13 - Fiscal Policy and Supply-Side Policies

Question 1

What are supply side policies?

Answer 1

Supply-side policies are government policies/attempts to increase productivity and increase efficiency in the economy. If successful, they will shift aggregate supply (AS) to the right and enable higher economic growth in the long-run.

Question 2

What are the two types of supply side policies?

Answer 2

Free-market supply side policies - involve policies to increase competitiveness and free-market efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.

Interventionist supply side policies - involve government intervention to overcome market failure. For example, higher government spending on transport, education and communication.

Question 3

Draw the long-run aggregate supply (LRAS) for supply policies?

Answer 3

Question 4

Explain this LRAS curve fore supply side policies.

Answer 4

Question 5

What are supply side improvements? NOT the same as supply side policies.

Answer 5

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

Question 6

Draw the Laffer Curve.

Answer 6

Question 7

What does the price level mean on diagrams?

Answer 7

Price level is the average of current prices across the entire spectrum of goods and services produced in an economy.

Question 8

What are the advantages of supply side policies/increasing productivity?

Answer 8

1. Economic growth (increasing LRAS rise in national output without causing inflation).
2. Lower Inflation - Shifting AS to the right will cause a lower price level. By making the economy more efficient, supply-side policies will help reduce cost-push inflation. For example, if privatisation leads to more efficiency it can lead to lower prices.
3. Lower Unemployment -Supply-side policies can contribute to reducing structural, frictional and real wage unemployment and therefore help reduce the natural rate of unemployment.
4. Improved trade and Balance of Payments - By making firms more productive and competitive, they will be able to export more. This is important in light of the increased competition from an increasingly globalised marketplace

Question 9

What are the examples of Free-Market supply-side policies?

Answer 9

• Privatisation
• Deregulation
• Tax Cuts
• Remove regulations / red tape
• Flexible Labour markets
• Free trade agreements
• Reduce Welfare Benefits

Question 10

How is Privatisation a Free-Market Supply Side Policies?

Answer 10

This involves selling state-owned assets to the private sector. It is argued that the private sector is more efficient in running businesses because they have a profit motive to reduce costs and develop better services

Question 11

How is Deregulation / Red Tape a Free-Market Supply Side Policies?

Answer 11

This involves reducing barriers to entry to allow new firms to enter the market. This will make the market more competitive. For example, BT used to be a monopoly in telecommunications, but now several firms compete for our business. Competition tends to lead to lower prices and better quality of goods/service.

The difficulty is that not all industries are amenable to competition. For example, power generation and water supply is a natural monopoly. Privatising and deregulating these industries tends to create a private monopoly who can charge higher prices.

Red Tapes - Planning restrictions can make it difficult for firms to expand and invest in new capacity. Reducing red tape and levels of bureaucracy reduce firms’ costs and encourage an environment conducive to encouraging investment.

Question 12

How is Tax Cuts a Free-Market Supply Side Policies?

Answer 12

It is argued that lower income tax rates increase the incentives for people to work harder, leading to an increase in labour supply and more output. Similarly, a cut in corporation tax gives firms more retained profit they can use for investment.

However this is not necessarily true, lower taxes do not always increase work incentives (e.g. if income effect outweighs substitution effect). Firms may not invest the increased profit but give to shareholders or save

Question 13

How is Deregulating the Labour Market a Free-Market Supply Side Policies?

Answer 13

Labour markets can be deregulated through policies such as

Make it easier to hire and fire workers
Enable zero-hour contracts which allow firms to employ workers when demand is greater.
If it is cheaper to hire and fire workers, the argument is that it encourages firms to take on workers in the first place, creating more employment opportunities.

However, more flexible labour markets can cause increased uncertainty and lower productivity.

Question 14

How is reducing the power of Trades Unions a Free-Market Supply Side Policies?

Answer 14

This can involve legislation which reduces the ability of trade unions to go on strike. This should:

Increase efficiency of firms e.g. less time lost to strikes.
Reduce real wage unemployment. (if labour markets are competitive)

Question 15

How is Encourage Immigration a Free-Market Supply Side Policies?

Answer 15

Free-movement of labour can enable firms to fill labour shortages – whether they are skilled jobs, in construction and engineering or low-skilled jobs such as fruit picking. Liberal immigration policies make labour markets more flexible and in economic booms – help firms keep up with growing demand. This can prevent wage inflation and enable firms to increase productive capacity.

