13. Fiscal Policy And Supply-side Policies

Question 1

Fiscal policy

Answer 1

The use by the government spending and taxation to try to achieve the government’s policy objectives

Question 2

Balanced budget

Answer 2

Achieved when government spending equals government revenue (G=T)

Question 3

Budget deficit

Answer 3

Occurs when government spending exceeds government revenue (G>T) . This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.

Question 4

Budget surplus

Answer 4

Occurs when government spending is less than government revenue (G<T). This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary

Question 5

Way of financing a budget deficit

Answer 5

Public-sector borrowing

Question 6

Ways of eliminating a budget deficit

Answer 6

Raising taxation, cutting public spending

Question 7

Demand-side fiscal policy

Answer 7

Used to increase or decrease the level of aggregate demand (and to shift the AD curve right or left) through changes in government spending, taxation and the budget balance.

Question 8

Deficit financing

Answer 8

Deliberately running a budget deficit and then borrowing to finance the deficit

Question 9

Goal of running a budget deficit on purpose

Answer 9

To achieve full employment and to stabalise the economic cycle, without at the same time creating excessive inflationary pressures.