macro topic 5 : fiscal and supply side policies

Question 1

fiscal policy involves the use of

Answer 1

government spending and taxation to influence aggregate demand in the economy

Question 2

fiscal policy instruments

Answer 2

-government spending
-taxation

Question 3

what does fiscal policy aim to stimulate

Answer 3

economic growth and stablise the economy

Question 4

fiscal policy aims (macroeconomic impacts)

Answer 4

-maintain low and stable rate of inflation
-maintain low unemployment
-reduce the business cycle fluctuation
-create a stable economic environment for long term economic growth
-redistribute income
-control level of imports and exports

Question 5

microeconomic impacts of fiscal policy

Answer 5

changes to polices such as taxes and subsidies

Question 6

effect of cuts in income tax

Answer 6

influence labour to be more productive

Question 7

effects of cuts in tax for firms

Answer 7

encourage firms to increase output or be more entrepreneurial

Question 8

subsidies often lead to

Answer 8

higher output

Question 9

expansionary fiscal policy include

Answer 9

-reducing taxes or increasing gov spending with the aim of increasing ad

Question 10

contractionary fiscal policy include

Answer 10

-increasing taxes or decreasing gov spending w the aim of decreasing ad

Question 11

how fiscal policy can influence as

Answer 11

-the gov could reduce income tax and coorporation tax to encourage spending and investment
-the government could subsidise training or spend more on education which lowers costs for firms bcs they will have to train fewer workers
-gov could spend more on infrastructure such as imparing roads and schools

Question 12

is gov spending a withdrawal or injection

Answer 12

injection

Question 13

is taxation a withdrawal or injection

Answer 13

withdrawal

Question 14

the stablilising effect of fiscal policy

Answer 14

-gov budget is set once a year
-the fiscal policy then operates automatically in the background as economic activity fluctuates

Question 15

what are automatic stabilisers

Answer 15

are automatic fiscal changes that occur as the economy moves through stages of the business cycle

Question 16

fiscal policy stabilising effect in a recession

Answer 16

-will be automatically lower tax revenue due t nature of progressive taxation as incomes fall
-in a recession as unemployment rises higher unemployment benefits will be paid for ehich increases household consumption
-both of the above result in real GDP being higher

Question 17

fiscal policy stabilising effect in a boom

Answer 17

–will automatically be higher tax revenue due to the nature of progressive tax as incomes rise
-unemployment falls so less unemployment benefits are paid which decreases household consumption
-both lead to real GDP being lower
-effectively a automatic disinflationary effect

Question 18

sources of government revenue

Answer 18

-taxation
-sales of goods and services
-the sale of government owned assets

Question 19

types of government expenditure

Answer 19

-current expenditure
-capital expenditure
-transfer payments

Question 20

current expenditure

Answer 20

include daily payments required to run the gov and public sector
also includes payments for goods and services such as medicines for gov hospitals

Question 21

capital expenditure

Answer 21

investments in infrastructure and capital equipment

Question 22

transfer payments

Answer 22

-payments made by the government for which no goods or services are exchanged
-this type of government spending does not contribute to ad as income is only transferred from one group of people to another
-eg unemployment benefits, subsidies

Question 23

excise taxes can be used to reduce the consumption of

Answer 23

demerit goods that create negative externalities

Question 24

progressive tax has an increase in the average rate of tax as

Answer 24

income increases

Question 25

what is progressive tax based on

Answer 25

the payers ability to pay

Question 26

what does progressive tax help reduce

Answer 26

inequality

Question 27

progressive taxes are built around the idea f

Answer 27

marginal tax rates

Question 28

direct taxes are generally more

Answer 28

progressive

Question 29

what does regressive tax not relate to

Answer 29

incomes

Question 30

is the proportion of income paid as regressive tax on lower incomes higher or lower

