Fiscal Policy - Demand-side Policies 2.6.2

Question 1

What are the 2 Demand-side policies and who are they run by

Answer 1

Fiscal Policy - UK government
Monetary Policy - Bank of England

Question 2

What is fiscal policy

Answer 2

Government changes its taxes and spending to influence the economy

Question 3

What is contractionary fiscal policy

Answer 3

Government ↑ tax, ↓ spending, to improve budget deficit which contracts the circular flow of income

Question 4

What is expansionary fiscal policy

Answer 4

Government increases spending and decreases tax, to worsen budget deficit which expands the circular flow of income

Question 5

What is an advantage of decreasing income tax for high earners

Answer 5

↑ Disposable income, ↑ Consumption, ↑ AD, Multiplier effect

Question 6

What is a disadvantage of decreasing tax for high earners

Answer 6

↓ Government revenue, ↓ Government spending, ↓ AD

Question 7

What is a disadvantage of increasing tax for high earners

Answer 7

↓ Disposable income, ↓ Consumption, ↓ AD, ↓ GDP, Might not increase Tax revenue as high earners will tax avoid

Question 8

What is the advantage of increasing benefit payments

Answer 8

↑ Consumption, ↑ AD, ↓ Income inequality

Question 9

What is the disadvantage of increasing benefit payments

Answer 9

If benefits too high, decentivises work as they may earn more by claiming benefits - Benefits Trap

Question 10

What is the advantage of decreasing benefit payments

Answer 10

↓ Budget deficit, ↓ Benefits incentivises work, ↓ Unemployment

Question 11

What is the disadvantage of decreasing benefit payments

Answer 11

Poor households have les to spend, ↓ Consumption, ↓ AD, ↑ Income inequality

Question 12

What is the disadvantage of increasing corporation tax

Answer 12

↓ Profit, ↓ Investment, ↓ AD

Question 13

What is the advantage of increasing corporation tax

Answer 13

↑ Tax Revenue, ↓ Budget deficit or ↑ Government spending, ↑ Growth

Question 14

What is the advantage of decreasing corporation tax

Answer 14

↓ Costs, Shift SRAS Right, ↑ GDP in the SR, ↑ Profit, ↑ Investment, ↑ Productivity, ↑ AD, Shit LRAS right, ↑ Growth

Question 15

What is the disadvantage of decreasing corporation tax

Answer 15

↓ Tax Revenue, Extra profit may not be spent on investment

Question 16

What is the advantage of increasing spending on Healthcare and Education

Answer 16

↑ Government spending, ↑ AD, ↑ GDP, Healthier workforce, ↑ Productivity, Shift right LRAS

Question 17

What is the disadvantage of increasing spending on Healthcare and Education

Answer 17

Worsens Budget deficit, ↑ Expenditure on education could lead to useless degrees

Question 18

What is the advantage of decreasing spending on Healthcare and Education

Answer 18

↑ Supply of Labour, ↓ Wages, ↓ Costs, Shift Right SRAS, ↑ GDP

Question 19

What is the advantage of increasing VAT

Answer 19

↑ Tax Revenue, Improves budget deficit

Question 20

What is the disadvantage of increasing VAT

Answer 20

↑ Costs, Left shift SRAS, ↓ Growth, leads to cost push inflation

Question 21

What is the advantage of decreasing VAT

Answer 21

↓ Costs, Right shift LRAS, ↑ GDP, ↑ Growth, ↓ Price level

Question 22

What is the disadvantage in decreasing VAT

Answer 22

↓ Tax revenue, Worsens budget deficit

Question 23

What is the advantage of increased spending on infrastructure

Answer 23

↑ Geographical mobility of labour