Question 16

How is Increased Education and Training a Interventionist Supply Side Policies?

Answer 16

Better education can improve labour productivity and increase AS. Often there is under-provision of education in a free market, leading to market failure. Therefore the government may need to subsidise suitable education and training schemes to fill vacancies in the labour market.

However govt intervention will cost money and require higher taxes, It will take time to have an effect and the government may subsidise the wrong types of training.

Question 17

How is improving Transport and Infrastructure a Interventionist Supply Side Policies?

Answer 17

With transport, there is usually a degree of market failure – congestion and pollution. Government spending on improved transport links can help reduce congestion and overcome this market failure. Improved transport provision helps reduce the cost of transport and will encourage firms to invest. Transport bottlenecks on the road, rail and air – are often cited as a major stumbling block for the UK economy.

However, in a crowded country like the UK, it can be difficult to increase transport capacity, especially in London.

Question 18

How is Housing Supply a Interventionist Supply Side Policies?

Answer 18

Building affordable council homes in expensive areas can make it easier for workers to move and find jobs in expensive areas reducing geographical immobility. Firms can suffer from labour shortages in areas that have become very expensive to live in.

Question 19

How is improved healthcare a Interventionist Supply Side Policies?

Answer 19

Business can face substantial costs from time lost to ill-health. Health care spending which improves a nation’s health can improve labour productivity. Improved health can also come from discouraging unhealthy habits. For example, tax on cigarettes, alcohol and sugar can reduce health care costs associated with drunkenness, obesity and polluted environments.

Question 20

What are the examples of the Interventionist Supply-Side Policies?

Answer 20

• G Spending on infrastructure
• G spending on education and training
• Housing Supply
• Health Spending

Question 21

What are the limitations of supply side policies?

Answer 21

Cost, supply side policies are very expensive.

Supply-side policies can be counter-productive. For example, flexible labour markets may reduce costs for business – but if they cause job-insecurity, workers may become demotivated and labour productivity stagnates.

Time. All supply-side policies take a long time to have an effect. Some policies, such as education spending may not influence the economy for 20-30 years.

No guarantee of success

Question 22

What is Fiscal Policy?

Answer 22

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

Question 23

What is the difference between:
1. Balanced Budget
2. Budget Deficit
3. Budget Surplus

Answer 23

1. G = T
2. G > T
3. G < T

G= Government Spending
T= Taxation (Government Revenue)

Question 24

In the UK what do the Government spend most of their budget on?

Answer 24

In the UK, the government spends most of their budget on pensions and welfare benefits, followed by health and education. Income tax is the biggest source of tax revenue in the UK.

Question 25

What fiscal policy’s aim?

Answer 25

Fiscal policy aims to stimulate economic growth and stabilise the economy.

Question 26

What is expansionary fiscal policy?

Answer 26

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

Question 27

What is contractionary fiscal policy?

Answer 27

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

Question 28

Draw the Diagram showing effect of expansionary fiscal policy?

Answer 28

Question 29

Draw the Diagram showing effect of contractionary fiscal policy?

Answer 29

Question 30

What does Fiscal Policy directly affect in Aggregate Demand?

Answer 30

G (Government Spending more or less)

The other C, I, X and I maybe be a secondary change from the change in G.

Question 31

Explain this expansionary fiscal policy diagram.

Answer 31

Question 32

Explain this contractionary fiscal policy diagram.

Answer 32

This involves decreasing AD.
Therefore the government will cut government spending (G) and/or increase taxes. Higher taxes will reduce consumer spending (C)
Tight fiscal policy will tend to cause an improvement in the government budget deficit.

Question 33

Explain this expansionary fiscal policy diagram, simply?

Answer 33

This involves increasing AD.
Therefore the government will increase spending (G) and cut taxes (T). Lower taxes will increase consumers spending because they have more disposable income (C)
This will tend to worsen the government budget deficit, and the government will need to increase borrowing, to make up for this.

Question 34

What is supply-side fiscal policy?

Answer 34

Changes in government spending and taxation to affect aggregate supply. It’s used to increase the economy’s ability to produce and supply goods through creating incentives to work, save, invest and be entrepreneurial.

Question 35

Explain briefly how fiscal policy can affect aggregate supply, AS?

Answer 35

The government could reduce income and corporation tax to encourage spending and investment.

