Important Concepts Key Vocabulary Unit 4a: Government and the

Macroeconomic goals of government 1. Ad valorem taxes 1. In Latin means “to the value” and is a tax levied based
macroeconomy – demand
There are five traditional macro-economic goals of government:
Economic Governments aim to increase real GDP overtime, pushing the
on the value of an item which is charged at the point and supply side policies
of sale (e.g. VAT).
growth PPF outwards and improving standards of living. 2. Aggregate 2. The total demand across an economy from expenditure, Key sources:
Full Having all people employed and contributing to the economy will Demand exports, investment and government spending. • Economics IGCSE Revision Guide (Titley & Carrier, 2014)
employment mean operating on the curve of the PPF. However, there is often 3. Aggregate 3. The total supply across an economy. • http://www.i-study.co.uk/Economics/IGCSE%20Eco%20main%20page.html (accessed on 27.06.17)
frictional unemployment, Supply • Complete Economics for Cambridge IGCSE® and O Level (Moynihan & Titley, 2016)
• http://www.dineshbakshi.com/ib-economics/macroeconomics/revision-notes/728-circular-flow-
Price stability By keeping inflation low and steady (2-3%) allows businesses 4. Base rate 4. The interest rate that a central bank will charge to lend of-income (accessed on 22.06.17).
and individuals to plan for the future. commercial banks money.
Redistribution Most governments aim to ensure some level of equality by 5. Budget 5. Annual financial statement documenting government
of income taxing the rich at a higher rate (progressive taxation) and expenditure and income.
Facts to commit to memory
providing to the poor through social welfare payments. 6. Budget Deficit 6. A situation where government expenditure is greater
Favourable Governments prefer to have a positive balance of payments than income for the given year. 1. Governments use policy instruments to help achieve macro-
Balance of where the amount of money flowing into an economy through 7. Budget Surplus 7. A situation where government expenditure is smaller economic objectives.
Payments the sale of exports is greater than, or balanced with, the money than income for the given year. 2. Public spending can be broken into current expenditure and capital
(BoP) leaving the economy through the purchase of imports. 8. Capital gains tax 8. Tax levied on the sale of an asset that has increased in expenditure.
value. 3. Public expenditures are financed by taxes and other revenues.
Demand-side policies 9. Corporation tax 9. Tax levied on company profits.
1. The government has a number of policy instruments that it can use to affect aggregate 4. Taxes can have progressive, regressive or proportional impacts on
10. Current 10. Short-term government spending that is recurrent, for
demand in the economy.
expenditure example salaries paid to people working in the state income.
2. As well as affecting output, controlling aggregate demand also affects employment, 5. Taxes on incomes and wealth are known as direct taxes.
sector.
inflation and the BoP. 6. Indirect taxes are incurred when consumers spend their incomes.
11. Capital 11. Government spending that has a long-term impact on
3. The two main demand-side instruments are fiscal policy and monetary policy.
expenditure both supply and demand and includes spending on
4. Fiscal policy involves government spending and taxation.
physical assets like roads, bridges, hospitals and
5. Monetary policy involves the money supply and the interest rate.
6. Demand-side policies can be expansionary, leading to an increase in aggregate
schools. Important Diagrams
demand, or contractionary, leading to a decrease in aggregate demand. 12. Deregulation 12. The process of reducing or removing legislation and
7. Expansionary policies will tend to increase spending and borrowing whilst reducing red tape. Circular Flow of Income
saving. 13. Direct tax 13. Taxes levied on income and wealth (examples include
8. Contractionary policies will tend to decrease spending and borrowing whilst increasing income tax, corporation tax, inheritance tax and capital
saving. gains tax).
Contractionary 14. Effective tax rate 14. The average tax rate that a person or corporation pays
Policy Tool or Output Employment Inflation over their whole income.
expansionary 15. Excise duties 15. An indirect tax levied on the manufacture, sale or use of
↑ Taxes Contractionary ↓ ↓ ↓ 16. Funding 16.
a good, e.g. the tax on cigarettes.
Long-term government debt that the government issues
Fiscal
↓ Gov.
spending
Contractionary ↓ ↓ ↓ to reduce the money supply (e.g. securities and bonds).
