...The UK currently has a budget deficit of £80bn. It is forecast to fall to £0 over the next 5 years. Discuss whether the UK government should either raise taxes or cut government spending to ensure that the budget is balanced. A budget deficit is a state of financial health in which expenditure exceeds revenue and it usually results in the government having to borrow money. They government can use fiscal policy to correct the deficit and ensure that a balance is kept however, it also depends on what state the economy is in and whether trade-offs will occur meaning that some other macroeconomic targets are put in jeopardy. By reducing government spending, it’s a way of demand management. An advantage is that it reduces the dangers of crowding out the private sector. When the government spends or runs a large deficit, much of the spending is financed through borrowing which is done through government bonds. To make these bonds more attractive the government will offer a higher rate of interest on these bonds. In addition, government bonds are seen to be safer than private sector investments, especially if the government has a triple A credit rating. Therefore when the government offers bonds, investors provide their money to the government, reducing the potential investment for the private sector. Moreover, if the government borrows through the banks then the increased demand for repayable loans will increase, pushing up interest rates and also increasing the cost of borrowing...
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...According to text whenever a government's expenses exceed its total revenues it is consider a deficit. Government deficit spending is the main point of focus for debate in economics. The actual idea for any economy is for it to grow. It’s clear that if the economy has more available assets, more people will be afforded the opportunity to work. With that being said logically speaking the more people working, they’ll be able to purchase more things and more revenue will circulate to government agencies. The ending result is that the more cash that circulates, tax rates don’t fluctuates as much which in turn could affect interest rates in a negative or positive way. From the looks of things deficit spending can be tackled, from many angles it...
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..."Deficit Spending Introduction Deficit spending has become one of the highly discussed concepts in the corporate market. Deficit spending refers to the amount by which the spending of an organization exceeds the revenues in a particular period of time (William and Alan, 2005). The term can also be applied to the budget of an individual, family or government. The term can also be used to refer situations like imports exceed exports and liabilities exceed assets. Taking a loan that has to be repaid after certain period of time, say two years, at low interest rate to use the money on important things can be considered as an example for deficit spending (Oxley & Martin, 1991). If the loan taken by the individual right now is more important than the interest money that he or she spends on interest, it can be considered as a good deficit spending deal and vice versa. The deficit spending can be explained by referring to the activities of Federal Government. When then expenditure exceeds its revenues, the government will try to borrow, likely from foreign governments, to finance the excess spending needs (William and Alan, 2005). Governments will operate in deficit spending with the anticipation that the increased government spending will stimulate economic growth. Advantages of...
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...investment. It includes: * Net investment from abroad (e.g. A UK firm buying a factory in Japan would be a debit item) * Net financial flows – These are mainly short term monetary flows such as “hot money flows” to take advantage of exchange rate changes * Reserves * (note the Financial Account used to be called the Capital Account) 3. Capital Account This refers to the transfer of funds associated with buying fixed assets such as land * Balancing Item In practice when the statistics are compiled there are likely to be errors therefore the balancing item allows for these statistical discrepancies. Balance of Payments equilibrium * In a floating exchange rate the supply of currency will always equal the demand for currency, and the balance of payments is zero. * Therefore if there is a deficit on the current account there will be a surplus on the financial / capital account. * If there was an increase in interest rates this would cause hot money flows to enter into the UK, therefore there would be a surplus on the financial account The appreciation in the exchange rate would make exports less competitive and imports more competitive therefore with less exports and more imports there would be a deficit...
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...Fiscal Policy Paper Deficit can affect multitudes while a surplus creates positive results for those on the receiving end. A debt requires the liability to be paid or the liability may be repossessed or rendered bad credit to the individual. While Americans face issues with debt, surplus, and even deficit it is important to know that the United States deals with it first hand as well. Several areas the three topics affect include tax payers, unemployed, Social Security, Medicare, imports, exports, and the GDP. A synopsis of Team B’s discussion of the topics follows. Tax Payers Taxes are imposed on the United States by three categories; federal, state, and local government. Tax payers are taxed on their income, payroll, property, sales, imports, estates and gifts, as well as various fees. Tax payers are required to file tax returns whether it be for a business, corporation, or individual. Tax payers are affected by the U.S. deficit when there is a shortfall in revenue which is the result from the National Debt increasing. Additionally when there is a surplus tax payers are affected as well. Future Social Security and Medicare Users Social Security Administration figures that by the year 2040 the SS trust fund will be used up causing utilizing one of three options: borrowing, increasing revenue, or lowering benefits. The Medicare program is estimated to be much closer to crisis than the SS trust fund. In contrast to current Medicare and Social Security benefits budget...
