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The macroeconomic
context 2 the role of
government
w w w . s t ud y i n t e r a c t i v e . o r g
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CHAPTER 13
CHAPTER CONTENTS
LEARNING OUTCOMES ------------------------------------------------- 144
GOVERNMENT MACROECONOMIC POLICY GOALS AND PUBLIC
FINANCE ----------------------------------------------------------- 145
UNEMPLOYMENT -------------------------------------------------------- 149
INFLATION -------------------------------------------------------------- 151
MACROECONOMIC POLICY--------------------------------------------- 155
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LEARNING OUTCOMES
a) Explain the main principals of public finance and macroeconomic policy.
b) Describe the impacts on organisations of potential policy responses of
government to each stage of the trade cycle.
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a) Economic growth
c) Full employment.
The difficulty governments face is that once committed to set expenditure, either
by laws or private sector contracts, cutting expenditure may prove problematic.
Cyclical deficit
cycle.
being the fiscal deficit being run due to the phase of the trade
Structural deficit deficit that arises as a result of the governments assumed role
in the economy, such as running state owned industries, government failure
and emergency borrowing.
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Functions of taxation
The purpose of taxation being:
Equity
Certainty
Qualities
of a
good tax
Convenience
Economy
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Types of taxation:
Complete the following table, providing two examples for each category of taxation:
INCOME
EXPENDITURE
CAPITAL
(Examples)
(Examples)
(Examples)
Taxes can also be categorised according to the percentage of income which is paid
as tax as income levels vary.
EXERCISE 1
The following illustrates two individuals with substantially differing annual incomes
complete the table below so as to compare the three categories of taxation -
Type of Tax
Regressive
Levied At
$20,000 p.a.
$200,000 p.a
$2,000 flat
20%
Finally, taxes may be categorise according to how they are collected, direct
taxation being paid direct to the government, compared with indirect taxation
which is collected on behalf of governments.
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The Laffer Curve examines the impact on tax revenue as a result of increasing the
rate of taxation
Tax revenue
DISCUSSION 1
Discuss the possible reasons as to why total tax revenue will eventually fall, as the
tax rate approaches 100%?
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UNEMPLOYMENT
Unemployment is where not all workers willing to take a job at the present level of
wages can find work. Unemployment calculated as - (Number of unemployed /
total workforce) X 100.
Frictional unemployment -
Seasonal unemployment
Technological unemployment -
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Cyclical unemployment -
Voluntary unemployment -
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INFLATION
Inflation refers to a sustained increase in the general price level. Inflation in the UK
is measured by reference to the consumer price index (CPI) which comprises a
oods and services.
As with unemployment, exam questions will often require students to identify the
different types of inflation, to which there are three:
AS2
Price
level
AS1
P2
P1
AD1
Y2
Y1
Real GDP
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LRAS 1
Price
level
P2
P1
AD2
AD1
Y1
Y2
Real GDP
MV = PT, where:
For the above equation to explain the link between money supply & inflation, V and
T must remain constant!
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Hyperinflation
Generally regarded as being inflation in excess of 1000% per year.
Consequences of inflation
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Redistribution
of wealth
Balance of
payments
effects
Wage
bargaining
Consumer
behaviour
CHAPTER 13
Inflation
Rate %
Phillips Curve
LRPC
NAIRU
SRPC
Unemployment
rate %
The NAIRU
non-accelerating inflation rate of unemployment
as the rate of unemployment when the rate of wage inflation is stable!
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MACROECONOMIC POLICY
Macroeconomic
policy options
Fiscal policy
Monetary policy
Supply side
policies
Fiscal policy
Fiscal policy may be defined as the manipulation of public spending, taxation and
Fiscal policy is
concerned with aggregate demand (AD).
With government spending (G) and taxation (T), two policy stances may be
adopted-
G>T
Or;
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T>G
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Monetary policy
Monetary policy can be used as a means towards achieving ultimate economic
objectives for inflation, the balance of trade, full employment and real economic
growth.
There are two groups of monetary policy instruments: those that affect the money
DISCUSSION 2
State the impact from a rise in interest rates on the following
Household spending
Private sector investment
Foreign funds
Exchange rates
Inflation
Bond prices
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By augmenting the overall level of supply in the economy (causing a rightward shift
in the aggregate supply curve) achieves not only increased output within the
economy, but at lower prices!
AS
AS
ASs
ASs
AD2
AD1
AD1
National income
National income
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