FISCAL, MONETARY & SUPPLY

SIDE POLICIES
[4.3, 4.4 & 4.5 IN SYLLABUS]

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Table of Contents
Note ................................................................................................................................................................. 2

Fiscal Policy .................................................................................................................................................. 3

Government Budget.............................................................................................................................. 3

Balanced, Deficit, and Surplus Budgets .................................................................................... 3

Reasons For Government Spending ................................................................................................ 3

Reasons For Taxation............................................................................................................................ 4

Tax Burden ........................................................................................................................................... 4

Classification of Taxes ........................................................................................................................... 5

Direct & Indirect Taxes ................................................................................................................... 5

Taxation Types .................................................................................................................................... 6

Principles of Taxation ....................................................................................................................... 6

Impact of Taxation ............................................................................................................................ 7

Fiscal Policy .............................................................................................................................................. 8

Fiscal Policy Measures ....................................................................................................................... 8

Effects of Fiscal Policy on Government Macroeconomic Aims......................................... 9

Monetary Policy ....................................................................................................................................... 10

Monetary Policy Types ...................................................................................................................... 10

Effects of Monetary Policy Measures on Macroeconomic Aims ........................................ 11

Supply-Side Policy ................................................................................................................................. 12

Supply-Side Policy Measures .......................................................................................................... 12

Supply-Side Policy & Macroeconomic Objectives .................................................................. 14

One Little Problem… .......................................................................................................................... 14

Glossary ....................................................................................................................................................... 15

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Note
Hey guys!

So, I started doing economics notes!

This is going to be a bit different as I will be making notes with some specific topics
in “chunks” like this one where I do the policies (4.3, 4.4, and 4.5).

Just remember one thing, this is based on the 2023 syllabus but I’m pretty sure
there weren’t any major changes from the 2022 syllabus lol.

Anyways, hope this helps!

Cheers,

MST_Creator

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Fiscal Policy

Government Budget
This refers to the government’s financial plans in terms of planned revenues (mainly
taxes) and expenditures (like healthcare or education).

Balanced, Deficit, and Surplus Budgets

Governments try their best to balance their budget.

Reason is because raising taxes isn’t favourable and taking loans for funding a deficit
budget is highly expensive due to the interest for the loans.

Reasons For Government Spending

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Reasons For Taxation

Tax is a government levy on expenditure or income.

Government imposes taxes to:

1. Help redistribute income and wealth in economy by imposing taxes on salaries &
profits.
2. To reduce output of certain demerit goods by imposing tax and increasing
production cost.
3. To protect domestic firms from oversees rivals by imposing tariffs on foreign
goods & services.
4. To fund governments spending and expenditure.

Tax revenues are spent in key areas like national defence, infrastructure, healthcare,
educations, etc.

Before spending the tax revenues, the government must first take money from the
taxpayers and other government finances (like loans).

Tax Burden
Tax burdens refers to the amount of tax households & firms must pay.

Tax burden can be measured in 3 ways:

1. For Country: Calculating total tax revenues as proportion of GDP (Gross Domestic
Product).
2. Individuals & Firms: Absolute value of tax paid or by amount of tax paid as
proportion to their income/profits.

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Classification of Taxes
Name Tax Type Information
Income Tax Direct Levied on personal incomes
Corporate Tax Direct Tax on business profits
Sales Tax Indirect Charged on consumer spending
Excise Duties Indirect Inland taxes imposed on certain goods and services
Customs Duties Indirect Cross-border taxes on foreign goods
Capital Gains Tax Direct Tax on earning made from investments and buying
shares/private property
Inheritance Tax Direct Tax on the transfer of income & wealth like when
property is passed onto another person
Stamp Duty Indirect Progressive tax paid on sale of
commercial/residential property
Carbon Tax Indirect Imposed o vehicle manufacturers or firms which
produce high carbon emissions
Windfall Tax Direct Charged on individuals and firms that gain
unexpected one-off amount of money.

Direct & Indirect Taxes

Direct Tax Indirect Tax
These are taxes paid from income, These are expenditure taxes imposed on
wealth, or profit of individuals or firms goods and services
Income tax, inheritance tax, etc. GST, VAT, etc.

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Taxation Types
Progressive Taxation Proportional Taxation Regressive Taxation
Higher income, wealth, or Higher income, wealth, or
profit of taxpayer Income does not affect the profit of taxpayer
= tax rate =
Higher tax rate Lower tax rate

Examples: Examples: Examples:

1. Income tax 1. GST 1. Sales tax
2. Capital gains tax 2. VAT 2. Excise Tax

Principles of Taxation
Principle Information
Taxes must be based on taxpayer’s ability to pay.
Equitable (Fair)
This justifies progressive taxes since rich people can pay more.
Tax should be easy and cheap to collect to maximise yield relative
Economical
to the cost of collection.
Convenience Payment method should be convenient for taxpayer.
Certainty Taxpayer must know what, when, where, and how to pay tax.
Tax system should attempt to achieve aims without undesirable
Efficiency
side-effects.
Taxes must be flexible enough to adapt to a change in the
Flexibility economic environment without needing to rewrite the tax
legislation.