The government could subsidise training or spend more on education. This lowers costs for firms, since they will have to train fewer workers. Better funding of STEM education.

Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.

Governments could spend more on infrastructure, such as improving roads and schools.

Question 36

How can fiscal policy affect SHORT RUN aggregate supply?

Answer 36

Question 37

How can fiscal policy affect LONG RUN aggregate supply?

Answer 37

Question 38

How government spending and taxation can affect the. pattern of economic activity?

Answer 38

• Alter the prices of goods and services (taxes and subsidies)
• Change Consumption patters.
• Promote investment
• Provision of goods such as roads and schools

Question 39

Draw diagram to show a successful supply-side fiscal policy.

Answer 39

Question 40

Explain this successful supply-side fiscal policy.

Answer 40

Question 41

What are the types of public expenditure?

Answer 41

• Social Protection, benefits/pensions
• Debt
• Education
• Transport
• Defence
• Hosuing
• Environment

Question 42

Answer 42

Question 43

What are the main forms of revenue (mostly taxation) for the UK government?

Answer 43

1. Income Tax (main revenue earner)
2. VAT
3. Corporation tax
4. National Insurance Contributions

Question 44

What are direct taxes, with examples?

Answer 44

Direct taxes are imposed on income and are paid directly to the government from the tax payer. Consumers and firms are responsible for paying the whole tax to the government.

Examples include income tax, corporation tax, NICs (national insurance contributions) and inheritance tax.

Question 45

What are indirect taxes?

Answer 45

Indirect taxes are imposed on expenditure on goods and services, and they increase production costs for producers. This increases market price and demand contracts.

Question 46

What are the two types of indirect taxes?

Answer 46

1. Ad valorem taxes are percentages, such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK.
2. Specific taxes are a set tax per unit, such as the 58p per litre fuel duty on unleaded petrol. EXCISE duties, sugar tax, alcohol/tobacco tax and petrol tax

Question 47

What is budget deficit?

Answer 47

A government has a budget deficit when expenditure exceeds tax receipts in a financial year.

Question 48

What is a budget surplus?

Answer 48

A government has a budget surplus when tax receipts exceed expenditure.

Question 49

What is the difference between debt and deficit?

Answer 49

The debt is the accumulation of the government deficit over time. It is the amount the government owes.

The deficit (or surplus) is the difference between expenditure and revenue at any one point.

Question 50

What is proportional tax?

Answer 50

A proportional tax has a fixed rate for all tax payers, regardless of income. It is also called a flat tax.
For example, all tax payers might have to pay 20% income tax rate.
The incidence of taxes is equal, regardless of the ability of the taxpayer to pay.

Question 51

What could proportional taxation cause?

Answer 51

It could encourage people to earn higher incomes, because the rate of tax paid does not increase.

Government may lose revenue, charging millionaires the same as people on 20K.

Question 52

What is progressive taxation?

Answer 52

A progressive tax has an increase in the average rate of tax as income increases. As income increases, the proportion of income taxed increases.

Question 53

What is a UK example of a progressive tax being set, and explain it?

Answer 53

For example, in the UK income tax is progressive. People have a personal allowance of £10,600 where tax is not paid. For incomes below £31,785, people only pay the basic rate of 20%. For incomes between £31,786 and £150,000, people pay the higher rate of 40%. Above this, a 45% rate is paid.

Question 54

What effect can progressive taxation have?

Answer 54

This should help reduce inequality, because those on lower incomes pay less tax. The tax is based on the payer’s ability to pay. Higher income households are more able to pay higher rates of tax than lower income households.

Reduce inequalities in the distribution of income.
Reduces spending power of the rich, while increasing the spending power of the poor.

Question 55

What type of tax is generally more progressive and which are more regressive?

Answer 55

Generally, direct taxes are more progressive

Generally, indirect taxes are more regressive

Question 56

What are regressive taxes?

Answer 56

A regressive tax does not relate to income, but means those on lowest incomes have a higher average rate of tax. In other words, the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes

Question 57

Simply show the difference between regressive, progressive and proportional taxes

Answer 57

Regressive Tax - When the proportionate of income paid in tax falls as income increases

Proportional Tax - when the proportion of income paid in tax stays the same as income increases.

Progressive Tax - when the proportion of income paid in tax rises as income rises.

Question 58

What are some examples of regressive taxes

Answer 58

VAT
Sugar Tax
Alcohol Tax
Tobacco tax

Question 59

What is the specific problem with regressive taxes like tobacco, alcohol and sugar?

