Macroeconomics + Taxes

  • Created by: Adrian
  • Created on: 30-11-13 04:28

Macroeconomics and Taxes

Main Macroeconomic Objectives:

- Reducing Unemployment: 

Unemployment can be a waste of resources. People who are not working do not contribute to output -> GDP will be lower. Moroever, unemployed people face lower standards of living compared to those who work. Without a benefit system, unemployed people may live in poverty. 

- Economic Growth:

Economic growth occurs when output, or GDP, grows. Economic growth raises living standards, as people will have:

1) Increased consumption of goods + services: This is because people will have more income.

2) Improved public services: With increased tax revenue, government can increase its expenditure on healthcare/education, thereby improving living standards.

3) Less chances of unemployment: Economic growth creates more oppurtunities for jobs.  

(GDP measures the total value of all goods and services produced in an economy over a period of time)

- Mantaining Inflation (The rise in the general price level):

 If prices rise faster than incomes, the living standards will fall because people cannot buy as much. Also Causes uncertainty because it complicates decision making for firms

- Balance of Payments (The Current Account) 

No. of Imports (bought from overseas) should equal no. of Exports (sold overseas). Economic growth could be when Exports > Imports

- Protect the Environment

Concerns are being raised about environmental damage

The Fiscal Policy 

Note: Gov Budget Deficiet (When spending > tax rev)  

Gov Budget Surplus (When tax rev > spending)

Expansionary Fiscal Policy: Raises demand by increasing budget deficiet by spending more or taxing less

Contractionary Fiscal Policy: Dampens (or cut) demand by reducing budget deficiet by spending less or raising taxes

How Does the Fiscal Policiy help achieve the Macroeconomic Objectives?

Inflation:Contractionary Fiscal Policy dampens demand. For instance, because the government will increase taxes, there will be less disposable income for consumers. Hence this will decrease consumer spending and hence aggregate demand. Demand curve shifts left and hence PL will be lowered. 

Unemployment: Expansionary Fiscal policy helps firms produce more and take on more workers if demand from consumers and the government increases.

Economic Growth:  Expasionary Fiscal Policy: Government spending such as investment in the infrastcture will help stimulate growth. Tax cuts, however, may be less ineffective because some money will be spent on imports.

Current Account Deficit (when imports > exports) :Contractionary fiscal policy will cut aggregate demand, and this will reduce the demand for imports.  

Monetary Policy 

Involves controllowing aggregate demand by adjusting interest rates or the money supply. 

(Interest rates is the extra price paid to lenders for borrowed money) 

(Money supply is total amount that circulates in the economy, including all the notes and coins in the economy plus money held in bank accounts.)

Reduce Inflation: (Tight monetary policy = Higher interest rates. Loose monetary policy = Lower interest rates) Higher interest rates and a lower money supply will dampen aggregate demand (less borrowing, therefore less investment OR less borrowing, therefore less spending). Demand curve shifts left and hence price level decreases.

Reduce Unemployment: Loose Monetary policy causes lower…


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