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Impact of Taxation
Impact On… Increase in Tax
- Cost of production increases
- Supply curve shift to the left
- Increase in price
Price & Quantity - Quantity produced & sold
decreases
- Tax revenue gained may
decrease (depends on PED)
- Decrease in motivation to
work/produce
Economic Growth - Increases unemployment
- Decreases output
- Economy is negatively impacted
- Reduces spending
- Reduces firm profits
Inflation
- Helps reduce likelihood of
inflation
- High corporation tax can
discourage companies from
Business Location locating in these countries
- Foreign direct investment in the
counties may be lower
- Imposing taxes on demerit goods
reduces consumption
Social Behaviour - Taxing things that cause
pollution can reduce demand for
them.
- High tax rates would motivate
Tax Avoidance &
many households to try avoiding
Evasion
or evading taxes.
- Higher income and sales tax
would mean that the rich would
pay more tax and the poor
Distribution of Wealth would pay less
- All the revenue from the taxes
can be put into education,
healthcare, etc.
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Decrease in Tax
- Cost of production decreases
- Supply curve shift to right
- Decrease in price
- Quantity produced & sold
increases
- Tax revenue gained may increase
(depends on PED)
- Increase in business activity
- Increased production/output
- More job opportunities
- Lower unemployment rates
- Positively impacts the economy
- Disposable income of households
& firms increases
- Increases likelihood of inflation
- Low-income tax rates attracts
workers easily
- Low corporation tax can
encourage companies to locate in
the countries.
None mentioned in book…
- Low tax rates would not
motivate many to avoid taxes or
defraud the government.
None mentioned in book…
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Fiscal Policy
This is the use of taxation and government expenditure strategies to affect
macroeconomic objectives.

Fiscal Policy Measures

Expansionary Fiscal Policy
Increase government spending
Decreasing taxes
Used to reduce effects of economic
recession
Negative impact in the short run as
revenue greatly decreases and spending
increases
Positive impact in the long run as people
earn money & there is less need for
government to boost spending.
Contractionary Fiscal Policy
Decrease government spending
Increase taxes
Used to reduce inflationary pressures
during economic boom
Positive impact on budget in the short
run as revenue increases and
government spending decreases.
Negative impact in the long run as
many businesses may close due to high
production cost and unemployment
would increase.

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Effects of Fiscal Policy on Government

Macroeconomic Aims
Aim Reason
- Government capital expenditure on infrastructure helps
boost investment in the economy.
Economic Growth
- Lower corporation tax helps attract foreign direct
investment (FDI) into the country.
- Lower taxes means higher FDI
- Higher FDI boost productive capacity of the economy in
Low Inflation the long run, this helps keep general price levels low.
- Contractionary fiscal policy measures help prevents the
price levels from skyrocketing.
- Decrease in income tax can motivate people to work.
- Governments support new businesses with subsidies or
Employment
tax concessions, this motivates entrepreneurs which
decreases unemployment.
- Low tax rates keep domestic firms competitive.
Healthy Balance of
- Subsidising domestic industries improve their
Payment
international competitiveness.
Redistribution of - Use of progressive taxes and government spending helps
Income redistribute wealth and income.

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Monetary Policy
Monetary policy refers to the use of interest rates, exchange rates, and money supply
to control macroeconomic objectives and affect the level of economic activity.

Term Meaning
Refers to the cost of borrowing or yield from saving money at a
Interest Rates
financial institution.
Refers to the price of one currency in terms of other currency
Exchange Rates
(1 usd = 229.06 pkr)
Refers to the amount of money in the economy at a point in
Money Supply
time (like coins, banknotes, etc).

Monetary Policy Types

Expansionary Monetary Policy Contractionary Monetary Policy
Low interest rates Increase interest rates
Money supply increases Money supply decreases
Borrowing is cheaper Borrowing is expensive
Used to boost the economy Used to control inflation

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Effects of Monetary Policy Measures on

Macroeconomic Aims
Aim Reason
- Low interest would mean that cost of borrowing for
household & firms. This boosts consumption and
investment.
- Saving decreases as the savers don’t get high returns, this
Economic Growth encourages spending.
- People with loans and mortgages will have low repayment
cost and would have more money to spend.
- Low savings, high spending, and investing causes economic
growth.
- Low interest rates cause economic growth
Full Employment
- More spending and investment in the economy will cause
or Low
business activity to increase which would create more job
Employment
opportunity.
- Low interest rates would cause high consumption and
investment expenditure.
Stable Prices or - This increases the economy’s productive capacity so more
Low Inflation can be produced without increasing prices.
- High interest rates can be used to limit consumption and
investment to control inflation rate.
- Lower exchange rates can increase international
Balance of
competitiveness of the country which helps improve balance
Payments Stability
of payments.

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Supply-Side Policy
These are the long-term measures to increase the productive capacity of the
economy, leading to an outward shift of the production possibility curve by
improving the quality and/or the quantity of factors of production.