Answer 59

These taxes are designed to reduce consumption of the demerit goods, alcohol, sugar, tobacco, fall heavily on the poor.

Low income families more likes to eat cheap fast food which is high in sugar whereas a healthy diet like the high incomes families. So sugar tax will affect low income families more.

Low paid- lose more of their income to smoking and alcohol then rich as they are addictive so they will still buy the same amount. More tax as more of their income is going towards buying smokes.

High pad may be more educated on the danger of these demerit goods, so will not consume. Low income less educated people may not have this information so will consume more.

Question 60

What effect can regressive taxes have?

Answer 60

Create more inequalities, and larger distribution income and wealth.

Question 61

How do you calculate average tax rate?

Answer 61

Question 62

How do you calculate marginal tax rate?

Answer 62

Question 63

Answer 63

Question 64

What does levy taxes mean?

Answer 64

Government charging people taxes.

Levy = charge

Question 65

What does the principles of taxation mean (canon of taxation)?

Answer 65

A criterion used for judging whether tax is good or bad. These ‘Canons of Taxation’ were first developed by Adam Smith.

Question 66

What are the principles of taxation?

Answer 66

1. Economy - The cost of collecting the tax must be low relative to the yield
   2) Certainty - The timing and quantity paid must be obvious to the tax payer
   3) Convenience - The timing and way of paying should be convenient for the tax payer
   4) Equity - Taxes should be fair and imposed depending on the ability to pay. Taxes should also be equitable. (Progressive Taxation).
   5) Efficiency - The tax should not limit efficiency, and there should only be a minimum loss of efficiency.
   6) Flexibility - change with new circumstances. Adjust with inflation and tax system to be compatible with other countries (for UK that’s with other European countries).

Question 67

What is current government expenditure?

Answer 67

Current government expenditure is spending which recurs. This is on goods and services which are consumed and last for a short period of time. For example, it could be on drugs for the health service.

Question 68

What is capital government expenditure?

Answer 68

Capital government expenditure is spent on assets, which can be used multiple times. For example, it could be government expenditure on roads or building a school.

Question 69

What are transfer payments?

Answer 69

Transfer payments are welfare payments from the government. They aim to provide a minimum standard of living for those on low incomes. No goods or services are exchanged for transfer payments.

Question 70

What are some example of transfer payment in the UK?

Answer 70

o Job Seeker’s Allowance
o Income Support
o Child benefit
o The state pension

Question 71

Why does the government use transfer payments?

Answer 71

These are in place to ensure people have a basic standard of living and to help reduce the level of inequality in society. Transfer payments are a means for the government to redistribute income from the rich to the poor.

Question 72

What is national debt?

Answer 72

The national debt is the accumulation of the government deficit over time. It is the total amount the government owes.

Question 73

What is the effect of the government running a deficit on debt?

Answer 73

If the government is continuously running a deficit, the size of the debt increases.

If the government reduces the size of their deficit, the rate of increase of the total debt is slower, but the debt is still increasing.

Question 74

Answer 74

Question 75

What is the cyclical budget deficit?

Answer 75

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

This is a temporary deficit, which is related to the business cycle. A deficit might occur during recessions, when governments increase spending to stimulate the economy.

Question 76

What is the structural budget deficit?

Answer 76

Not related to the state of the economy. Will not disappear when the economy recovers

This is a deficit which is due to an imbalance in the revenue and expenditure of the government, so it exists at every point in the business cycle.

Question 77

Answer 77

Question 78

Why would a government use expansionary fiscal policy?

Answer 78

1. Boost Growth - AD will increase so growth will increase
2. Reduce employment - shift in AD to the right more goods and services being produced in the economy, firms need more workers to make the more goods and services demanded. Labour Derived Demand
3. Increase inflation - AD shifts to the right makes more demand pull inflation in theory, if inflation is below target inflation.
4. Redistribute income - government spending on welfare and benefits helping people. Affordable housing and easier and faster transport links. Lower regressive taxation.

Question 79

Why would a government use contractionary fiscal policy?

Answer 79

1. Reduce Inflation - cool economy down, reduces Demand Pull inflation as AD shifts to the right. Not Job of government.
2. Reduce Budget Deficit/National Debt - reduce the amount of borrowing the government is doing, and therefore reduce the amount of debt. Main Reason.
3. Redistribute Income - higher tax on the rich, and then redistribute this income gained to poor people in income top ups.
4. Reduce Current Account Deficit - AD is reduced, incomes will lower so then the will be less SUCKING in of IMPORTS, then reducing trade deficit.