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...Topic 4 – Fiscal Policy Refers to the governments choices regarding the overall level of government purchases or taxes * Government spending – on health sector, education, infrastructure, defence. * Taxation policy – income tax, sales tax (VAT), corporate tax, capital gains tax. Fiscal policy and aggregate demand * Government spending – increase in G spending → AD shifting right * e.g. Gov places £10 billion order for new school buildings → building contractor has increased demand for output → hires more staff and increases production. * Taxation – * Income tax cut → consumption increases → AD shifting right * Corporate tax cut → investment increases → AD shifting right * If tax cuts are seen as temp then AD shift may be smaller Multiplier Effect The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. * Example continued… * Positive impact - The Gov buys £10 billion of buildings from Bob and Co, → demand from gov raises employment and profits at Bob and Co → as workers see higher earnings and firm owners see higher profits → increase own spending on consumer goods and so on… This is the multiplier effect. * Negative impact could be that spending on foreign goods may increase → neg impact on AD as imports increase. * Size of multiplier depends on marginal propensity to consume and import. * SHOW IMPACT OF MULTIPLIER...
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...Zhiyu Li Investment Dr. Richard W. Taylor October 10th 2012 The Magnitude of the Mess We’re In The annual spending by the federal government now exceeds the 2007 level by about $1 trillion. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. On the other hand, the Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up. The author thought economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. Zhiyu Li Investment Dr. Richard W. Taylor October 10th 2012 World War II Stimulus and the Postwar Boom Despite two years of fiscal and monetary stimulus, the U.S. economy is sagging. During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. Today, households carry a much greater relative debt burden...
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...five Fiscal Policy Paper * Depending on the time, the economy can have many financial stages. There are times when the economy is facing a budget deficit, which means the tax revenues in the government are lower than the government expenditures. The economy can also experience a surplus and high debt, which can also drain an economy. The state of our government can affect people from taxpayers, to the elderly who are collecting social security, to children needing medical and governmental benefits for their well-being. The government debt situation can be either an advantage to the population by lowering taxes, or a disadvantage by making taxes higher. * To know how taxpayers, future Social Security and Medicare users, and unemployed individuals are affected by the U S.’s deficit, surplus, and debt. It is important to understand the definitions of deficit, surplus and debt. Surplus occurs when there is more supply than demand, as in extra resources. Deficits occur when a government's expenditures exceed the revenue that it generates. Debt is an amount owed to another person or government in economics. * Taxpayers can benefit from a budget surplus. A surplus can create a reduction in the tax rate which leads to a higher consumer’s savings rate. The less taxes that consumers have to pay allows spending or savings in other areas. An increase in national savings (reduction in tax rate) also creates additional money that can be available for banks to lend...
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...thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put macroeconomic theory to its best use by leading to a more stable economy, which benefits everyone. | Critics of active monetary and fiscal policy emphasize that policy affects the economy with a lag and that our ability to forecast future economic conditions is poor. As a result, attempts to stabilize the economy can end up destabilizing. It might be desirable if policymakers could eliminate all economic fluctuations, but that is not a realistic goal given the limits of macroeconomic knowledge and the inherent unpredictability of world events. Economic policymakers should refrain from intervening often with monetary and fiscal policy and be content if they do no harm. | 2. Whether or not the government should fight recessions with spending hikes rather than tax cuts | Advocates of increased government spending to fight recessions argue that because tax cuts may be saved rather than spent, direct government spending does more to increase aggregate demand, which is key to promoting production and employment. Monetary policy is the first line of defense against economic downturns. By...
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...achieving these goals: fiscal policies, which is done through taxes and spending and monetary policies, through which it manages the supply of money. In this paper, I will discuss the why high deficits of today will reduce growth rate of the economy in the future, look at the history of our nation’s debt and deficits, different elements that causes of deficit and why the cause actually matters, what role the fiscal and monetary policies have to lead to higher or lower budget deficits and how deficits affect the overall long-term economic growth and debt of the U.S. Let us first begin by learning the difference between the terms debt and deficit. In economics, the term deficit means a shortfall in revenue of a fiscal year. It is when the government’s revenue called receipts, which are collected taxes (payroll, corporate, excise, income and social insurance), fee revenues and tariffs that are called receipts are lower that what is spent called outlays. In other words, the federal budget deficit is the yearly amount by which spending exceeds revenue. The term debt is described as an accumulation of deficits so the national debt is the total amount of money owed by the government. It is calculated by adding all of the deficits minus the surpluses since the nation’s inception and you get the current national debt. According to Econintersect, “the estimated 2011 budget deficit is at almost $1.5 trillion, following deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010.” ¶ 1. This is...
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...Assignment 5: Persuasive Paper Part 3: Possible Disadvantages, Answers, with Visuals Strayer University August 31, 2014 The topic of taxation is a very controversial subject. Due to its complexity, people from the left to the right have objected to it. There was a time when the federal government was funded only with revenue from imported products. A little bit of history informs us that income tax started in 1861 with the Civil War, when congress passed a bill required everyone to pay three percent of their income starting at $600 to $10,000 each year (Boortz & Linder, 2005). Since the end of Civil War, the battle began to get rid of the income tax. The truth is that the tax takes money off our pockets. But, I proposed that tax increase on income $ 250,000.00 or more per year because that will decrease taxation on the lower income levels, and increase revenue to the government to fight budget and reduce the national debt. As stated above, income tax was a battle in 1896 and continues to be a battle in 2012. The Sixteenth Amendment of the US Constitution was born to collect revenue from American workers, and that was a fight between Democrats and Republican over income taxation. Due to a 2% tax in 1894, the two major political parties took the fight all the way to the US Supreme Court with a question about the constitutionality of that law. The Supreme Court ruled that the income tax was unconstitutional. As a response to that ruling, Joseph Bailey a democratic senator...
