THEME 2 - Topic 8 - Macroeconomic Policies

Question 1

What is fiscal policy also known as?

Answer 1

Demand-management policy.

Question 2

Define fiscal policy

Answer 2

Involves decision made by the government on its expenditure, taxation and borrowing.

Question 3

What are the 4 forms of government expenditure?

Answer 3

1. Current expenditure
2. Capital expenditure
3. Transfer payments
4. Debt interest repayments

Question 4

Define current expenditure

Answer 4

(Government consumption expenditure) is the spending on day-to-day running of public services.

Question 5

Define capital expenditure

Answer 5

Spending on social infrastructure and includes spending on new hospitals, schools and roads, encouraging private sector investment.

Question 6

Define transfer payments

Answer 6

Payments to pensioners, the unemployed and subsidies to producers, they are designed to increase income of the vulnerable, and may be used to increase output of some goods/services.

Question 7

Define debt interest repayments

Answer 7

Payments made to the holders of government debt (e.g interest paid to holders of national saving certificates).

Question 8

Define direct tax

Answer 8

Taxes levied directly on the income and wealth of an individual, or an organisation (e.g income tax, corporation tax and NICs), collected by the Inland Revenue.

Question 9

Define indirect tax

Answer 9

Taxes levied on the expenditure of goods/services (e.g VAT and excise duty), collected by The Department of Customs and Excise.

Question 10

Define a progressive tax

Answer 10

Takes a higher percentage of an individual’s income, as income rises (e.g income tax).

Question 11

Define regressive tax

Answer 11

Takes a lower percentage of an individual’s income, as income rises (such as VAT).

Question 12

Define the budget

Answer 12

A financial plan that sets out fiscal policy for the year, announced by the chancellor of the exchequer, Rachel Reeves, in October/November.

Question 13

What was the 2024/25 budget deficit?

Answer 13

£150 billion (5% of GDP).

Question 14

Define budget deficit

Answer 14

When government expenditure exceeds government revenue, meaning the government has to borrow money (+ve PSNCR), to finance the difference, which involves borrowing from the financial sector which contributes to national debt.

Question 15

What is the name of the difference in a budget deficit?

Answer 15

Positive public sector net cash requirement (PSNCR).

Question 16

Define a budget surplus

Answer 16

When government revenue exceeds government expenditure, in which case the difference can be used to repay part of the national debt.

Question 17

Define balanced budget

Answer 17

When government expenditure is equal to government revenue.

Question 18

What is the value of the UK’s national debt?

Answer 18

£2.8 trillion (96% of GDP).

Question 19

Define national debt

Answer 19

(Net debt) is the accumulation of all of the prior budget deficits (£2.8 trillion).

Question 20

Define crowding out

Answer 20

A process by which an increase in government expenditure, crowds out private sector activity by raising the cost of borrowing.

Question 21

Define the golden rule

Answer 21

States that over the business cycle, the government will borrow only to invest (capital expenditure), and not to fund current government expenditure.

Question 22

Define the sustainable investment rule

Answer 22

Required government net debt as a percentage of GDP to be held over the business cycle at a stable and prudent level (approx. 40% of GDP).

Question 23

In what year were the golden rule and the sustainable investment rule abandoned?

Answer 23

2008.