Answer 30

higher

Question 31

indirect taxes are generally more

Answer 31

regressive

Question 32

a proportional tax has a

Answer 32

fixed rate for all taxpayers regardless of income

Question 33

what is proportional tax also called

Answer 33

flat rate

Question 34

what does proportional tax encourage

Answer 34

people to earn higher incomes

Question 35

principles of taxation

Answer 35

-simple -fair -convenient -efficient -fit for purpose -flexible

Question 36

limitations of fiscal policy

Answer 36

-gove may have imperfect information about the economy leading to inefficient spending -significant time lag invloved w employing a fiscal policy , could take months to years -if gov borrows from the private sector there are fewer funds available for the private sector which could lead to crowding out -if interest rates are high fiscal policy may be ineffective for increasing demand -if gov spends too much there could be difficulties paying back debt

Question 37

what is the gov budget compromised of

Answer 37

tax revenues and gov expenditure

Question 38

a government budget surplus is when

Answer 38

tax receipts exceed expenditure

Question 39

a government budget deficit is when

Answer 39

expenditure exceeds tax recipts

Question 40

national debt is

Answer 40

the accumulation of gov deficit overtime

Question 41

when does national debt decrease

Answer 41

when the government runs a budget surplus

Question 42

cyclical deficit

Answer 42

a temporary deficit which is related to the business cycle -may occur during recessions when gov increases spending

Question 43

when could a cyclical deficit be corrected

Answer 43

when the economy recovers through the impact of automatic stablisers

Question 44

structural budget deficit

Answer 44

difference between a governments spending and revenue when the economy is operating at its full potential independent of the business cycle

Question 45

structural budget analysis ivloves

Answer 45

evaluating the sustainability of government polices and need for fiscal adjustments to ensure long term fiscal stability

Question 46

significance of the size of the nation debt

Answer 46

-cost of borrowing could increase since by borrowing money the gov is increasing demand for credit -if confidence is lost in the governments ability to repay the debt there my be a increase in interest rates because the gov may have to offer investors an attractive rate in order to encourage them to buy bonds so they can finance debt -could lead to higher taxes and austerity measure (gov policies)

Question 46

consequences of budget deficits and surpluses for macroeconmic objectives

Answer 46

- a fiscal deficit could be inflationary if it increases ad -more government spending could lead to crowding out of the private sector -increased interest rates because the gov may have to offer investors an attractive rate in order to encourage them to buy debt -can make the economy vulnerable to economic shocks

Question 47

when was the office for budget responsibility established

Answer 47

2010

Question 48

what is the OBRs primary responsibility

Answer 48

to manage to public sector finances

Question 49

responsibilities of the OBR include

Answer 49

-produce 5 year forecasts for the economy including the impact of tax and spending changes -an analysis of uk public spending and taxation -asses the performance of the government against the fiscal target set -advises the gov on economic predictions to aid future decision making -use long term projections to analyse sustainability of gov spending and revenue

Question 50

supply side policies aim to

Answer 50

improve the long run productive potential of the economyh

Question 51

how can the economy experience supply side improvements in the private sector without government intervention

Answer 51

-innovation -investment

Question 52

aims of supply side policies include

Answer 52

-long term growth -improving competition -increasing labour market flexibility -increase international competitiveness

Question 53

strengths of supply side policies

Answer 53

-only policies that can deal with structural unemployment because the labour market is directly improved

Question 54

weaknesses of supply side policies

Answer 54

-demand side policies are better at dealing with cyclical unemployment as they can reduce the size of a negative output gap and shift the ad curve to the ad curve to the right -significant time lags -market based supply side policies such as reducing the rate of tax can lead to more unequal distribution of wealth

Question 55

market policies limit

Answer 55

the intervention of the government and allow the free market to eliminate imbalances. the forces of supply and demand are used

Question 56

free market supply side policies

Answer 56

-to incease incentives- such as reducing income and corporation tax -to promote competition - such as by deregulating or privatising the public sector -reform the labour market- such as reducing national minimum wage or getting rid of it or reducing trade union power

Question 57

intervention policies rely on

Answer 57

government intervening in the market

Question 58

interventionist supply side policies

Answer 58

-promote competition- such as a stricter competition policy which could help reduce monopoly power -reform the labour market- such as improve geological mobility of labour by subsiding relocation of workers or improve job vacancy info -improve skills and quality of labour force - improve infrastructure