18) Demand Management(1) FISCAL POLICY

Question 0

Who is the Chancellor of exchequer, and what is he in charge of

Answer 0

• George Osborne

- In charge of government fiscal policy

Question 1

What does Fiscal Policy mean

Answer 1

The uses of taxes and government spending to manipulate the level of aggregate demand in the economy

Question 2

What is budget day

Answer 2

• spending and taxation plans are announced
• by the chancellor
• in March

Question 3

What is autumn statement

Answer 3

• further announcement by the chancellor

- in November

Question 4

What are the four main categories of public (government) spending in the uk

Answer 4

• current expenditure
• capital expenditure
• transfer payments
• debt interest

Question 5

What is current expenditure

• definition
• give example
• where is it recorded in the AD

Answer 5

• Spending on the day to day running of public services
• teachers and nurses pay

-recorded in C components on AD
> its households who put money into the circular
flow
> by spending their income

Question 6

What is capital expenditure

• give definition
• example
• what component is it recorded in the AD

Answer 6

• investment for the future
• building a new hospital, school and road

-recorded in the G components of AD
-in long run can shit AS to the right
> increase of the factors if production

Question 7

What is transfer payments

• definition
• examples
• what component is it in the AD

Answer 7

• payments made by governments to the individuals
• pensions, tax credits, benefits

-recorded in C components of AD
>it is households who put the money into the
circular flow, by spending their benefits

Question 8

What is debt interest

• definition
• example

Answer 8

• Payments to the holders of government debts

- bond holders

Question 9

What are:

• income tax
• national insurance contribution

Answer 9

• direct taxes

- deducted directly from wages

Question 10

Whats is corporation tax

Answer 10

Paid by firms as a % of their profits

Question 11

What are:

• capital gains tax
• inheritance tax
• stamp duty

Answer 11

• capital taxes

- apply to the assets you require and sell

Question 12

What are:
-value added tax 
-tobacco duty
-alcohol duty
-petrol duty
-environmental taxes
 >aggregate levy
 >climate change levy
 >landfill tax

Answer 12

• indirect taxes
• applied to expenditure

-environmental taxes are a used to discourage activity that causes harm to the environment

Question 13

What is an expansionary fiscal policy

Answer 13

• to increase AD

- to promote economic growth and lower unemployment

Question 14

How can expansionary fiscal policy be done

Answer 14

• increase in the government spending, increases the level of injection in the circular flow
• decreasing taxation reduces the level of leakages from the circular flow

Question 15

What is contractionary fiscal policy

Answer 15

• to reduce the AD

- by reducing level or inflation, or reducing level of government devt

Question 16

How can contractionary fiscal policy be done

Answer 16

• decreasing the government spending, to reduce injection into circular flow
• increasing taxation, to increase leakages from circular flow

Question 17

How can a cut in income tax rate be described as an expansionary fiscal policy

Answer 17

• reduces income tax bill
• increases income after tax has been deducted
• creates an injection of consumer spending
• increase in AD shifting to the right
• increases real GDP

Question 18

How can an increase in cooperation tax rate be described as a contractionary fiscal policy

Answer 18

• increase the tax taken from business profits
• reduce the amount of profits left after tax
• reduce amount if business investment
• decrease AD shifting to the left
• reducing real GDP

Question 19

What is a budget/fiscal deficit

Answer 19

When government spending is greater than tax revenue

Question 20

Give in example of when the UK was in budget/fiscal deficit, and explain why this happened

Answer 20

>2011-12
>-£122billions
>occurred because government borrowed money 
  through the issue of bonds
     >had to pay interests on it

Question 21

What is the impact of a budget deficit on AD

Answer 21

A budget/fiscal deficit:

• increases AD
• increases real GDP
• increases inflation

Question 22

What is the impact of budget deficit on injection/leakages in the circular flow

Answer 22

Government spending is an injection into the circular flow whereas the taxation is a leakage

-if the injection (G) is greater than leakage (T)
>AD will increase
-if tax is greater that government spending
>budget surplus
> decrease in AD

Question 23

What are the advantages of fiscal policy

Answer 23

• has a big impact on AD
• can influence behaviour
• can have supply-side effects on the long run
• meet environmental goals
• reduce income inequalities

Question 24

How does fiscal policy cause a big impact on AD

Answer 24

-causes multiplier effect -the multiplier is when an initial injection into the circular flow leads to a proportionally increase in AD and GDP. This is a positive multiplier effect -an example is a cut in the income tax >reduces income tax bills >increases income after tax has been deducted >creates injection in consumer spending >causes a shift in AD to the right >increases real GDP

Question 25

How can fiscal policy be used to influence behaviour

Answer 25

-government uses working tax credits to encourage people to work

Question 26

How can fiscal policy effect supply-side policy in the long run

Answer 26

-increase spending on education -increases AD in the short run -increases AS in the long run >better educated individual are more productive >more can be produced at the same level of resources

Question 27

How can fiscal policy meet environmental goals

Answer 27

Carbon taxes reduces CO2 emissions

Question 28

How can fiscal policy reduce income inequalities

Answer 28

- rich pay more income tax to the government - re-distributed in the form of benefits and spending on the poorer section of the society - a tax that takes larger % of income from the rich is called progressive

Question 29

What are the limitation of the fiscall policy

Answer 29

- budget deficit - can have immediate impact but long time to implement - only decided twice yearly - some fiscal policy measure have disincentive effect - increase government spending can crowd out private investment - government failure

Question 30

Why is the budget deficit a limitation for fiscal policy

Answer 30

increasing government spending can lead to budget deficit ⚫️ means government have to borrow to fund its spending, borrowing means: ➡️government spending will be cut back in future, to pay back the debt ➡️national debt increases ➡️interest payments will have to be paid on this debt ➡️tax rise in future, to repay debt causing C and I to fall

Question 31

Explain how having an immediate impact but taking long to implement is a limitation for fiscal policy

Answer 31

➡️e.g ➡️budget has to be presented to parliament ➡️passed through majority vote ➡️government with weak majority vote ➡️could find it difficult to pass the budget

Question 32

Explain how deciding twice yearly is a limitation for fiscal policy

Answer 32

⚫️chancellor of the exchequer publishes the governments taxation and spending plans ➡️on budget day ➡️autumn statements

Question 33

Explain how some fiscal policy measuring can have a disincentive effect can cause a limitation of fiscal policy

Answer 33

``` ⚫️if increase in income tax ➡️some people decide to work less ➡️reducing the amount of ➡️labour willing to work ➡️and quantity of the factors of production ```

Question 34

Why is an increased government spending crowding out private investment a limitation of fiscal policy

Answer 34

⚫️use of builders to build large government funded schemes ➡️mean fewer builders available to build private houses ➡️lead to misallocation of resource ➡️as private sectors usually more productive than public sectors

Question 35

Explain why government failure is a limitation of fiscal policy

Answer 35

⚫️government failure can lead to ➡️making things worse ➡️creating a misallocation of resources ⚫forexample ➡️subsidies paid to farmers ➡️resulted in the overproduction of food