3.1 Fiscal Policy

Question 1

what is fiscal policy ?

Answer 1

the use of the govt expenditure and/or taxation to influence behaviour of economic agents and the level of economic activity within an economy

Question 2

what are the objectives of fiscal policy ?

Answer 2

promote economic stability
reduce market failure
enhance social cohesion

Question 3

what are the two types of fiscal policy ?

Answer 3

expansionary fiscal policy

contractionary fiscal policy

Question 4

what is current government expenditure ?

Answer 4

government spending on day-to-day running costs, e.g. buying raw materials

Question 5

what is capital government expenditure ?

Answer 5

govt spending on capital projects that leaves the govt with assets

Question 6

what is government expenditure used for ?

Answer 6

provide public goods
fill gap in market caused by market failure
nudge consumer behaviour to enhance society

Question 7

what is direct taxation?

Answer 7

taxes are levied on income or profits, e.g. national insurance

Question 8

what is indirect taxation?

Answer 8

taxes are levied on the spending of economic agents such as households and firms, e.g. VAT

Question 9

what is the purpose of taxation?

Answer 9

can create an incentive to work, by govt increasing person allowance they saw an increase in then labour market
changes to system, such as moving to universal credit, may be introduced to reduce risk of poverty trap
can be used to influence pattern of demand. by putting tax on demerit goods like alcohol to persuade consumers to longer purchase them.
also lower rates of corporation tax can stimulate investment

Question 10

what is capital-output ratio?

Answer 10

amount of capital needed to produce a unit of output

Question 11

what is progressive taxation?

Answer 11

proportion of income paid in tax increases as incomes rise

Question 12

what is regressive taxation?

Answer 12

proportion of income paid in tax falls as incomes rise

Question 13

what is proportional taxation?

Answer 13

proportion of income paid in tax stays the same as incomes rise

Question 14

what is average tax rates ?

Answer 14

tax paid divided by taxable income

Question 15

what is marginal tax rates ?

Answer 15

change in tax paid divided by change in taxable income

Question 16

what is the government budget ?

Answer 16

the balance between government receipts and expenditure

Question 17

what is the balanced budget ?

Answer 17

occurs when govt expenditure is equal to taxation receipts

Question 18

what is a budget deficit ?

Answer 18

occurs when govt expenditure dsture outweighs govt taxation receipts

Question 19

what is a budget surplus ?

Answer 19

occurs when govt taxation receipts outweigh govt expenditure

Question 20

what is cyclical deficit ?

Answer 20

budget deficit that occurs over the course of the economic cycle. it appears in a downturn and disappears during an upswing

Question 21

what is a structural deficit ?

Answer 21

budget deficit that persist even when the economy is at full employment

Question 22

what is national debt?

Answer 22

total amount of govt debt based upon accumulated budget deficits

Question 23

what is crowding out ?

Answer 23

government spending crowds out private sector investment by increasing the rate of interest, which increases the cost of borrowing for private firms

Question 24

what is discretionary fiscal policy ?

Answer 24

government planned and autonomous expenditure that involves a policy decision to alter govt expenditure or taxation rates

Question 25

what are automatic stabilisers ?

Answer 25

changes in tax revenue and state pending arising automatically as the economy moves through different stages of the economic cycle

Question 26

draw and explain diagram of expansionary fiscal policy

Answer 26

see diagram sheet

Question 27

draw and explain diagram of contractionary fiscal policy

Answer 27

see diagram sheet

Question 28

what is the gaffer curve and draw it

Answer 28

see gig arm sheet for graph

laffer curve illustrates the optimal rate of tax

Question 29

what are the factors influencing the effect of fiscal policy measures?

Answer 29

Question 30

what is the macroeconomic purpose of fiscal policy ?

Answer 30

manage rates of economic growth
achieve low and stable rates of inflation
maintain balanced budgetary position
Redistribute income