4.2.5 Fiscal Policy And Supply-side Policies Flashcards

1
Q

What does fiscal policy involve?

A

The manipulation of government spending, taxation and the budget balance

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2
Q

What are the types of demand-side fiscal policy?

A

Expansionary and contractionary

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3
Q

What is expansionary fiscal policy?

A

Policy which boosts AD by increasing government spending or lowering taxes
Can cause a budget deficit

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4
Q

What is a budget deficit?

A

government spending > revenue

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5
Q

What is contractionary fiscal policy?

A

Policy which reduces AD by reducing government spending or increasing taxes
Can cause a budget surplus

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6
Q

What is a budget surplus?

A

Government spending<revenue

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7
Q

What is supply-side fiscal policy used for?

A

To try and shift the economy’s LRAS curve to the right

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8
Q

What is the reason for government expenditure?

A

To invest in new capital products and infrastructure
To fund the running costs of public projects

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9
Q

What are the types of government expenditure?

A

Investment
Transfers
Interest payments on the national debt

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10
Q

What are examples of government transfers?

A

State pensions
Unemployment-related benefits

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11
Q

What is a tax?

A

A compulsory levy made by a government to pay for its activities

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12
Q

What is the reason for tax?

A

To finance public expenditure

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13
Q

How much did the government spend on health in 2019/2020?

A

£155bn

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14
Q

How much income tax did the government collect in 2019/2020?

A

£185bn

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15
Q

What is the VAT percentage rate?

A

20%

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16
Q

What is direct tax?

A

A tax that cannot be shifted onto someone else by the person legally liable to pay the tax
Levied on income and wealth

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17
Q

What is an example of a direct tax?

A

Income tax
Corporation tax

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18
Q

What is indirect tax?

A

A tax that can be shifted onto someone else by the person legally liable to pay the tax

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19
Q

What is an example of an indirect tax?

A

VAT

20
Q

What is progressive taxation?

A

When the proportion of income paid in taxes rises as income increases

21
Q

What are regressive taxes?

A

When the proportion of income paid in tax falls as income increases

22
Q

What is proportional taxation?

A

When the proportion of income paid in tax stays the same as income increases

23
Q

What are the principles of taxation?

A
  • efficient
  • equitable
    -flexible
  • economy
  • convenient for tax payers to pay
24
Q

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

A

The larger the deficit, the larger the national debt

25
Q

What is a cyclical budget deficit?

A

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle

26
Q

What is a structural budget deficit?

A

The part of the budget deficit which is not related to the state of the economy but results from structural change in the economy from long-term government policy decisions

27
Q

What is the significance of large national debt?

A
  • Push up long term rates of interest
  • increased government borrowing may eventually require higher taxation
28
Q

What are the reasons for structural deficits and surpluses?

A

High levels of tax avoidance and evasion
High levels of income and wealth inequality
High levels of financial support from government

29
Q

Arguments for a budget surplus

A

Possible reduction in inflation
Reduction of national debt
Reduction of crowding out

30
Q

Arguments against a budget surplus

A

Reduced gov spending on merit and public goods
Reduced spending on the supply side of the economy
Increased taxation on investment and consumption

31
Q

Arguments against a budget deficit

A

Adds to national debt
Could be inflationary
Could lead to crowding out

32
Q

Arguments for a budget deficit

A

Increased government spending on merit goods

33
Q

What is the role of the Office for Budget Responsibility (OBR)?

A

To provide independent analysis of the UK’s public sector finances

34
Q

What are supply-side policies?

A

Government economic policies which aim to make markets more competitive, efficient and increases productive potential

35
Q

What are supply-side improvements?

A

Reforms undertaken by the private sector to increase productivity in order to reduce costs and become more competitive

36
Q

How can supply-side policies help to achieve supply-side improvements?

A

interventionist policies which provide training and infrastructure reduce firms’ costs

37
Q

What are interventionist policies?

A

When the government intervenes in, and sometimes replaces, free markets

38
Q

Example of interventionist supply-side policies

A

Government provisions of education and training
Investment in infrastructure projects
Subsidising spending on research and development

39
Q

What are free market supply-side policies?

A

Policies which free up markets, promote competition and greater efficiency
And reduce the economic role of the State

40
Q

Examples of free market supply-side policies

A

Tax cuts to create incentives to work
Cuts in welfare benefits to reduce incentive to choose unemployment
Deregulation

41
Q

What diagram should be drawn for supply-side policies?

A

The Laffer Curve

42
Q

What should be on the X axis of the laffer curve?

A

% average tax rate

43
Q

What should be on the Y axis of the laffer curve?

A

Total tax revenue (£bn)

44
Q

What is the optimum tax rate?

A

50%

45
Q

Explain the Laffer curve

A

Increasing tax above optimum disincentiveivises people to work
or causes brain drain
So revenue would decrease

46
Q

What is the trickle down effect?

A

The rich benefiting causing the poor to also benefit as they employ them as servants