5.2 Fiscal Objectives

Question 1

What is a fiscal policy made up of?

Answer 1

The use of government spending (G) and taxation (T)

Question 2

What is the government budget?

Answer 2

A plan of future government spending mostly from taxation revenue

Question 3

What is a government budget surplus?

Answer 3

Occurs when government spending (G) is less than government income (T)

Question 4

What is a government budget deficit?

Answer 4

Occurs when government spending (G) is more than government income (T)

Question 5

What is a balanced government budget?

Answer 5

Occurs when government spending (G) is equal to the government income (T)

Question 6

What does a government use a government budget surplus on?

Answer 6

To spend on the direct provision of public goods and reducing market failure of merit goods

Question 7

What does a budget deficit lead to?

Answer 7

An economic recession

Question 8

What does a budget surplus lead to?

Answer 8

An economic boom

Question 9

What is national debt?

Answer 9

The total amount of money owed to creditors from the government

Question 10

What is an indirect tax on?

Answer 10

On expenditure of goods and services

Question 11

What is an direct tax on?

Answer 11

On incomes

Question 12

What are the two types of indirect taxes?

Answer 12

Specific and Ad-Valorem

Question 13

What’s a specific tax?

Answer 13

A tax per unit sold of a good that doesn’t change based on how expensive the goods is, only the type of good

Question 14

What’s a Ad-Valorem tax?

Answer 14

A tax as percentage of the price of the good

Question 15

What a regressive tax?

Answer 15

A tax that takes a higher proportion of the incomes of the poor

Question 16

What a progressive tax?

Answer 16

A tax that take a higher proportion of the income of the rich

Question 17

What a proportional tax?

Answer 17

A tax that takes a equal proportion of the incomes of the rich and the poor

Question 18

What are the reason for taxation?

Answer 18

• Generate tax revenue
• Decrease consumption of demerit goods
• To redistribute income to reduce income inequality
• To reduce imports to protect domestic industries

Question 19

Why can high national debt be beneficial to an economy?

Answer 19

Government will have lots of money to spend on fiscal policy

Question 20

Why can high national debt be bad to an economy?

Answer 20

Government will have to pay it back with high interest amounts

Question 21

What are the two types of government spending?

Answer 21

Capital spending and current spending

Question 22

What is an example of capital spending?

Answer 22

• Infrastructure
• Street lighting
• Military defence
• Public roads

Question 23

What are examples of current spending?

Answer 23

Day to day operational expenses
- salaries for government employees

Question 24

What are the main reasons for government spending?

Answer 24

• Provision of public goods
• To increase AD and create jobs
• Subsides
• Government Aid

Question 25

What is the aim of a contractionary fiscal policy?

Answer 25

To reduce AD in the economy and in doing so contract the economy

Question 26

How can contractionary fiscal policies be done?

Answer 26

Through increasing taxation and/or reducing government spending

Question 27

What is the aim of a expansionary fiscal policy?

Answer 27

To increase AD in the economy an in doing so expand the economy

Question 28

How can expansionary fiscal policies be done?

Answer 28

Through decreasing taxation and/or increasing government spending

Question 29

Which government macroeconomic objectives does a expansionary fiscal policy help?

Answer 29

- Sustainable Economic growth - Low unemployment

Question 30

Why do expansionary fiscal policies increase demand-pull inflation?

Answer 30

An increase in AD leads to a rise in the price level shown in the AD/AS model

Question 31

Why do expansionary fiscal policies worsen BOPS?

Answer 31

Due to lower unemployment, incomes rise which leads to higher consumer spending (C) which increases imports which leads to a BOP instability

Question 32

Which government macroeconomic objectives does a contractionary fiscal policy help?

Answer 32

- Low and stable inflation - Stable balance of payments

Question 33

Why do contractionary fiscal policies lead to an economic recession?

Answer 33

An decrease in AD leads to a lower GDP which means incomes are lower, less consumer spending (C) and there is overall an economic recession

Question 34

Why do contractionary fiscal policies lead to an high inflation rate?

Answer 34

An decrease in AD will lead to a lower price level shown on the AD/AS analysis