Supply-Side Policy Measures

Measure Reason
- Workforce has better skills, productivity, etc.
Education
- Increase in economy’s productive capacity.
and
- Government may directly provide education but may fund private
Training
businesses to increase job opportunities to decrease unemployment.
- Flexible labour markets = greater productivity.
- Includes removing or reducing:
- Trade union power
- Unemployment benefits
Labour - Minimum wages
Market - Promotes greater competition by removing rigidities in labour
Reforms market.
- May cause excessive and complex employment legislation and may
cause strikes by trade unions.
- Tries to reduce unemployment as market becomes more
internationally competitive.
- Can motivate people to work (especially ones with low wages).
Lower
- Over time, this causes consumers to have higher disposable income
Direct Taxes
which boosts consumption expenditure, this increases GDP.
- Reduction or removal of barriers to entry to make markets more
competitive.
Deregulation
- Increase in competition = low prices & high quality of goods and
services
- Low direct tax = Increase incentives to work
Incentive To
- Creates incentives to spend and consume.
Work
- Reduction of unemployment benefits = Increase incentive to work

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Measure Reason
- Low corporate tax = greater incentive for firms to invest
- This maximises their returns.
- High corporate tax = lower incentives to invest
- Government may provide subsidies to give them incentive to invest in
the “enterprise zone”.
Incentive To - Enterprise zones are places with high unemployment where
Invest government creates financial incentives for firms to relocate.
- These include tax rebates and reduced regulations.
- Supply-side policies focus on research & development (R&D), new
product development, new technology, and infrastructure.
- Causes economic growth as capital increases the productive capacity
& productivity
- This is the policy of selling off state-owned assets to the private
sector so they can be run more efficiently.
- Private sector firms have a profit motive, this means that they
Privatisation
develop better products and deliver better services.
- Can increase competitiveness, efficiency, and productivity. This helps
boost the productive potential of the economy.

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Supply-Side Policy & Macroeconomic

Objectives
Aims Reason
Economic - Increase in productive capacity of economy = economic growth
Growth
- Increase productive capacity of economy = increase national
output
Full
- This creates more jobs in the economy in the long-term.
Employment
- Policies like investment in education decreases frictional and
structural unemployment.
- Increase in productive capacity of economy help prevent price
Low Inflation
levels from rising beyond control.
Balance of - Increase in productivity & national output means that
Payments international competitiveness of the country increases, this helps
Stability boost economy’s export earnings.
- Policies like education and incentive of work can benefit low-
Redistribution income earners more than high income earners.
of Income - Lower income tax rate means they will have more disposable
income and are likely to spend more.

One Little Problem…

All the supply-side policies take a long time to start giving benefits.

This is mainly because all these policies help in the long term unlike fiscal or
monetary policies.

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Glossary
Budgets
Government Refers to the government’s financial plans in terms of planned
Budget revenues (tax revenues mainly) and expenditure.
Surplus Budget This is when revenue earned is more than money spent.
Deficit Budget This is when revenue earned is less than the money spent.
Balanced
This is when revenue earned is the same as the money spent.
Budget
Taxes
Taxes This is a government levy on income or expenditure.
Tax Burden The amount of tax households and firms must pay.
Tax that a person or organization pays directly to the entity that
Direct Taxes
imposed it.
Indirect Taxes This is tax imposed on goods and services.
Tax Evasion Illegal act of not paying correct amount of tax.
Tax Avoidance Legal act of minimising tax payment.
Progressive Tax Tax where the average tax burden increases with income
Regressive Tax Tax where the average tax burden decreases with income
Proportional Tax where the average tax burden stays the same despite the
Tax income.
Inflation
Sustained rise in the general level of prices of goods and services over
Inflation
time.
Demand-Pull This is when there are high levels of demand, this causes general
Inflation prices of goods and services to increase.
Policies
Use of taxes & government spending to affect macroeconomic
Fiscal Policy
objectives
Refers to the use of interest rates, exchange rates, and money
Monetary Policy supply to control macroeconomic objectives and affect levels of
economic activity.
Supply-Side Long-term measures to increase productive capacity of economy,
Policy cause PPC to shift outwards.

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Sectors
Public Sector Economic activity directly involving the government
Economic activity involving private individuals/firms and aims to
Private Sector
earn profit for owner(s).
Other Definitions
Business
Place or structure occupied by a firm/business to run its operations
Location
Full This is when everyone in the country who is willing and able to work
Employment has a job.
Occurs when people of working age are willing and able to work but
Unemployment
cannot find employment.
Privatisation Transfer of ownership of assets from public to private sector.
Redistribution of Macroeconomic aim of achieving greater equality in the distribution
Income of income in an economy.
The reduction or elimination of government power in a particular
Deregulation industry, generally used to create more competition within the
industry/
Money Supply Refers to the amount of money in the economy at a point in time
Exchange Rate Refers to the price of one currency in terms of another

The End
Hope This Helped! 😉

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