Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

Policy by the government to influence the economy

Question 2

What can fiscal policy affect?

Answer 2

Aggregate demand and aggregate supply

Question 3

What are the aims of fiscal policy?

Answer 3

To prevent national income remaining persistently bellow the full employment level, to smooth out cyclical fluctuations in AD and to solve market failures

Question 4

What is government spending?

Answer 4

An injection

Question 5

What does an increase in government spending cause?

Answer 5

It shifts the injections upwards and increase equilibrium output

Question 6

What types of governments are there?

Answer 6

Local and central government

Question 7

What is local government responsible for?

Answer 7

Regional services

Question 8

What is central government responsible for?

Answer 8

National provision of some products

Question 9

What are examples of government spending?

Answer 9

Defence, social security, education, NHS and repayments on previous borrowing

Question 10

What is government expenditure?

Answer 10

It is an injection that affects the position of the AD curve

Question 11

What is government spending financed by?

Answer 11

Tax revenue and borrowing

Question 12

What are direct taxes?

Answer 12

Placed on households’ incomes and firms’ profits

Question 13

What are examples of direct taxes?

Answer 13

Business rates, income, corporation, national insure, capital gains, inheritance and council tax

Question 14

What are indirect taxes?

Answer 14

Paid when items are bought

Question 15

What are example of indirect taxes?

Answer 15

Excise duties, licences, customs duties and landfill tax

Question 16

What are the different types of taxation systems?

Answer 16

Progressive, regressive and proportional

Question 17

What is progressive tax?

Answer 17

Average rate of tax increases as people earn more money

Question 18

What is regressive tax?

Answer 18

Average rate of tax falls as people earn more money

Question 19

What is proportional tax?

Answer 19

Average rate of tax is constant whatever people earn

Question 20

How do we calculate the average rate of tax?

Answer 20

Average rate of tax = (tax paid / income) x 100%

Question 21

What is marginal rate of tax?

Answer 21

Tax paid on the last pound earned

Question 22

How do we calculate the marginal rate of tax?

Answer 22

Change in tax paid / change in income

Question 23

What makes an effective taxation system?

Answer 23

Understandable, cost-effective, difficult to avoid paying, non-distortionary and does not have a disincentive effect

Question 24

What is tax avoidance?

Answer 24

When individuals or firms take legal steps to avoid paying tax

Question 25

What is tax evasion?

Answer 25

Illegally avoiding tax

Question 26

What is a budget deficit?

Answer 26

When governments expenditure is greater than governments receipts

Question 27

What is a budget surplus?

Answer 27

When governments receipts are greater than governments expenditure

Question 28

What is national debt?

Answer 28

The outstanding government debt

Question 29

What is the public sector?

Answer 29

Central government + local government + public corporations

Question 30

What is the public sector net borrowing (PSNB)?

Answer 30

The amount the public sector needs to borrow to finance the combined deficit

Question 31

What is public-sector debt?

Answer 31

Accumulated total of past PSNB's

Question 32

What are the instruments of fiscal policy?

Answer 32

Automatic stabilisers and discretionary fiscal policy

Question 33

What are automatic stabilisers?

Answer 33

Mechanisms in the economy that reduce the response of national income to shocks

Question 34

What are the advantages of automatic stabilisers?

Answer 34

Reduce fluctuations in national income and are quick, not dependent on forecasting accuracy

Question 35

What are the disadvantages of automatic stabilisers?

Answer 35

Fiscal drag and not preventative

Question 36

What is discretionary fiscal policy?

Answer 36

Active policy by the government to stabilise output

Question 37

What changes occur with discretionary fiscal policy?

Answer 37

It changes the level of government expenditure and change the marginal tax propensity

Question 38

How does discretionary fiscal policy change the marginal tax propensity?

Answer 38

Changing rates of existing taxes, changing benefits, introducing new taxes/benefits and withdrawing taxes/benefits

Question 39

What is the effectiveness of discretionary fiscal policy?

Answer 39

Time lags, uncertainty, induced effects on autonomous demand and crowding out

Question 40

What is supply-side fiscal policy?

Answer 40

It influences AS in the economy through regulation in the labour market and goods market