Policy ↓ Taxes Expansionary ↑ ↑ ↑ 17. Indirect tax 17. Taxes levied on spending (examples include VAT,
export and import taxes).
↑ Gov.
spending
Expansionary ↑ ↑ ↑ 18. Interest rates 18. The cost of borrowing money.
19. Macro- 19. The study of economics at the level of the national
↑ interest
rate
Contractionary ↓ ↓ ↓ economics economy.
20. Micro-economics 20. The study of economics at the individual level of the
Monetary
↓ money
supply*
Contractionary ↓ ↓ ↓ consumer or supplier.
21. Open market 21. The borrowing and repayment of short-term public sector
Policy ↓ interest
rate
Expansionary ↑ ↑ ↑ operations debt by the private sector and individuals.
22. Payroll tax 22. A tax that an employer pays on behalf of its staff and
↑ money
supply*
Expansionary ↑ ↑ ↑ that is calculated as a percentage of an employee’s
Source: http://www.dineshbakshi.com/ib-economics/macroeconomics/revision-
notes/728-circular-flow-of-income
* Note: the government can manipulate the money supply through a number of mediums wage.
including quantitative easing, funding, open market operations and special deposits (see 23. Personal income 23. A direct tax levied on a person’s income. Overview
definitions opposite). tax 1. The circular flow of income represents a simplified economy.
24. Privatisation 24. The sale of state owned assets to the private sector. 2. There are five economic agents – firms, hhds, banks, government and
Supply-side policies 25. Progressive tax 25. A taxation system that taxes higher earners a higher % abroad (firms, government and individuals).
1. Supply-side policies aim to influence the aggregate supply in an economy. of their income. 3. The diagram shows how money moves around the economy, how it can
2. They can also be grouped into market-orientated and interventionist approaches. 26. Proportional tax 26. A tax system that levies the same percentage of tax enter an economy (injections) and how it can leave an economy
3. Market-oriented involves strategies to free-up the market and reduce government from all taxpayers irrespective of their income. (withdrawals/leakages).
intervention. 27. Quantitative 27. A form of monetary policy where the government credits
4. Interventionist strategies involve the government taking an active role in the market. easing its own account and then buys financial assets like Injections
government bonds to increase money supply and 1. Government can inject money into an economy through current and capital
Market-orientated approaches: encourage spending. spending (G).
1. Reduce taxes on firms. 28. Regressive tax 28. A taxation system where the tax rate falls as income 2. Firms can make capital investments (I).
2. Reduce bureaucracy and red tape to make production more efficient. increases taking a larger % of tax from lower income 3. Foreign people, governments and firms can buy exported goods (X).
3. Curb the power of trade unions which will reduce their ability to demand higher wages earners than from higher earners.
and to take industrial action which in turn should increase output. 29. Special deposits 29. An order by the central bank for commercial banks to Leakages/Withdrawals
4. Reduce/remove unemployment benefits. deposit money with it for a certain period of time thus 1. The government taxes directly and indirectly which removes money from
5. Remove the minimum wage. reducing the money circulating in the economy. the economy (T).
30. Subsidies 30. A payment made by the government to suppliers to 2. Hhds can save their money removing it from the circular flow (though it is
Interventionist strategies: increase output and/or keep prices low. often lent by banks for investment) (S).
1. Invest in healthcare and education/training to make the workforce healthier and more 31. Tariffs 31. A tax levied on imported goods and services. 3. Domestically, individuals and firms can import foreign goods/services
productive. 32. Tax revenue 32. The total amount of revenue gained by the government which represents money leaking from the economy (M).
2. Subsidise entire industries to make them more competitive and reduce the costs of from taxation.
production for firms. 33. Transfer taxes 33. A tax levied on the transfer of property from one Economy grows if… G + I + X > T + S + M
3. Invest in technology and research and development to help improve the efficiency of
production.
person to another.
Economy shrinks if… T + S + M > G + I + X
34. User charges 34. A fee charged for using a product or service, e.g. a
Key issue with supply-side policies – they have a time-lag!
highway toll.