3. Macroeconomic Policy - Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

Using taxation, public spending and government budgetary position to achieve policy objectives.

Question 2

How does government spending and taxation affect the government budget position?

Answer 2

Government spending is equal to taxation its a balanced budget.If government spending is great and taxation there is a budget deficit.If government spending is less than taxation there is a budget surplus.

Question 3

What is public sector borrowing?

Answer 3

Borrowing to finance a deficit, so in the budget deficit you have a positive borrowing requirement in a budget surplus you have a negative borrowing requirement.

Question 4

What is deficit financing?

Answer 4

Deliberately running a budget deficit I’m borrowing to finance it.

Question 5

What is expansionary fiscal policy?

Answer 5

Using fiscal policy to increase our demand.

Question 6

Is contractionary fiscal policy?

Answer 6

Using fiscal policy to reduce aggregate demand.

Question 7

What are the potential difference affects of the different types of fiscal policy?

Answer 7

Expansionary fiscal policy will be inflationary all relational me where as contractionary fiscal policy will be deviation me.

Question 8

What do the inflationary, reflation re or deflationary effects of fiscal policy depend on?

Answer 8

How close the economy is to its normal capacity output – because the short run aggregate supply curve is steeper at one end.

Question 9

What is discretionary fiscal policy?

Answer 9

Discrete changes to government spending, taxation and budgetary position to manage I will get demand levels.

Question 10

What is crowding out?

Answer 10

When an increasing government spending actually just displaces private spending so has little to no impact on aggregate demand overall.

Question 11

What are supply-side fiscal policies?

Answer 11

Policies is that aim to improve the economy is ability to produce and supply goods and services and improve supply-side performance. This may be done through creating incentives to work, save, best and be entrepreneurial.The aim to shift the long run aggregate supply outwards and increased in the tent you normal capacity level.

Question 12

What are the OBR and what did they do?

Answer 12

They are the office for budgeting responsibility created in 2010, the independent analyse the UK public sector finances, produce forecast for the economy, decided government policy has a greater than 50% chance of meeting objectives and George progress by government policy.

Question 13

It is national debt?

Answer 13

A stock of all passed central government borrowing does not been paid back.

Question 14

What is a cyclical budget deficit?

Answer 14

The parts of a budget deficit the D crease in the recession and increase in the boom.

Question 15

What is the cyclical budget surplus?

Answer 15

The surplus that occurs on the upswing of the economic cycle (boom) assuming there isn’t a structural budget deficit.

Question 16

What is the structural budget deficit?

Answer 16

The part of the budget deficit the results from structural changes to the economy affecting government finances and long-term government policy decisions. For example D industrialisation.

Question 17

What are the two main reasons for government taxation and government spending?

Answer 17

Allocation and distribution.

Question 18

How does taxation affect allocation?

Answer 18

You can text the merit goods and subsidise merit goods, thanks finances can be used to fund the public good, you can tax things with negative externalities and subsidise things with positive externalities, you can text monopolies to reduce the wind fall gained.

Question 19

How does taxation affect distribution?

Answer 19

The price mechanism doesn’t provide salaries wages based on the value of certain jobs so if the gov. thinks it needs rectifying they can use taxes to redistribute incomes and reduce the market failure of inequity. Progressive taxation has previously been used to dry and would use in equity and improve the provision of merit goods.

Question 20

What were Adam Smith’s for principles of taxation?

Answer 20

Taxi should be: equitable, economical, convenience and surgeon. He also said they should be efficient and flexible. It’s not always possible to meet all of these but better taxes meet more or them.

Question 21

What does equity mean?

Answer 21

A fair system.

Question 22

Economical mean?

Answer 22

Cheek to collect in relation to revenue and games.

Question 23

What is convenient mean?

Answer 23

Convenient he’s even taxpayers to pay.

Question 24

What does certainty mean?

Answer 24

Taxpayers know roughly how much they must pay.

Question 25

What does efficiency mean?

Answer 25

Thanks should achieve its objectives with minimal on the side-effects.

Question 26

What does flexibility mean?

Answer 26

Easy to change to meet new circumstances.

Question 27

What are the evaluation points of the school policy?

Answer 27

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.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).It depends on other factors in the economy. For example, if the government pursue expansionary fiscal policy, but interest rates rise and the global economy is in a recession, it may be insufficient to boost demand.Bond yields. If there is concern over the state of government finances, the government may not be able to borrow to finance fiscal policy. Sharp tool, target a specific area.

