3.6 - Government Management of the Economy - Fiscal Policy

Question 1

Define fiscal policy.

Answer 1

fiscal policy is where the government uses taxation and government expenditure to achieve its economic objectives.

Question 2

List the 5 objectives of fiscal policy.

Answer 2

• Sustainable economic growth
• Low unemployment
• External balance on the current account balance of payments
• Low inflation or price stability
• Achievement of a more equitable distribution of income

Question 3

List the 4 sources of government revenue.

Answer 3

• Direct taxation
• Indirect taxation
• Profit from state run organizations
• Asset sales (government privatizes industries)

Question 4

Elaborate on government borrowing.

Answer 4

Government borrowing is an important part of fiscal policy because it is needed when expenditure is greater than taxation.

This is financed by selling bonds in the financial markets.

Question 5

Define budget deficit.

Answer 5

On year of government borrowing.

Question 6

Define national debt.

Answer 6

Accumulated government borrowing over time.

Question 7

List the three types of government expenditure.

Answer 7

• Current expenditure - day to day such as wages.
• Capital expenditure - Projects financed by the government.
• Transfer expenditure - welfare payments.

Question 8

Define the Keynesian multiplier.

Answer 8

The ratio of a change in government expenditure to a change in national income.

A multiplier effect occurs when a change injects brings a greater proportionate change in national income.

Question 9

State the formula for the multiplier

Answer 9

Multiplier = change in national income/change in injections

Question 10

List the stages of the multiplier effect.

Answer 10

• 4Bn is paid to the factors of production to build the rail line.
• The 4Bn will be spent on wages paid to labour and the income generated by money paid to firms that supply construction equipment, raw materials and services.
• The 4Bn income paid to the factors of production to build the rail line will be partly spent as consumption expenditure and the rest will be leaked out to the economy in the form of savings, tax and imports.
• The amount of the 4Bn spent will depend on the MPC, MPS, MPT, and MPM.
• The $2Bn of consumption spending by households will be on buying goods and services produced by firms and this will become income for the factors of production employed by these firms.
• This process continues with each spending round getting smaller and smaller until they no longer afford to the total national income.