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...John Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? Despite Keynes’ avid support for the free market, his theory is one strongly based on the mixed-market economy. “Keynes said it was possible for governments to come in and make markets work better... Keynes saved capitalism from the capitalists.” - Prof. Joseph Stiglitz Keynes’ theory opposed Adam Smith’s metaphor of “the invisible hand” – which envisages a self-correcting economy, in the form of the self-regulating behaviour of the market - due to individuals' efforts to maximize their own gains in a free market which benefits society, even if original ambitions include no benevolent intentions. Instead Keynes said that capitalism doesn’t always work on its own accord, but that government intervention is sometimes necessary (especially during periods of recession – which Keynesians see as an “economic malady” rather than a normal part of the business/trade cycle. Keynesian theory in modern macro-economics Alistair Darling MP, Chancellor of the Exchequer, 2007-2010 – “The dominant thinking in Europe at the moment is exactly repeating the mistakes (I believe) that were made at the end of the First World War”. This statement was made...
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...Terms: Define the following terms and concepts by typing them on your chapter three word document. Comparative v/s Absolute Advantage-comparative advantage is defined as the theory that states that a country should see to other countries those products that it produces most efficiently, and buy from other countries those products that it cannot produce as effectively as compare to absolute advantage which states the advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. Trade Deficit states that an unfavorable balance of trade; occurs when the value of a country’s imports exceeds that of its exports Trade Surplus is defined as a favorable balance of trade; occurs when the value of a country’s exports exceeds that of its imports. Tariff is described as a tax imposed on imports Balance of Trade is the total value of a nation’s exports compared to its imports over a particular time period Balance of Payments is the difference between money coming into a country from exports and money leaving the country from imports plus money flows from factors such as tourism, foreign aid, military expenditures, and foreign investment Dumping is selling products in a foreign country at lower prices than those charged in the producing country Licensing is a global strategy in which a firm allows a foreign company to produce its products in exchange for a fee ...
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...Introduction | 2-3 | 2 | Macro-Economic Analysis | 4-7 | 3 | Factors affecting Israel and their solution | 8-10 | 4 | Bibliography | 11 | TABLE OF CONTENTS TABLE OF CONTENTS Submission by – Group 5 Yashwant Kasturi – 49B Srinivas Gadepalli – 42B Shasank S Jalan – 37B Saurabh Malik – 34B Saurabh Kumar – 35B Submission by – Group 5 Yashwant Kasturi – 49B Srinivas Gadepalli – 42B Shasank S Jalan – 37B Saurabh Malik – 34B Saurabh Kumar – 35B Macro-Economic review of Israel Macro-Economic review of Israel Economic Backdrop In the last decade, Israel has secured * Strong growth—averaging 3.8 percent * Inflation in the 1–3 percent range * Public debt falling below 80 percent of GDP * Budget deficits declining into the 1–3 percent range * Freely floating and competitive Shekel (Israeli Currency) The economy was open and flexible—reflected in * Exports of around 40 percent of GDP * Stable Property markets (capped by earlier supply overhangs) * Highly activist and effective Financial—and especially banking—supervisory structures The Israeli economy is a diverse open market economy. Being a relatively young state in the modern era, Israel is recognized as a developed market by many major indices. It has also became a member of the OECD in 2010. As of 2011, Israel has the largest number of companies listed on the NASDAQ after the United States and Canada. Resilient Economy The Israeli economy showed great...
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...taxes (taxes minus transfers) has an expansionary (contractionary) effect. 4. What is the balanced budget multiplier? 5. Explain why discretionary fiscal policy has not been very effective in reducing recessions in the United States. 6. What are the “time lags”? 7. What is meant by "automatic stabilization"? What are the main automatic stabilizers? 8. What is meant by "official budget deficit"? by "structural deficit"? Why is the structural budget deficit a better measure of the intent of fiscal policy? 9. What does it mean that "fiscal policy is expansionary (or contractionary)"? How does one determine whether fiscal policy is expansionary or contractionary? 10. In what ways might budget deficits be bad for an economy? In what ways might they be good for an economy? 11. What is meant by “crowding-out”? 12. Explain the relation between the budget deficits and the trade deficits. 13. What is meant by the "national debt"? What is the difference between "budget deficit" and "national debt"? What is the difference between "gross national debt" and "net national debt"? 14. What is the difference between a Treasury bill, a Treasury note, and a...
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