4.2.5 fiscal and supply side policies

Question 1

what is fiscal policy

Answer 1

manipulation of government spending taxation and the budget balance to achieve macro and micro objectives

Question 2

3 macro functions of fiscal policy

Answer 2

increase AD
reduce inflation
reduce national debt

Question 3

3 micro functions of fiscal policy

Answer 3

reduce consumption of demerit goods
redistribute income
public services financing

Question 4

expansionary fiscal policy

Answer 4

aims to increase aggregate demand by reducing taxes and increasing gov spend

Question 5

contractionary fiscal policy

Answer 5

aims to decrease aggregate demand by increasing taxes and decreasing gov spend

Question 6

3 ways fiscal policy can influence aggregate supply

Answer 6

reduce taxes to encourage investment
subsidise training
increased spend on infrastructure projects

all lead to a more productive workforce

Question 7

3 ways fiscal policy influences the level of economic activity

Answer 7

reduce income tax leads to economic growth
reduce corporation tax can reduce unemployment
taxes and spend can control inflation

Question 8

public expenditure

Answer 8

spending by the government on the needs and wants of its citizens

Question 9

3 types of public expenditure

Answer 9

current expenditure
capital expenditure
transfer payments

Question 10

current expenditure

Answer 10

regular day to day spending such as public sector salaries

Question 11

capital expenditure

Answer 11

spending on fixed assetts that promotes long term economic benefit such as roads

Question 12

transfer payments

Answer 12

payments made by gov without the exchange of goods or services such as disability payments

Question 13

4 reasons for public expenditure

Answer 13

increased quality of life
better supply side
decrease inequality
allows country to function

Question 14

taxation

Answer 14

a compulsory levy made by a government used to finance public expenditure or reduce the consumption of a demerit good

Question 15

direct taxes

Answer 15

cannot be shifted by the person and they legally have to pay it
eg income tax, corp tax, capital gains tax

Question 16

indirect taxes

Answer 16

can be legally shifted to another person usually via increasing prices
eg value added tax, excise duty, stamp duty

Question 17

difference between direct and indirect taxes

Answer 17

direct taxes pass straight from payer to gov whereas indirect go payer to supplier to gov

Question 18

progressive taxation

Answer 18

as income increases the proportion of income spent on tax increases

Question 19

regressive taxation

Answer 19

lower paid lose a higher proportion of income
eg VAT

Question 20

proportional tax

Answer 20

everyone pays same proportion of income as tax

Question 21

principles of taxation- judging whether a tax is good or bad (5)

Answer 21

convenience
certainty
equity
efficiency
flexibility

Question 22

budget deficit

Answer 22

gov spend is more than tax rev
adds to national debt

Question 23

national debt

Answer 23

stock of all past government borrowing that has not yet been payed back

Question 24

cyclical budget deficit

Answer 24

part of the budget deifcit that will reduce when economy recovers

Question 25

structural budget deficit

Answer 25

part of the budget deficit that doesnt reduce when economy recovers
gov are consistently spending beyond their means eg due to an ageing population

Question 26

6 benefits of budget deficit

Answer 26

• spend on infrastrure increases LRAS
• less corp tax more competitive more exports
• less income tax increased standard of living
• infrastructure projects create jobs
• less corp tax attracts FDI
• gov spend has multiplier effect

Question 27

5 costs of budget deficit

Answer 27

• high borrowing can crowd out private sector investment
• firms may anticipate high taxes and cut back spending
• risks of higher inflation
• higher national debt
• could reflect a recession

Question 28

why is national debt bad

Answer 28

burden for future generation of taxpayers

Question 29

explain how national debt can decrease due to inflation

Answer 29

if the rate of inflation is greater than the rate at which the budget deficit adds to the nominal national debt
money value of national debt as a proportion of nominal gdp will decrease

Question 30

what does the OBR do

Answer 30

Office for budget responsibility
provide independent analysis of the UK’s public sector finances

Question 31

fiscal drag

Answer 31

gov doesnt increase tax thresholds in line with inflation
workers bid for higher wages in inflation
dragges into higher tax brackets
higher tax rev for gov

Question 32

crowding out

Answer 32

increasd gov borrowing needs higher demand for loanable funds
higher market interest rates
crowd out private sector investment

Question 33

non dom tax payers

Answer 33

uk residents permanent home (for tax purposes) is outside the uk and thus they only pay tax on money they earn within the uk

Question 34

automatic fiscal stablisers

Answer 34

in boom theres higehr tax rev and less spend on welfare benefits so budget surplus
opposite for recession

Question 35

what does the laffer curve show and what are the 4 reasons for this

Answer 35

higher tax rates do not mean there will always be higher tax revenues
- tax avoidance
- tax evasion
- less incentive to work
- brain drain

Question 36

how can we shift up the laffer curve

Answer 36

tackle non dom