Topic 2.3 - How the government manages the economy

Question 1

What is fiscal policy

Answer 1

Refers to all the choices the government makes when it comes to earning money and the way it spends money

Question 2

What is fiscal policy used for

Answer 2

Used by the government to change the level of government spending and taxation in order to influence the level of demand within the economy

Question 3

Why and how would the government increase total demand

Answer 3

Might do this to stimulate economic growth
- They could increase spending to encourage higher employment
- Or they might reduce taxes to give individuals higher disposable income

Question 4

Why and how would the government decrease total demand

Answer 4

Might do this to reduce inflation or improve a budget deficit
- They could decrease spending
- Or they might increase taxes to reduce customers’ disposable income

Question 5

How can fiscal policy be used to achieve economic growth

Answer 5

A reduction in taxes gives consumers more disposable income, raising consumer spending, total demand and therefore the total supply. The greater the supply the higher the GDP and the higher the economic growth

Question 6

How can fiscal policy be used to achieve full employment

Answer 6

A reduction in income tax gives workers more disposable income so more money will be spent. Increased consumer spending leads to higher output, which increases the demand for labour and so therefore more job opportunities.

Question 7

How can fiscal policy be used to achieve inflation and price stability

Answer 7

Taxes can be raised to reduce individuals’ disposable income and therefore reduce the total demand. If demand drops, then the level of demand-pull inflation will fall

Question 8

How can fiscal policy be used to achieve balance of payments

Answer 8

During a budget deficit, taxes can be increased to reduce consumers’ disposable income, reducing the number of imports.

Question 9

How can fiscal policy be used to achieve distribution of income

Answer 9

The reduction of taxes can increase disposable income so more people have more money.

Question 10

Define a balanced budget

Answer 10

It means that the government expenditure is equal to the government revenue.

Question 11

Consequences of operating a budget surplus

Answer 11

Tight fiscal policy
Lower economic growth
Individuals struggle paying off debt
Less money is borrowed
Government spending will be reduced which might affect public infrastructure

Question 12

Consequences of operating a budget deficit

Answer 12

Increase in national debt
Increase in total demand
Increased quality and quantity of public services and infrastructure
Inflation

Question 13

What is the monetary policy

Answer 13

It aims to influence the level of demand in the economy by adjusting the base interest rate, and other monetary tools and manage the supply of money

Question 14

Main objective of the monetary policy

Answer 14

A low and stable rate of inflation

Question 15

What are the other monetary tools

Answer 15

Quantitative easing and Quantitative tightening

Question 16

What is Quantitative easing

Answer 16

Where the bank of England buys bonds mainly from the government using newly created digital money

Question 17

What does Quantitative easing do

Answer 17

It means there is more money in the economy which keeps interest rates low and promotes growth and employment

Question 18

What is Quantitative tightening

Answer 18

When the bank of England sells bonds or doesn’t re-invest funds from maturing bonds

Question 19

What does Quantitative tightening do

Answer 19

It means there is less money in the economy, raising interest rates and lowering inflation

Question 20

How can monetary policy be used to achieve full employment

Answer 20

Lower interest rates mean that the cost of borrowing is reduced. This means that people spend more money and invest more. This increases the level of demand and GDP and decrease cyclical unemployment

Question 21

How can monetary policy be used to achieve economic growth

Answer 21

Lower interest rates mean that the cost of borrowing is reduced. This means that people spend more money and invest more. This increases total demand and GDP and therefore stimulates economic growth

Question 22

How can monetary policy be used to achieve balance of payments

Answer 22

A low interest rate would weaken the exchange rate which increases the international competitiveness of exports as they become cheaper. However, it does mean the imports become more expensive which could counteract the increased revenue from increased exports.

Question 23

What are supply side policies

Answer 23

Government policies used to enable an increase in the total supply of goods and services within the economy. This might involve improving the quality and/or quantity of goods and services, or increasing the productive capacity of an economy

Question 24

Name supply side policies

Answer 24

1. Investment in education and training
2. Reducing direct taxes
3. Reducing co-operation tax
4. Trade union reform
5. Privatisation and deregulation

Question 25

How can supply side policies be used to achieve economic growth

Answer 25

If the use of supply-side policies is successful then productivity and output should rise. Increased quantity and quality of output leads to a larger GDP for the economy and therefore higher economic growth

Question 26

How can supply side policies be used to achieve full employment

Answer 26

If supply side policies are used to improve training and education then levels of unemployment will fall. This is because it will be easier to move between jobs as individuals have more transferrable skills

Question 27

How can supply side policies be used to achieve inflation and price stability

Answer 27

Privatisation and deregulation can encourage increased competitiveness which can reduce costs and therefore counter inflation. The power of trade unions can be reduced so that it is harder for workers to ask for higher wages which counters cost push inflation