Question 80

Why is the reduction and increase in inflation in theory a reason for Fiscal Policy but not in reality?

Answer 80

As it is the job of the central bank to control inflation instead of the government, not their job.

Question 81

Pros of contractionary fiscal policy?

Answer 81

1) Confidence in Government Fiances - reduce budget deficit and national debt promotes confidence of government paying back its bonds, so people see them as less risky and will buy more government bonds. And over time can issue lower interest rates on these bonds as people will still buy them as they know there less risk. Making it cheaper for governments to borrow overtime and then cheaper for government to spend. Also attract inward FDI, good for growth.

2) Flexibility with fiscal policy - if national debt less spending on debt interest, even if they are able to spend more. If emergency health care funding say a disease breaks out then they have the fiscal ability to respond to this.

3) Less Crowding Out/X-inefficiency - less détraction of private sector investment, as there is less pressure of demand so interest rates will decrease.

4) Lower Inflation and CA deficit - reduction demand pull inflation.

Question 82

Cons of contractionary fiscal policy?

Answer 82

1. Demand side shock, into a recession as there will less growth and more unemployment as AD decreases.
2. Cut government spending on public services like health care could mean long wait time to see a GP or operation. Less doctors or nurses people living in pain. Less spending on education, larger class sizes and poorer teaching. Maybe special education can not be provided as it is too expensive. Lower spending on infrastructure, public transport people rely on it to get around. Lower welfare spending, who rely on it. MACRO harm LRAS and stop productivity and competitiveness and long term growth.
3. Stops future higher returns of government spending. Cutting government stops long term growth which would have increased government revenue from more products/services being provided.
4. Lower incentives - lower incentive to work, brain drain, tax evasion and avoidance will increase with higher taxes. (Laffer Curve) Also reduce incentive to invest.
5. Risk of income inequality if welfare tax is cut.

Question 83

Evaluation of Fiscal Policy?

Answer 83

1. It depends on the size of the multiplier. If the multiplier effect is large, then changes in government spending will have a bigger effect on overall demand.
2. It depends on the state of the economy. Fiscal policy is most effective in a deep recession where monetary policy is insufficient to boost demand. In a deep recession (liquidity trap). Higher government spending will not cause crowding out because the private sector saving has increased substantially. See: Liquidity trap and fiscal policy – why fiscal policy is more important during a liquidity trap.
3. Bond yields. If there is concern over the state of government finances, the government may not be able to borrow to finance fiscal policy. Countries in the Eurozone experienced this problem in the 2008-13 recession.

Question 84

Draw diagram of the expamsionary fiscal policy with a multiplier effect?

Answer 84

(Can be the same for contractionary fiscal policy AD move left and AD multiplier moves further left)

Question 85

Explain how the multiplier effect works in this expansionary fiscal policy diagram.

Answer 85

Question 86

What are the pros of national debt and rising budget deficits?

Answer 86

1) Higher growth and lower unemployment - especially in a recession a deficit is required to keep growth taking place and people standard of living not dropping. Boost

2) Solving Market Failure - government spending on education, healthcare, infrastructure, merit goods and public services.

3) Redistribution of Income - government spending on benefits, education and healthcare. Lower regressive taxation.

4) Tax cuts - incentive for people to work, increase entrepreneurship, productivity and immigration which boost LRAS. Also higher tax revenue from this.

5) Crowding In - more government spending can promote private sector investment and spending. As AD has increased so there is more demand and firms see this so will long term growth.

Question 87

What are the cons of national debt and rising budget deficits?

Answer 87

1) Determination of Government Finances - lower credit ratings on government bonds (the risk of the government repaying your money) the higher the risk the less likely people are too buys the government bonds. A larger debt of budget deficit promotes risk. These means governments will have to offer a higher interest or coupon rate on the government bonds so people will buy them. This increases the cost of the government borrowing in the future. This means it will cost the government more to fund public services like health care. Burden of future generations. Retract FDI as confidence in the governement finances are low.

2) Demand Pull inflation from increasing AD.

3) Worsening of ÇA deficit, more demand will increase the demand for imports. And higher incomes increase spending on imports.

