Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

A Level Economics Year 1 > 4.2.5 Fiscal and Supply- side policies > Flashcards

4.2.5 Fiscal and Supply- side policies Flashcards

(111 cards)

Start Studying
1
Q

What does fiscal policy involve?

A

Use of government spending and taxation to influence aggregate demand in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the 2 types of fiscal policy?

A

Expansionary and contractionary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the purpose of expansionary fiscal policy?

A

Generate further economic growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the purpose of contractionary fiscal policy?

A

Slow down economic growth or reduce inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What do expansionary fiscal policies include?

A

Reducing taxes or increasing government spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What do contractionary fiscal policies include?

A

Increasing taxes or reducing government spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How is fiscal policy presented annually by the government?

A

Government budget

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does a balanced budget mean?

A

Government revenue = government expenditure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does a budget deficit mean?

A

Government expenditure > government revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does a budget surplus mean?

A

Government revenue > government expenditure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How does a budget deficit have to be financed?

A

Public sector borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is public debt?

A

The cumulative total of past government borrowing which has to be repaid with interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How can fiscal policy be used to achieve macroeconomic objectives?

A

Maintain low and stable rate of inflation

Maintain low unemployment

Reduce the business cycle fluctuations

Create a stable economic environment for long-term economic growth

Redistribute income so as to ensure more equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the microeconomic impacts of fiscal policy?

A

Income tax cuts can influence labour to be more productive

Tax cuts can encourage firms to increase output or be more entrepreneurial

Subsidies can lower costs of production in the industry, leading to higher output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does expansionary fiscal policy aim to do?

A

Shift AD to right

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Show the diagram for expansionary fiscal policy where income tax is cut

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Explain how a fall in corporation tax will impact the economy?

A

Firms net profits increase > investment increases > AD increases > Economic growth increases > Inflation rises > Less unemployed as firms as output increases > export volumes could rise but imports too due to higher incomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Explain how the government increasing unemployment benefits will impact the economy?

A

Household incomes rise > consumption increases > AD increases > Economic growth increases > Inflation rises > Less unemployed as output increases > Imports likely to remain same as policy affects poorest > more equitable distribution of income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Show the diagram for contractionary fiscal policy

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Explain how the government increasing income tax will affect the economy?

A

Households pay more tax > less disposable income > less consumption > AD falls > economic growth falls > inflations falls > unemployment rises as fewer workers > imports may fall due to lower incomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Explain how the government reducing or freezing the public sector workers’ pay may impact the economy?

A

Wages stagnate or fall > consumer confidence falls > consumption decreases > AD decreases > economic growth falls > inflation falls > unemployment could rise as output falling > imports fall due to lower incomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Explain the impact of the government cutting its spending in its budget?

A

Less demand for goods and services > less income for firms > output and profits decrease > economic growth falls > inflation falls > unemployment rises as less output > imports fall as lower incomes > less corporation tax available for distribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the difference between fiscal and supply side policy?

A

Fiscal is short term / supply side is long - term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is government spending an example of ?

