4.2.5 Fiscal Policy And Supply-side Policies

Question 1

What does fiscal policy involve?

Answer 1

The manipulation of government spending, taxation and the budget balance

Question 2

What are the types of demand-side fiscal policy?

Answer 2

Expansionary and contractionary

Question 3

What is expansionary fiscal policy?

Answer 3

Policy which boosts AD by increasing government spending or lowering taxes
Can cause a budget deficit

Question 4

What is a budget deficit?

Answer 4

government spending > revenue

Question 5

What is contractionary fiscal policy?

Answer 5

Policy which reduces AD by reducing government spending or increasing taxes
Can cause a budget surplus

Question 6

What is a budget surplus?

Answer 6

Government spending<revenue

Question 7

What is supply-side fiscal policy used for?

Answer 7

To try and shift the economy’s LRAS curve to the right

Question 8

What is the reason for government expenditure?

Answer 8

To invest in new capital products and infrastructure
To fund the running costs of public projects

Question 9

What are the types of government expenditure?

Answer 9

Investment
Transfers
Interest payments on the national debt

Question 10

What are examples of government transfers?

Answer 10

State pensions
Unemployment-related benefits

Question 11

What is a tax?

Answer 11

A compulsory levy made by a government to pay for its activities

Question 12

What is the reason for tax?

Answer 12

To finance public expenditure

Question 13

How much did the government spend on health in 2019/2020?

Answer 13

£155bn

Question 14

How much income tax did the government collect in 2019/2020?

Answer 14

£185bn

Question 15

What is the VAT percentage rate?

Answer 15

20%

Question 16

What is direct tax?

Answer 16

A tax that cannot be shifted onto someone else by the person legally liable to pay the tax
Levied on income and wealth

Question 17

What is an example of a direct tax?

Answer 17

Income tax
Corporation tax

Question 18

What is indirect tax?

Answer 18

A tax that can be shifted onto someone else by the person legally liable to pay the tax

Question 19

What is an example of an indirect tax?

Answer 19

VAT

Question 20

What is progressive taxation?

Answer 20

When the proportion of income paid in taxes rises as income increases

Question 21

What are regressive taxes?

Answer 21

When the proportion of income paid in tax falls as income increases

Question 22

What is proportional taxation?

Answer 22

When the proportion of income paid in tax stays the same as income increases

Question 23

What are the principles of taxation?

Answer 23

• efficient
• equitable
  -flexible
• economy
• convenient for tax payers to pay

Question 24

What is the relationship between the budget balance and the national debt?

Answer 24

The larger the deficit, the larger the national debt

Question 25

What is a cyclical budget deficit?

Answer 25

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle

Question 26

What is a structural budget deficit?

Answer 26

The part of the budget deficit which is not related to the state of the economy but results from structural change in the economy from long-term government policy decisions

Question 27

What is the significance of large national debt?

Answer 27

• Push up long term rates of interest
• increased government borrowing may eventually require higher taxation

Question 28

What are the reasons for structural deficits and surpluses?

Answer 28

High levels of tax avoidance and evasion
High levels of income and wealth inequality
High levels of financial support from government

Question 29

Arguments for a budget surplus

Answer 29

Possible reduction in inflation
Reduction of national debt
Reduction of crowding out

Question 30

Arguments against a budget surplus

Answer 30

Reduced gov spending on merit and public goods
Reduced spending on the supply side of the economy
Increased taxation on investment and consumption

Question 31

Arguments against a budget deficit

Answer 31

Adds to national debt
Could be inflationary
Could lead to crowding out

Question 32

Arguments for a budget deficit

Answer 32

Increased government spending on merit goods

Question 33

What is the role of the Office for Budget Responsibility (OBR)?

Answer 33

To provide independent analysis of the UK’s public sector finances

Question 34

What are supply-side policies?

Answer 34

Government economic policies which aim to make markets more competitive, efficient and increases productive potential

Question 35

What are supply-side improvements?

Answer 35

Reforms undertaken by the private sector to increase productivity in order to reduce costs and become more competitive

Question 36

How can supply-side policies help to achieve supply-side improvements?

Answer 36

interventionist policies which provide training and infrastructure reduce firms’ costs

Question 37

What are interventionist policies?

Answer 37

When the government intervenes in, and sometimes replaces, free markets

Question 38

Example of interventionist supply-side policies

Answer 38

Government provisions of education and training
Investment in infrastructure projects
Subsidising spending on research and development

Question 39

What are free market supply-side policies?

Answer 39

Policies which free up markets, promote competition and greater efficiency
And reduce the economic role of the State

Question 40

Examples of free market supply-side policies

Answer 40

Tax cuts to create incentives to work
Cuts in welfare benefits to reduce incentive to choose unemployment
Deregulation

Question 41

What diagram should be drawn for supply-side policies?

Answer 41

The Laffer Curve

Question 42

What should be on the X axis of the laffer curve?

Answer 42

% average tax rate

Question 43

What should be on the Y axis of the laffer curve?

Answer 43

Total tax revenue (£bn)

Question 44

What is the optimum tax rate?

Answer 44

50%

Question 45

Explain the Laffer curve

Answer 45

Increasing tax above optimum disincentiveivises people to work
or causes brain drain
So revenue would decrease

Question 46

What is the trickle down effect?

Answer 46

The rich benefiting causing the poor to also benefit as they employ them as servants