3.5 Fiscal Policy

Question 1

What is government spending?

Answer 1

The total amount of money spent by the government in a given time period.

Question 2

What are 4 things the government spends money on and why?

Answer 2

• Education: ensures everyone has basic skills
• Healthcare: some may not be able to afford private version
• Defence: provides services that the private sector can’t do
• Debt interest: repays money government has borrowed

Question 3

What is government revenue and what is it used for?

Answer 3

The total amount of money the government receives. Used to finance government spending.

Question 4

What are direct taxes?

Answer 4

Taxes on income and wealth.

Question 5

What are three examples of direct taxes?

Answer 5

1. Income tax
2. National insurance contributions: paid by employer and employee
3. Corporation tax: paid by firms on the profit they have made

Question 6

What is an indirect tax?

Answer 6

A tax on spending which is imposed on the producer but may be passed onto consumers by an increase in price.

Question 7

What are three examples of indirect taxes?

Answer 7

1. Value-added tax (VAT): paid on most goods and services but at different rates
2. Excise duties: taxes on alcohol, tobacco and petrol
3. Customs duties: taxes on imports into the country

Question 8

What is a balanced government budget?

Answer 8

When revenue is equal to government expenditure.

Question 9

What is a budget surplus?

Answer 9

When government revenue is greater than spending.

Question 10

What is a budget deficit?

Answer 10

When government spending exceeds revenue.

Question 11

What are the 5 goverment objectives?

Answer 11

1. Economic growth
2. Low unemployment
3. Low inflation
4. Improved balance of payments
5. Fair distribution of income

Question 12

What is Fiscal Policy?

Answer 12

The use of taxation and government spending to affect the level of economic activity.

Question 13

What effects will increased government spending have on economic objectives?

Answer 13

• Budget deficit
• More employment
• Higher economic growth
• Increased inflation
• Fair distribution of income

Question 14

What effects will decreased government spending have on economic objectives?

Answer 14

• Budget surplus
• Low inflation
• Low economic growth
• Imports fall

Question 15

How do you calculate tax paid on a good/service?

Answer 15

Cost of good/service × tax multiplier

Question 16

What is the effect of a rise in income tax on markets?

Answer 16

Worker’s disposable income falls, so some may quit their jobs. Lower income leads to a fall in demand for non-essential goods and services.

Question 17

What is the effect of a rise in income tax on the economy?

Answer 17

Due to lack of demand, economic growth and inflation decrease. This happens as firms lower output and let off some workers as they are not needed.

Question 18

What is the effect of a fall in corporation tax on markets?

Answer 18

Firms keep more profits and invest more, leading to better quality goods. People are attracted to this and demand rises.

Question 19

What is the effect of a fall in corporation tax on the economy?

Answer 19

As demand rises, businesses expand leading to higher employment (as they need more workers) and economic growth. Balance of payments is improved as people are buying from their country.

Question 20

What is the effect of a rise in excise duties on markets?

Answer 20

There would be a fall in demand on the good depending on the PED. If it was on petrol, it could lead to switching to electric cars.

Question 21

What is the effect of a rise in excise duties on the economy?

Answer 21

The reduced demand will lead to a fall in negative externalities. It could also reduce imports and improve balance of payments if it is a good like petrol.

Question 22

What are three markets that government spending can affect? Give examples.

Answer 22

1. The labour market as the government employs many workers. Eg: teachers.
2. It can impact the construction market if they spend money on infrastructure like new hospitals and schools.
3. Specific markets such as providing subsidies to small businesses.

Question 23

What are two benefits of fiscal policy?

Answer 23

1. Reduces unemployment and increases economic growth through cutting taxes/increasing spending.
2. Fiscal policy is faster acting and has direct affects on the economy.

Question 24

What are three costs/unfavourable effects of fiscal policy?

Answer 24

1. Consumers may spend rather than save their extra income, so the economy might not grow as much.
2. Firms and consumers may spend extra money on imports, worsening balance of payments.
3. Inflation may rise if supply cannot keep up with demand.

Question 25

What are the opportunity costs of fiscal policy?

Answer 25

• If the government spends more on one area, it will spend less on another area
• If the government cuts taxes, it has to spend less or accept a budget deficit

Question 26

How does the government redistribute income and wealth?

Answer 26

Through progressive taxes or reducing indirect taxes.

Question 27

What is progressive taxation?

Answer 27

Taxes that take a greater percentage of tax, the higher the income.

Question 28

What are two benefits of redistributing income and wealth?

Answer 28

1. Reduces inequalities as poorer people are better off.
2. Increases opportunities for the poor, such as having equal chances in work and healthcare.

Question 29

What are three costs of redistributing income and wealth?

Answer 29

1. Higher taxes can deter international investment and make the wealthy move abroad.
2. People may seek ways to avoid paying tax or evade taxes (illegal).
3. Higher taxes reduce the incentive to work, so people might stay in the same job or live on benefits.