fiscal rules
Government can borrow to invest but not to fund current expenditure (wages)
Following rules prevent continuous borrowing and overspending
Increase confidence in future economic stability
OBR was created in 2010, which published reports on UK public spending, taxation and government predictions and assess the performance of the government
Tax revenue spending
Sources of revenue
Income tax
VAT
Natural insurance payments
Spending
Social support
NHS
Education