A

Injection as it increases economic activity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is taxation an example of?
Leakage as it reduces economic activity
26
What are automatic stabilisers?
Automatic fiscal changes that occur as the economy moves through stages of the business/trade cycle
27
Show the impact of automatic stabilisers on a diagram?
28
Explain the effects of automatic stabilisers in a recession?
Lower tax revenue due to nature of progressive taxation - as incomes fall households are taxed less > unemployment rises and therefore spending on unemployment benefits rises > consumption increases > economic growth increases
29
Explain the effects of automatic stabilisers in a boom?
Higher tax revenue due to nature of progressive taxation - as incomes rise, households are taxed more > unemployment falls > less spending on unemployment benefits > decrease consumption > economic growth falls
30
What can the impact of automatic stabilisers in a boom be described as?
Automatic disinflationary effect
31
What are direct taxes?
Direct taxes are taxes imposed on income and profits
32
Examples of direct taxes?
Income tax, corporation tax, capital gains tax, inheritance tax
33
What is capital gains tax?
Profits investors make when selling an asset
34
What are indirect taxes?
Taxes imposed on spending
35
Examples of indirect taxes?
VAT , excise duties , taxes on demerit goods
36
What was value of VAT in 2022?
20%
37
How can indirect taxes be passed onto consumers?
Depending on PED or PES
38
How does the government earn revenue through sale of goods and services?
Government owned firms sometimes charge for the goods/services that they provide
39
How does the government earn money through sale of government owned assets?
Privatisation can generate significant government revenue during the year in which the government sells the asset
40
What is privatisation?
The transfer of ownership of state owned assets to the private sector
41
What are the three main ways governments raise revenue?
Taxation Sale of goods and services Sale of government owned assets
42
What are the three types of government expenditure?
Current expenditures Capital expenditures Transfer payments
43
What is current expenditure?
Daily payments required to run the government and public sector
44
Examples of current expenditure?
Wages and salaries of public employees such as teachers, police
45
What is capital expenditure?
These are investments in infrastructure and capital equipment
46
Examples of capital infrastructure?
HS2 , Thames Gateway
47
What are transfer payments?
These are payments made by the government for which no goods/services are exchanged
48
Examples of transfer payments?
Unemployment benefits, disability payments, subsidies to producers and consumers
49
Why does government levy taxes?
Fund government expenditure Reduce consumption Aid distribution of income
50
What are the 3 types of taxation?
Progressive Regressive Proportional
51
What is progressive tax?
As income rises, a larger percentage of income is paid in tax
52
What is regressive tax?
As income rises, a smaller percentage of income is paid in tax
53
What is proportional tax?
As income rises, the same percentage of income is paid in tax
54
What is the characteristic of all indirect taxes?
Regressive
55
Diagram for progressive tax
56
Diagram for regressive tax
57
Diagram for proportional tax
58
What was the proportional tax rate of Bolivia in 2022?
13%
59
How are taxes in America structured
Federal Income Tax is progressive , state taxes regressive ( bottom 20% pay 6x more tax than others )
60
How to calculate average tax rate?
Total tax paid / income X 100
61
How to calculate marginal tax rate?
Change in total tax paid / change in income
62
What are progressive tax systems built around?
Marginal tax rates
63
What are marginal tax rates?
Amount of additional tax paid for each additional dollar of income
64
What are the 6 cannons of taxation?
Simple Fair Convenient Efficient Fit for purpose Flexible
65
Why should tax be simple?
Taxpayers should know what, when, where and how to pay the tax
66
Why should tax be fair?
Should reflect a taxpayer’s ability to pay; progressive taxation aims to achieve this as the wealthy can afford to pay more than the poor do
67
Why should tax be convenient?
Systems to collect payment should be easy and provide choice for taxpayers
68
Why should tax be efficient?
Management of the tax system by the government should not be overly expensive or wasteful
69
Why should tax be fit for purpose?
There should not be any unintended side effects of the system
70
Why should tax be flexible?
Should be easy to adjust/change as required by changes in the economy
71
What do Keynesian economists believe regarding budget deficits?
Keynesian economists believe that the government should ‘run a budget deficit’ to finance spending and stimulate economic growth
72
What is a cyclical budget surplus or deficit related to?
Economic cycle and aggregate demand
73
How can a boom affect the cyclical budget?
Improvement in the government budget as tax revenues rise and expenditure falls, decreasing the deficit
74
How can a recession affect the cyclical budget?
Increase in government expenditure, leading to a greater budget deficit
75
What does structural budget focus on?
Long-term underlying fiscal position of the government, independent of the effects of the business cycle
76
What does a structural budget aim to assess?
