paper 2 - macro

• Government spending is directed at:

  1. Education

  2. Healthcare

  3. Infrastructure

  4. Defence

  5. Law enforcement

  6. Welfare
• policy instruments - tools governments use to implement their policies such as interest rates, rates of taxation, levels of government spending.
• Indirect tax is imposed on spending
• sales tax are taxes on spending. VAT is a form of sales tax however some goods such as food, public transport, medicine and books are exempt
• duties tax are heavy taxes imposed on certain goods (eg. tabacco)
• custom duties are levied on imports
• stamp duties are levie when buying certain assets
• council tax - a tax on the value of a property to raise money for local services
• environmental tax -

  - landfill tax

  - aggregates levy - tax on sand, gravel and rock dug from the ground.
• Impact of a fiscal deficit -

  - bigger national debt so the government would have to spend more of its revenue paying off the debt.

  - new generations would be burdened with the repayment of the national debt which is unfair
• impact of a fiscal surplus

  - revenue could be used to pay off the national debt which increases the economic stability

  - it could be used to reduce taxes
• It is important to analyse the size of the defict in relation to the country's GDP in order to measure its impact
• expansionary fiscal policy - fiscal measures designed to stimulate demand in the economy (eg. decreasing taxes and spenign more)
• contractionary fiscal policy - fiscal measures designed to reduce demand in the economy (eg. increased taxation, spending less)
• Impacts of fiscal policy on macroeconomic objectives:

  • inflation (reduce by contractionary policy)
  • unemployment (reduce by expansionary policy)
  • current account deficit (reduce by contactionary policy)
  • economic growth (increased by expansionary policy)
  • fiscal policy and the environment (damage reduced by environmental tax and subsidies)
• Marginal rate of tax: the percentage of every extra dollar earned which is taxed.
• Progressive tax system - The more you earn, the higher percentage of tax is paid
• Unemployment is a situation where people in the labour force are actively looking for jobs but are currently unemployed
• • Seasonal unemployment: this occurs as a result of the demand for a product being seasonal. 
  • Structural unemployment: this occurs due to the long-term change in the structure of an economy. Workers end up having the wrong skills in the wrong place – causing them to be unfit for employment.
  • Frictional unemployment: this occurs as a result of workers leaving one job and spending time looking for a new one. This type of unemployment is short-lived.
  • Cyclical unemployment: this occurs as a result of fall in aggregate demand due to an economic recession.
• Wage price spiral (when inflation is over 3%) -

  • workers demand higher pay
  • cost of production increases so profit made decreases
  • producers must increase prices
• A wage price spiral can lead to businesses firing staff which causes unemployment and results in a recession
• Monetary policy is based on expectations
• Monetary policy: How do we control the cost of borrwing (interest rates)

  • central banks loan commercial banks money.
  • Commercial banks pay back a base rate
  • If the base rate increases then the borrowers have to pay more interest rates.
  • if it decreases, then the interest rates decrease
• inflation must always be between 1% and 3%