4) CROWDING OUT - harms private sector investment, from increasing taxation there is less income to be spent in investment. Unsustainable growth of the private sector relying on government spending.

5) X inefficiency - governments are no profit motivation and lack of information, can cause governments to spend to much money on policies.

Question 88

What is the evaluation of national debt and rising budget deficits?

Answer 88

1. The state of government financiers right now. If the government is already in massive debt then the cons are gonna be massively outweighed by the pros.
2. Short run and long run impacts. Short run debt could lead to long term return like crowding in.
3. Stage of Economic cycle - necessary in a recession (Keynesian’s) as we need to return the economy back to is full employment is necessary, so should take money. But taking on debt in a boom will cause inflation and should be a time to mend public debt.
4. Consumer/Business confidence - Cuts in taxation having an effect on more spending and investment is reliant on the consumers and buisnesses having confidence in the economy.

Question 89

What is the OBR and what does it do simply?

Answer 89

Office for Budget Responsibility.

The OBR provides analysis of the UK’s finances.

Question 90

What does the OBR do in depth?

Answer 90

They produce 5-year forecasts for the economy, including the impact of tax and spending changes announced in the Budget.

They judge the government’s performance against its fiscal targets. These are to balance the budget 5 years ahead and have net public sector debt falling in 2015-16. They assess the likelihood of the government meeting the targets.

They scrutinise tax and welfare spending measures.

They also assess how sustainable public sector finances are in the long run.

Question 91

The significance of differing levels of public expenditure as a proportion of GDP on Productivity and growth?

Answer 91

Governments can spend money on supply-side policies to improve human capital and boost long run growth. Human capital is important for competitiveness. The government could invest in youth apprentice schemes, for example, to make people more employable and productive from a young age.

Education and training can mean higher value products can be made and productivity can be improved.

Fiscal policy aims to stimulate economic growth and stabilise the economy. The government could influence the size of the circular flow by changing the government budget, and spending and taxes can be targeted in areas which need stimulating.

Question 92

The significance of differing levels of public expenditure as a proportion of GDP on Level of Taxation?

Answer 92

The tax rate might increase if government debts get too high. If confidence is lost in the government’s ability to repay the debt, governments might have to raise interest rates to encourage investors to buy bonds, so that they can finance the debt. It could lead to higher taxes and austerity measures, especially if the debt becomes uncontrollable.

In the UK, the size of government spending is about 40% of GDP. This means that citizens in the UK have a lower tax burden than in a country such as Switzerland, where government spending is 60% of GDP.

Question 93

The significance of differing levels of public expenditure as a proportion of GDP on CROWDING OUT?

Answer 93

Governments might have to fund its spending using taxes or running a budget deficit. This leaves fewer funds in the private sector for firms to use, since the government is borrowing money, which crowds them out of the market.

When the government borrows a lot of money, interest rates might increase. This discourages spending and investment among the private sector.

This reduction in private sector investment is the ‘crowding out’ of investment.

Sometimes, crowding out refers to the government provision of a good or which would otherwise be provided by the private sector.

Question 94

The significance of differing levels of public expenditure as a proportion of GDP on Equality and living standards?

Answer 94

Progressive taxes could be used to reduce inequality, since the poorest in society pay the smallest proportion of their income as tax. Redistributive policies and welfare payments, such as Income Support, could be used to help those on the lowest incomes.

Also, government spending on housing and the provision of public services, such as education and healthcare, helps provide equal opportunities for people from all income backgrounds. This ensures that even those on low incomes can afford a good standard of healthcare and education.

By providing these services, the government ensures that all members of society can achieve a minimum standard of living.

Question 95

What are The consequences of budget deficits and surpluses for macroeconomic performance.

Answer 95

A fiscal deficit could be inflationary if it increases AD.

More government spending could lead to crowding out of the private sector. This leaves fewer funds in the private sector for firms to use, since the government is borrowing money, which crowds them out of the market.

It could lead to increased interest rates. This is because the government has to offer investors an attractive rate in order to encourage them to buy the debt.

Question 96

What is The significance of the size of the national debt

Answer 96

The cost of borrowing could increase, since by borrowing money, the government is increasing demand for credit in the economy.

If confidence is lost in the government’s ability to repay the debt, governments might have to raise interest rates to encourage investors to buy bonds, so that they can finance the debt.

It could lead to higher taxes and austerity measures, especially if the debt becomes uncontrollable.