chapter 26 - fiscal policy

Question 1

definition of:

fiscal policy

Answer 1

use of taxes and government spending to affect macroeconomic objectives

Question 2

definition of:

government budget

Answer 2

frees to its financial plans in terms of planned revenues and expenditure

Question 3

definition of:

balanced budget

Answer 3

when gov balances its spending and its revenues

Question 4

definition of:

budget deficit

Answer 4

when gov spend more than earning revenues

Question 5

definition of:

budget surplus

Answer 5

when gov earns more revenue than its spendings

Question 6

why does gov spend?

Answer 6

• inject money into spending in macroeconomic objectives
• spend on policies to reduce negative externalities
• to achieve supply side
• to subsidise industries that need financial support

Question 7

effects of gov spending

Answer 7

• higher demand - higher economic growth - but inflation
• higher spending on welfare schemes - higher living standard
• higher spending on public goods - higher productivity and growth

Question 8

definition of:

tax

Answer 8

gov levy on income or expenditure

Question 9

what happens if high taxation?

Answer 9

• high tax on demerit goods - lower consumption
• export become less price competitive
• higher tax on rich to fund welfare schemes for poor

Question 10

definition of:

tax burden

Answer 10

the amount of tax households and firms have to pay

Question 11

definition of:

direct taxation

Answer 11

tax paid by income and wealth of individuals and firms

Question 12

definition of:

indirect tax

Answer 12

expenditure taxes imposed on spending on goods and services

Question 13

advantages of direct taxation

Answer 13

• higher revenue

- reduce inequalities in wealth and income

Question 14

disadvantages of direct taxation

Answer 14

• reduce incentive to work
• reduce enterprise incentive
• tax evasion

Question 15

advantages of indirect taxation

Answer 15

• cost effective to collect
• flexible to change the indirect tax rate
• expanded tax base
• can achieve macroeconomic aims

Question 16

disadvantages of indirect tax

Answer 16

• regressive
• tax evasion
• inflationary

Question 17

definition of:

progressive taxation

Answer 17

high income earners charged higher rate of tax

Question 18

definition of:

regressive taxation

Answer 18

high income earner charged with low rate of tax

Question 19

definition of:

proportional taxation

Answer 19

percentage paid stays the same, irrespective of taxpayer’s I level of income

Question 20

principle of taxation

Answer 20

equitable 
convenience
flexibility (adapt change in economic environment without rewriting tax legislation)
certainty (when where how to pay)
efficiency (achieve macroeconomic aims)
economical (easy and cheap)

Question 21

impact of taxation on price and quantity?

Answer 21

• supply curve shift leftward - higher production cost
• selling price increase - reduce quantity produced and sold
• lower tax revenue

Question 22

impact of taxation on growth?

Answer 22

lower incentives to work

Question 23

impact of taxation of inflation

Answer 23

tax reduce purchasing power - helps reduce likelihood of inflation

Question 24

impact of taxation on business location

Answer 24

• rates of corporation tax and income tax affect business location
• high corporate tax reduce foreign direct investment

Question 25

impact of taxation on social behaviour

Answer 25

lower consumption of demerit goods

Question 26

impact of taxation on distribution of wealth

Answer 26

wealthier pays higher tax to fund for welfare schemes for the poor

Question 27

definition of:

tax avoidance

Answer 27

legal act of minimising payment of taxes

Question 28

definition of:

tax evasion

Answer 28

illegal act of not paying the correct amount of tax

Question 29

definition of:

expansionary fiscal policy

Answer 29

used to stimulate economy by increase expenditure and reducing taxation and implemented during recession; increasing budget deficit

Question 30

effect of expansionary fiscal policy

Answer 30

• lower tax - increase in disposable income - higher aggregate demand
• lower corporate tax - higher incentive for firms to invest further - increase -output and productive capacity
• lower income tax - encourage people to work

Question 31

definition of:

contractionary fiscal policy

Answer 31

used to reduce level of economic activity by reducing expenditure and increasing taxation and implement during economic; budget surplus

Question 32

effect of contractionary fiscal policy

Answer 32

• higher tax - reduce aggregate demand - reduce employment and reduce growth in output
• high corporate tax - control firms trading activities
• high income tax - low consumption - reduce inflationary pressures