Key Terms 13 - Fiscal Policy And Supply-Side Policies

Question 1

Fiscal Policy

Answer 1

The use by the government of government spending and taxation to try to achieve the government’s policy objectives.

Question 2

Balanced Budget

Answer 2

Achieved when government spending equals government revenue (G = T).

Question 3

Balanced Deficit

Answer 3

Occurs when government spending exceeds government revenue (G > T). This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.

Question 4

Balanced Surplus

Answer 4

Occurs when government spending is less than government revenue (G < T). This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary.

Question 5

Demand-Side Fiscal Policy

Answer 5

Used to increase or decrease the level of aggregate demand (and to shift the AD curve right or left) through changes in government spending, taxation and the budget balance.

Question 6

Deficit Financing

Answer 6

Deliberately running a budget deficit and then borrowing to finance the deficit.

Question 7

Expansionary Fiscal Policy

Answer 7

Uses fiscal policy to increase aggregate demand and to shift the AD curve to the right.

Question 8

Contractionary Fiscal Policy

Answer 8

Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left.

Question 9

Supply-Side Fiscal Policy

Answer 9

Used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest, and be entrepreneurial. Interventionist supply-side fiscal policies, such as the financing of retraining schemes for unemployed workers, are also designed to improve supply-side performance.

Question 10

Direct Tax

Answer 10

A tax that cannot be shifted by the person legally liable to pay the tax onto someone else. Direct taxes are levied on income and wealth.

Question 11

Indirect Tax

Answer 11

A tax that can be shifted by the person legally liable to pay the tax onto someone else, e.g. through raising the price of a good being sold by the taxpayer. Indirect taxes are levied on spending.

Question 12

Principle Of Taxation

Answer 12

A criterion used for judging whether a tax is good or bad.

Question 13

National Debt

Answer 13

The stock of all past government borrowing that has not been paid back.

Question 14

Cyclical Budget Deficit

Answer 14

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle.

Question 15

Structural Budget Deficit

Answer 15

The part of the budget deficit which is not affected by the economic cycle but results from structural change in the economy affecting the government’s finances, and also from long-term government policy decisions.

Question 16

Supply-Side Improvements

Answer 16

Reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive. Supply-side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government.

Question 17

Interventionist Policies

Answer 17

Occur when the government intervenes in, and sometimes replaces, free markets. Interventionist supply-side policies include government funding of research and development.

Question 18

Privatisation

Answer 18

Involves shifting ownership of state-owned assets to the private sector.

Question 19

Marketisation

Answer 19

Involves shifting provision of goods or services from the non-market sector to the market sector.

Question 20

Deregulation

Answer 20

Involves removing previously imposed regulations. It is the opposite of regulation.