Macro M6 - Macroeconomic policy

Question 1

What is it called when tax revenue and expenditure are equal?

Answer 1

A balanced budget

Question 2

What is a budget deficit?

Answer 2

Expenditure > taxes

Question 3

What is a budget surplus?

Answer 3

Taxes > expenditure

Question 4

When is contractionary fiscal policy used?

Answer 4

When positive output gaps become too large

Question 5

When is expansionary fiscal policy used?

Answer 5

When negative output gaps become too large

Question 6

When AD increases, what also needs to increase for there to be no inflationary effects?

Answer 6

LRAS

Question 7

The best fiscal policies that increase AD do what as well?

Answer 7

Increase LRAS (E.g. Building new schools)

Question 8

What are automatic stabilisers?

Answer 8

Automatic fiscal effects which influence the path of economic growth due to cyclical changes in tax revenue and welfare costs

Question 9

Chain of reasoning for why taxes are automatic stabilisers?

Answer 9

Economic growth
Tax revenue rises
Welfare costs fall
Limits the upturn of an
economy
Fiscal finances improve

Question 10

What is capital spending?

Answer 10

Provision and maintenance of key national infrastructure

Question 11

What are determinants of government spending?

Answer 11

Politics, economic performance, demographics and lifestyles, finances

Question 12

What can be used to show income inequality?

Answer 12

A lorenz curve

Question 13

How is inequality determined on a lorenz curve?

Answer 13

The greater the distance from the Lorenz curve to the Line Of Equality, the greater the inequality

Question 14

What is the gini index?

Answer 14

A statistical measure of the level of income inequality in an economy calculated by analysing the size of any inflexion in the lorenz curve

Question 15

How is the gini index calculated?

Answer 15

A/B (answer will be between 0 and 1)

Question 16

What are the principles of a tax system?

Answer 16

• Easy to administer
• Mustn’t disincentivise work
• Easy to understand
• Horizontally and vertically equitable

Question 17

Horizontal equality

Answer 17

A tax impacts individuals in the same set of circumstances equally

Question 18

Vertically equitable

Answer 18

A tax is equally fair for individuals on high earnings as those on low earnings

Question 19

Indirect taxes are usually…

Answer 19

Regressive

Question 20

What is a structural deficit?

Answer 20

Deficit not related to the economic cycle

Question 21

What is cyclical deficit?

Answer 21

Deficit related to the economic cycle (should automatically correct over time)

Question 22

What measures are implemented during austerity?

Answer 22

Contractionary fiscal policy, expansionary monetary policy, expansionary supply side policies

Question 23

Which school of thought supports austerity and who is against is?

Answer 23

Classical - support
Keynesian - against

Question 24

What is crowding out?

Answer 24

When the effect of expansionary fiscal policy (increased government spending) is offset because this reduces resources and finance available to the private sector

Question 25

What is the laffer curve?

Answer 25

A theoretical analysis which suggests that raising tax rates does not always generate more tax revenue. It is supported by classical economists.

Question 26

According to the laffer curve, when the size of the private sector increases..

Answer 26

The size of the public sector decreases

Question 27

What does Keynes argue about the laffer curve?

Answer 27

As there is normally an output gap, the government can increase spending in the public sector without the private sector shrinking

Question 28

Why do classical economists believe that the public sector is less efficient than the private sector?

Answer 28

- No private capital is risked - No competition - Funding is guaranteed - Consequences of failure is less severe - Weak profit incentives

Question 29

What is the money supply?

Answer 29

The entire stock of money and other liquid assets at any point in time

Question 30

What do supply side policies include and not include?

Answer 30

Includes: incentives, support, regulations Does not include: spending

Question 31

Example of a fiscal policy that can have supply side policy effects?

Answer 31

Tax cuts may incentivise more people to work