revision questions chapter 29 pt1

Question 1

The tax cuts passed to help move the economy more rapidly toward potential GDP are an example of

Answer 1

discretionary fiscal policy.

Question 2

The actual budget deficit is equal to the

Answer 2

structural deficit plus the cyclical deficit.

Question 3

Because of automatic stabilizers, 1) when real GDP decreases:
2) when real GDP increases:

Answer 3

1) government expenditures increase and tax revenues decrease.
2) government expenditures decrease and tax revenues increase.

Question 4

The structural surplus or deficit is the

Answer 4

government budget surplus or deficit that would occur if the economy were at potential GDP.

Question 5

Looking at the supply-side effects on aggregate supply shows that a tax hike (inc taxes) on labour income

Answer 5

• weakens the incentive to work.
• decreases potential GDP.

Question 6

If tax revenue equal £1.5 billion and government outlays equal £1.6 billion, then

Answer 6

the government budget has a deficit of £0.1 billion.

Question 7

Year Government tax revenues (billions of pounds) Government outlays (billions of pounds)
1 240 240
2 250 245
3 260 255
4 300 320
5 325 340

What is the amount of the surplus or deficit incurred in year 5 by the government shown in the above table?

Answer 7

£15 billion deficit
year 5- 240 - 325= 15

Question 8

cyclical deficit and surplus

Answer 8

• deficit: deficit in government finances caused by fluctuations in business cycle
• surplus: occurs during economic upswings when tax revenue increase and government spending decreases

Question 9

structural deficit and surplus

Answer 9

• deficit: a deficit in gov finances that exist even when the economy is at its peak and operating at full capacity (caused by LT imbalances between gov spending and revenue)
• surplus: occurs when gov revenue exceeds spending in a sustainable manner, even during economic downturns

Question 10

what are tax revenues

Answer 10

funds collected by the government through various taxes imposed on individuals, businesses… (income tax, sales tax, corporate tax, property tax…)

Question 11

FISCAL POLICY:
contractionary fiscal policy
automatic fiscal policy
discretionary fiscal policy

Answer 11

fiscal policy refers to the use of gov spending and taxation to influence the overall economy. decisions on how much money to spend on public G&S.
_ contractionary: use of gov measures to reduce aggregate demand and slow down economic growth
_ automatic: refers to the built in stabilizers in the economy that adjust gov spending and taxation in response to changes in economic conditions
_ discretionary: deliberate changes in gov spending and taxation that are implemented through legislative action or executive decisions