Budget
the relationship between government revenue and government spending.
Budget deficit
government spending is higher than government revenue.
Budgetsurplus
government revenue is higher than government spending.
The reasons forgot spending
To influence economic activity
To reduce market failure
To promote equity
To
pay interest on national debt
National debt
the total amount the government has borrowed over time.
Multiplier effect
the nal impact on aggregate demand being greater than the initial change.
The reasons for levying taxation
To redistribute incomefrom the rich to the poor
To discourage the consumption of demeritgoods
To raise the costs of firms that impose costs on others
To discourage the consumption of imports and hence ptert
domestic industries
To influence economic activity
The main categories of taxes
direct taxes
taxes on income and wealth.
indivert taxes
taxes on expenditure.
progressive tax
one which takes a larger percentage of the income or wealth of the rich.
proportional tax
one which takes the same percentage of the income or wealth of all taxpayers.
regressive tax
one which takes a larger percentage of the income or wealth of the poor.
The main type of taxes
income tax
corporation tax
capital gain tax
inheritance tax
The principles
of taxation
equity
certainty
convenience
economy
flexibility
efficiency
Impart of taxation
In the case of products with inelastic demand, consumers bear most of the tax. This is because the
producers can pass on a high proportion of the tax in the form of a higher price as they know it will not
reduce the demand signi cantly. In contrast, if products have elastic demand it is producers who bear
most of the tax. This is because they know that they cannot pass on much of the tax to consumers as
such a move would bring down the sales signi cantly.
Automatic stabilisers
forms of government expenditure and taxation that reduce uctuations in economic activity, without
any change in government policy.
Fiscal
policy
decisions on government spending and taxation designed to in uence aggregate demand.
If governmentspending government revenue budgetdeficit
surplus
If government pending government revenue budget
If government spending government revenue balance
Expansionary fiscal policy
rises in government expenditure and/or cuts in taxation designed to increase aggregate demand.
price level
AS
Pli ˊ
p
ADAD
real GDP
Y Y
Contraction
ary fiscal policy
cuts in government expenditure and/ or rises in taxation designed to reduce aggregate demand.
pricelevel
AS
p
Pl ˊ
品
real GDP
YoY