4.2.5.1 Fiscal Policy

Question 1

Fiscal Policy Definition

Answer 1

Manipulation of government spending, taxation and borrowing to influence the economy.

Question 2

Expansionary Fiscal Policy

Answer 2

• Cutting Taxes
• Raising Government Spending
• Borrowing (Creating Debt)

Question 3

Contractionary Fiscal Policy

Answer 3

• Increasing Taxes
• Cutting Government Spending
• Reducing Borrowing (Reducing Debt Burden)

Question 4

Automatic Stabilisers vs Discretionary Changes

Answer 4

Changes in tax revenues and government spending that come about automatically as the economy moves through the economic cycle.

Deliberate changes in taxation and government spending.

Question 5

Progressive Tax

Answer 5

The marginal rate of taxation rises as income rises. eg. UK Income tax system.

Question 6

Proportional (Flat) Tax

Answer 6

Marginal rate of tax is constant. As income rises so does the amount of tax.

Question 7

Regressive Tax

Answer 7

The rate of tax falls as income rises. e.g. excise duties, VAT.

Question 8

What is Fiscal Drag

Answer 8

Increasing taxable income without changing tax rates. This increases tax revenue for the government, as people have to earn less to pay more.

Question 9

Types of Government Spending

Answer 9

Current - Day to day running of goverrnment - wages, raw materials etc. has to be renewed each year.

Capital - Spending on physical assets and infrastructure. More long term spending.

Transfer Payments (Annually Managed Expenditure) - Benefits and pensiosn as one way payments withut an exchange of goods or services.