BOP

• Government Macroeconomic Policy Objectives

  • Price stability
  • Low unemployment
  • Economic growth
  • Balance of payment stability
  • Exchange rate fluctuations
• Fiscal policy


  The use of taxation and government spending to manage aggregate demand in order to achieve the government's macroeconomic aims
• Budget surplus


  When tax revenue exceeds government spending
• Budget deficit


  When government spending exceeds tax revenue
• Balanced budget


  When government spending matches tax revenue
• Cyclical deficit


  A budget deficit that occurs due to a fall in economic activity
• Structural deficit


  When a government is committed to too much spending relative to its tax revenue
• National debt


  The total debt a central government, or the whole public sector, has built up over time
• Indirect taxes


  Taxes on the sale of goods and services, e.g. VAT, GST, excise duties, custom duties
• Direct taxes


  Taxes on income and wealth, e.g. income tax, corporate tax
• Progressive tax


  A tax that takes a higher percentage of a person or firm's income as that income rises
• Regressive tax


  A tax where a smaller percentage of income is taken as income rises
• Proportional tax


  A fixed percentage tax, the tax rate does not change as income changes
• Marginal rate of taxation (mrt)


  The proportion of extra income taken in tax
• Average rate of taxation (art)

  The proportion of a person's total income that is taken in tax
• Reasons for taxation


  • Raise revenue to finance government spending
  • Influence aggregate demand
  • Distribute income more evenly
  • Discourage consumption of certain products
  • Improve health and environment
• Types of government spending

  • Transfer payments
  • Current spending
  • Capital spending
• Expansionary fiscal policy


  Designed to increase aggregate demand, e.g. increasing government spending and/or cutting tax rates
• Contractionary fiscal policy


  Intended to lower the growth of aggregate demand, e.g. reducing government spending and/or increasing taxes
• Automatic stabilisers


  Forms of government spending and taxation that change, without any deliberate government action, to offset fluctuations in GDP
• Increase in the budget deficit

  An increase in the government's ability to borrow
• Increase in the rate of interest


  An increase in tax revenue
• Monetary policy


  Any policy tools that affect the price or quantity of money
• Monetary policy tools


  • Interest rates
  • The money supply
  • Exchange rate
  • Credit regulations
• Expansionary monetary policy


  A cut in the interest rate, an increase in the money supply and a reduction in any restrictions on bank lending
• Contractionary monetary policy


  A rise in the interest rate, a decrease in the money supply and restrictions on bank lending
• Supply-side policy


  Policies used by governments to increase aggregate supply by improving the workings of product and factor markets
• Supply-side policy tools


  • Education and training
  • Promoting infrastructure development
  • Support for technological improvement
  • Cuts in corporate tax
  • Subsidies
  • Cuts in income tax
  • Trade union
  • Privatisation and deregulation
  • Encouragement of immigration