4.5.3

Question 1

define discretionary fiscal policy

Answer 1

• implemented through one off policy changes
• deliberate chnages in government expenditure and taxes

eg: furlow scheme

Question 2

define automatic stabilisers

Answer 2

automatic chnages to government spending and tax revenue as the economy moves through different changes of the business cycle - such as a fall in tax revenue during recession

Question 3

explain how automatic stabilisers work during a boom period

Answer 3

1. tax reveunues will rise as household real income and corporation profits grow
2. government welfare spending also falls as more people are in work and need less support
3. improvement in budget deficit
   (automatically taking in more and spending less)
4. fiscal policy takes income out of the circular flow helping to moderate a boom

Question 4

explain how automatic stabilisers work during a recession period

Answer 4

1. tax revenues decrease and household real income falls and cocrporation profits
2. government welfare spending increases as less people are in work
3. budget deficit grows
4. automatically more is being spent that taken in, injecting income into ciruclar flow of income moderating a recession

Question 5

define fiscal defict

Answer 5

when government spending exceeds tax revenue

Question 6

define national debt

Answer 6

government’s stock of outstanding debt

an accumulation of consistent budget deficits paid with intrest

Question 7

how are fiscal/ budget deficits related to national debt?

Answer 7

budget debt is financed by
* issuing government bonds
* international borrowing
* central bank financing

Question 8

what are the impacts of budget deficits on economy?

Answer 8

• increase in national debt as a % of GDP, leading to a rise in bond yields which means government have to spend more on intrest payments in the future creating opportunity costs
• risks of inflationary pressures, as budget deficits mean more spending, AD shifts and demand pull inflation

Question 9

what is a cyclical budget defict?

Answer 9

size of the budget deficit is influenced by the state of the economy
eg: in booms budget deficit is low becuase tax revenue increases and welfare spendings are reduced

Question 10

what is a structural deficit?

Answer 10

not related to state of economy- when economy changes state this deficit doesnt go away

eg: aging population may mean increase on state pensions spending

Question 11

what factors influence the size of fiscal deficits?

Answer 11

• state of economy (cyclical) eg: recession causing unemployment
• demographic factors- aging population
• decrease in consumer spending and profits leading to less tax revenue
• increase in inactivity leading to rise in welfare benefit spending
• expansionary fiscal policy

Question 12

what factors influence the size of national debt?

Question 13

how can high levels of national debt effect a country?

Answer 13

• in order to pay off the debt the government will have to run a budget surplus in the future this could mean higher taxes in the future
• higher taxes and yield rates can “crowd out” private investors

Question 14

why does an increase in yields lead to crowding out?

Answer 14

yields are the intrest rates on government bonds.
1. if yields increase then intrest rates for loans also automatically increase, as otherwise banks could buy loans rather than lend to firms, so to stay profitable intrest rates for loans increase
2. this reduce private sector investment as cost of investment increases