Government Spending and Economic Impact Quiz

Study Notes

Governments utilize funds from taxation and borrowing to finance various projects, significantly impacting the economy.
Infrastructure projects, such as hospitals, can create jobs for construction companies, leading to increased employment and economic activity.
Employees in construction generate income, contributing to local businesses and enhancing their revenues through consumer spending.
Taxation levels influence individual purchasing power; lower taxes allow for greater consumption of goods and services.
Profit taxes affect the returns on investments for companies, influencing their financial strategies and growth potential.
Public sector investments support specific industries, e.g., a hospital's need for medical equipment benefits related suppliers.

The multiplier principle suggests that an initial economic injection can lead to a multiplied increase in national income.
Aggregate Demand (AD) represents the total demand for goods and services in an economy, while Aggregate Supply (AS) reflects the economy's production capacity.
Equilibrium in the national income occurs when the AD curve intersects the AS curve.
The formula for Aggregate Demand:
- AD = C (Consumption) + I (Investment) + G (Government Spending) + (X - M) (Net Exports).

Fiscal policy entails government strategies through spending and taxation to modulate economic demand.
Annual fiscal planning is outlined in budgets, focusing on:
- Expenditure planning
- Revenue generation
- Borrowing strategies
A budget deficit arises when government spending exceeds tax revenue; a surplus occurs when income surpasses expenditures.
To stimulate demand, governments can reduce taxes or increase spending; to decrease demand, they can increase taxes or cut spending.

Taxation is vital for government revenue, can deter unwanted behaviors (e.g., taxes on tobacco), and redistributes wealth.
Key characteristics of an effective tax system include flexibility, efficiency, and clear purpose.
Tax types:
- Direct taxes: Collected directly by tax authorities (e.g., income, capital gains, inheritance taxes).
- Indirect taxes: Collected through third parties (e.g., VAT, sales taxes).
Specific taxes are charged per item sold, while 'ad valorem taxes' are based on the item's price.

Regressive taxes disproportionately impact lower-income individuals, while proportional taxes maintain consistent rates across all income levels.
Progressive taxes charge higher rates as individuals' incomes increase, typically seen in income tax structures.
Indirect taxes may be regressive, affecting those who consume necessities heavily.

Focuses on regulating the money supply, interest rates, exchange rates, and credit controls to shape aggregate demand.
Key objectives include:
- Managing inflation
- Balancing trade (exports vs. imports)
- Full employment: Lower interest rates boost borrowing and job creation.
- Real economic growth: Expansionary policies stimulate economic activity, enhancing GDP.
Monetary authorities set intermediate targets to achieve these broader economic objectives.