2.6.2 - Demand Side Policies - Fiscal Policy

Question 1

Name the two types of Demand Side Policies

Answer 1

. Fiscal Policy

. Monetary Policy

Question 2

Purpose of Demand Side Policies (Fiscal and Monetary)

Answer 2

. To achieve macroeconomic and microeconomic objectives

Macroeconomic objectives ⁠— economic growth, low stable inflation, low unemployment, etc.

Microeconomic objective ⁠— reducing market failure and improve allocative efficiency

Question 3

Define Fiscal Policy

Answer 3

. Refers to the uses of taxes, government spending and government borrowing

. Used to influence AD and achieve macroeconomic and microeconomic objectives

Question 4

Define Budget Surplus

Answer 4

A budget surplus occurs when tax revenue from taxation exceeds government expenditure

. The government can use this money to pay of the national debt

. An issue with this is that to have a budget surplus, taxations has to be very high (e.g. income tax, VAT) With very high taxation, they may be affects such as a decrease in AD

Question 5

Define Budget Deficit

Answer 5

. Budget Deficit occurs when government expenditure exceeds tax revenue from taxation

. A issue is that the government has to borrow money through loans to finance the national debt. This can affect AD in the long run, as government spending may decrease, due to interest payments over time. Taxation may have to increase affecting growth in the long run

Question 6

Define Balanced Budget

Answer 6

. Government Expenditure = Government Taxation

. Macroeconomic objective

Question 7

Name two types of Fiscal Policy

Answer 7

. Expansionary Fiscal Policy — Aims to increase AD by increasing government spending or cutting taxes. Leads to budget deficit in the short run

. Contractionary Fiscal Policy — Aims to reduce AD by decreasing government spending or increasing taxes. Leads to a budget surplus in the short run

Question 8

Reasons for Expansionary Fiscal Policy

Answer 8

1.) Increase economic growth

2.) Reduce unemployment by increasing AD, especially cyclical unemployment if there was a recession

3. ) Redistribute income through government spending on welfare benefits for example

Question 9

Reasons for Contractionary Fiscal Policy

Answer 9

1. ) Reduce inflation (Demand Pull inflation)
2. ) Reduce Budget Deficit

3.) Redistribute income through increased taxation

Question 10

Define Direct Tax

Answer 10

Tax imposed on an individual or organisation

E.g. Income Tax

E.g. National Insurance is a tax on earnings used for pension, unemployment benefits, healthcare, etc.

E.g. Corporation Tax is a direct tax paid by companies on company profits

Question 11

Direct Indirect Tax

Answer 11

Tax imposed on a good or service

E.g. Value Added Tax (VAT) is charged on goods and services

E.g. Council Tax is paid by homeowners

E.g. Excise Duties are often used for demerit goods such as cigarettes, alcohol,