Question 28

What are progressive taxes?

Answer 28

A tax in which the tax rate increases as the taxable amount increases.

Question 29

What are regressive taxes?

Answer 29

A tax in which the tax rate decreases as the taxable amount increases.

Question 30

What are proportional taxes?

Answer 30

Taxes in which the taxed % of income remains constant regardless of the taxable amount.

Question 31

What are the two types of public expenditure?

Answer 31

Current Spending

Capital Spending

Question 32

What are the three types of taxation?

Answer 32

Progressive taxes
Regressive taxes
Proportional taxes

Question 33

What are progressive taxes?

Answer 33

A tax in which the tax rate increases as the taxable amount increases.

Question 34

What are regressive taxes?

Answer 34

A tax in which the tax rate decreases as the taxable amount increases.

Question 35

What are proportional taxes?

Answer 35

A tax in which the taxed % of income remains constant regardless of taxable amount.

Question 36

What is stealth taxation?

Answer 36

This is when the tax burden on consumers increases with any increase in the tax rates (normally as a consequence of economic growth)

Question 37

What are the two types of public sector spending?

Answer 37

Current Spending

Capital Spending

Question 38

What is current spending?

Answer 38

Current expenditure on goods that are bought for final consumption

Question 39

What is capital spending?

Answer 39

Current expenditure on goods that are bought to further the production of other goods in turn.

Question 40

What are automatic stabilisers?

Answer 40

Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle. Automatic stabilisers will influence the size of government borrowing.

Question 41

What are some examples of the influence of automatic stablisers?

Answer 41

In periods of high economic growth automatic stabilisers will help restrict growth to an extent so as not to overheat the economy. E.g. - government spending on unemployment benefits will fall – causing an improvement in government finances. Also, with higher growth, there will be a rise in income tax receipts and corporation tax receipts – this helps to limit the growth rate.
In periods of low economic growth the same process occurs in reverse. E.g. - Tax receipts fall – due to people earning lower incomes. Also, sales tax revenues will fall as people spend less.

Question 42

What is the Laffer Curve?

Answer 42

This is the u-shaped curve on a graph which show the relationship between tax rates and tax revenues - tax revenues increase with rates up to a point but then begin to fall due to avoidance/evasion etc.

Question 43

Give some examples of direct and indirect taxes in the UK.

Answer 43

Indirect Taxes - VAT, Sugar Tax, Duty Taxes, Landfill Tax, Carbon Tax and Business Tax
Direct Taxes - Income Tax, Corporation Tax, Inheritance Tax, National Insurance Tax

Question 44

What are the top five categories for government spending, and what are the figures?

Answer 44

1. Social Protection - £240bn
2. Health - £145bn
3. Education - £102bn
4. Defence - £46bn
5. Housing and Environment - £34bn

Question 45

What are the brackets for income tax rates?

Answer 45

Income tax in the UK is progressive
£11,850 is personal allowance - 0% tax
£11,851 to £46,350 - 20% tax
£46,351 to £150,000 - 40% tax
over £150,000 - 45% tax

Question 46

What are the implications of a large national debt?

Answer 46

High opportunity cost of the debt interest payments
Todays borrowing is tomorrows taxation
Continued austerity
More borrowing to finance the debt interest payments on existing borrowing
Inter-generational equity issues

Question 47

What is the relationship between the budget balance and national debt?

Answer 47

Essentially, if the government have a budget deficit they will have to borrow to finance that budget deficit - this will inevitably increase the national debt.
If the government have a budget surplus they will be able to pay off any existing debt more quickly, reducing the interest payments and they won’t need to borrow to finance any new debts.

Question 48

What is the current national debt in the UK?

Answer 48

£1.5 trn - this is roughly 90% of our GDP

Question 49

What are the causes of the UK’s vast national debt?

Answer 49

1. Brown ran a deficit in a boom
2. The cost of credit crunch bail outs
3. The cyclical nature of tax returns and benefit payments
4. Weak wage growth means tax revenues haven’t risen significantly which would’ve helped pay off the debts

Question 50

What is the potential relationship between Quantitative Easing and national debt?

Answer 50

At the moment the UK have relatively secure bonds - only Germany and France in Europe have securer - this means the bond yields of English bonds are low - QE means demand for UK bonds increases which forces the price up and the yield down - seeing as the government uses bonds to finance the borrowing if QE stopped - bond prices would fall - yields would rise and interest payments on borrowing would rise significantly.