Whether government revenues are sufficient to cover ongoing expenditures over the long term
77
What are the 4 main drawbacks of consistently running a budget deficit?
National debt increases Inflationary pressures Economic shocks Economic growth
78
How does a constant budget deficit increase national debt?
National debt rises as government spends more than it takes in > burdens future generations, as left with large interest payments on the debt > trade off as future gov might have to cut spending on services to pay debt
79
How does a constant budget deficit create inflationary pressures?
A deficit can cause the economy to overheat, as governments spend more money , causing demand-pull inflation
80
How can a constant budget deficit cause economic shocks?
If there is no surplus set aside in the event of a shock (e.g. Covid), then the ability to respond is limited
81
How can a constant budget lead to temporary economic growth which is bad?
Inflation, which can lead to a rise in interest rates to curb that inflationary pressure > higher interest rates discourages investment by firms and also cause currency to appreciate,
82
What does debt to GDP ratio measure?
A Debt to GDP ratio measures the size of a country’s debt in relation to size of the country’s economy
83
How is a large national debt costly?
Higher annual cost of repaying national debt plus paying interest and places a burden on future generations
84
How is large national debt causing trade offs?
Government has less funds available to spend on public sector
85
How can a large national debt diminish UK's international credit ranking?
Increasing national debt means that UK’s credit-rating is deteriorating > international firms stop lending money to UK
86
How can a large national debt cause crowding out?
Government sells bonds which increases demand for interest rates which reduces incentive to borrow by firms and reduces AD
87
What is the primary objective of the Office for Budget Responsibility?
Manage public sector finances
88
Two more roles of OBR?
Providing detailed forecasts on the current economic performance Assesses the performance of the government against the fiscal targets set
89
What are supply side policies?
Government policies aimed at increasing the productive potential of the economy
90
What are the 2 types of supply side policies?
Interventionist Free market
91
What is an interventionist supply side policy?
Requires government intervention to achieve full employment level of output
92
What is a free market supply side policy?
Aims to restrict setbacks in market that prevent economy from operating at full potential
93
Give examples of supply side policies
Tax cuts on firms Spending on healthcare and education Subsidies on R and D
94
How can free market supply side policies reduce inflation?
Government subsidies reduce costs of production and therefore reduce cost-push inflation + increased supply reduces demand-pull inflation
95
How can free market supply side policies boost balance of payments?
Increased spending on innovation and subsidies can improve export volumes
96
What does a free-market supply side policy do?
Free market based supply-side policies aim to free up markets and improve market incentives so as to increase the long-run aggregate supply
97
How does supply side of tax cuts increase incentives?
Taxes decrease → firms and individuals retain more money for themselves → incentives increase → productivity improves → long term growth increases
98
How does deregulation improve competition and efficiency?
Regulation on firms decreases → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
99
How does privatisation improve competition and efficiency?
State owned firms are privatised → more firms enter the market to compete → competition and efficiency improves
100
How does decreasing trade union power or abolishing min wage increase competitivness?
Wages decrease → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
101
What is minimum wage?
Legally imposed wage level that employers must pay their workers
102
Abolition of minimum wage diagram?
103
Advantages of free market supply side policies
Improved resource allocation No burden on government budget
104
Disadvantages of free market supply side policies
Equity issues Time lags Environmental impact
105
How does the interventionist supply side policy of spending on education boost LRAS?
Skill level increases → productivity improve → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
106
How does interventionist supply side policy of spending on healthcare improve LRAS?
Human capital improves → productivity improves → the cost of production for firms falls → firms lower selling prices → international competitiveness improves
107
How does interventionist policy of R and D improve LRAS?
A new industry emerges → new infrastructure is developed → more jobs are created → GDP increases → increase in long term economic growth
108
How does interventionist supply side policy of provision of infrastructure boost LRAS?
New infrastructure is developed → costs of production decrease → supply increases → firms lower selling prices → international competitiveness improves
109
Advantages of interventionist supply side policy
Direct support of sectors important for growth Improvements in living standards
110
Drawbacks of interventionist supply side policy
Costs Time lags
111
Diagram of successful supply side policy

A Level Economics Year 1 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions