This is the total demand in the economy.
It is made up of:
This is the total supply in the economy.
Figure represents a simplistic model of an economy.
Governments may provide goods/services that are a natural monopoly (water/electricity).
Essential goods such as health care, education and police forces are often provided by the government.
Governments may provide merit goods such as public swimming pools, libraries and sports centres.
This focuses on controlling changes in the money supply, interest rates & exchange rate.
Contractionary Monetary Policy: raising interest rates and reducing money supply to reduce AD.
Expansionary Monetary Policy: reducing interest rates and increasing the money supply to increase AD.
This focuses on changes in government expenditure and taxation.
Reflationary Fiscal Policy: increasing gov spending and reducing taxation to increase AD.
Contractionary Fiscal Policy: reducing gov spending and increasing taxation to reduce AD.
Market Orientated Supply Side Policies
Interventionist Supply Side Policies
But taxation itself is a general term, as there are different types of taxes. In general we can identify:
With a progressive taxation system, citizens are put into ‘income earning bands’ and charged taxation according to these bands. The higher your income, the greater percentage of taxation that you need to pay on income in a particular bracket.
Regressive taxation is the opposite to progressive taxation; the higher your income, the less percentage you pay in tax. Once again, citizens are allocated a tax band and must pay accordingly.
In this case, citizens pay the same percentage in tax, regardless of their income. There are no tax bands – everyone pays the same % - for example 10%. If you earn $100 a year, you thus pay $10. If you earn $100 000 a year, you pay $100. Again, note that the amount each person pays is different but the percentage is the same.