4.2.5.1 - Fiscal Policy And Taxation

Question 1

What is fiscal policy

Answer 1

The manipulation of government spending, taxation and borrowing to influence the economy

Question 2

What are the fiscal policy goals

Answer 2

• keep inflation on target 2% (BofE control this however shifts in ad/as can have an affect too)
• stimulate economic growth whilst continuing to maintain a stable economic cycle
• tackle market failure
• provide a welfare state
• improve competitiveness
• redistribute income and wealth (lower inequality)

Question 3

What effects the impact of policies

Answer 3

The size of the taxation/ gov spend
Who is affected by it

Question 4

What is an expansionary policy

Answer 4

Designed to boost ad/as
- cutting taxes
- raising gov spending
- increasing borrowing

Question 5

What is a contractionary policy

Answer 5

Designed to reduce ad/as
- increasing taxes
- cutting gov spending
- reduce borrowing

Question 6

What are automatic stabilisers

Answer 6

Change in tax revenues and gov spending that one about automatically as the economy moves through the business cycle
Eg:
- when the economy is booming, gov revenue should automatically increase
- when the economy increases, gov spending should decrease

Question 7

What are discretionary changes

Answer 7

**deliberate ** changes in taxation and gov spending eg: capital spending

Question 8

What is indirect taxation

Answer 8

Taxed placed on goods that the firms have to pay, usually resulting on firms pushing this cost onto the consumers
Eg:
- VAT
- ad valorem tax
- excise duties

Question 9

What is direct taxation

Answer 9

Tax that’s applied directly onto the income,wealth or profit of individuals or firms
Eg:
- income tax
- inheritance tax
- capital gains tax
- corporation tax
- national insurance

Question 10

What are the income tax bands

Answer 10

personal allowance (12,570) = **0%
basic rate (12,570 -50,270) = 20%
higher rate (S0,270-125,190) = 40%.
additional rate (125,190 +) = 45%.

Question 11

What is the value of inheritance tax

Answer 11

40% tax on anything above £325,000

Question 12

What is affected by capital gains tax and what are the values

Answer 12

Affects second properties, shares, business sale, valuables
-> the rates differ between areas

Question 13

What is the corporation tax rate

Answer 13

• 19% tax on businesses whose profit is below 50,000
• 25% tax on businesses whose profit is over 250,000
• Business with profit between 50,000 and 250,000 are able to claim marginal relief

Question 14

What is national insurance used for

Answer 14

Payed by employers and employees
- used to help pay for state pensions and maternity leave

Question 15

What’s is a progressive tax

Answer 15

The marginal rate of taxation rises as income rises

Question 16

What is a proportional tax

Answer 16

Also known as a ‘flat’ tax
- the marginal rate of taxation is constant, as income rises, you will pay more tax however the % payed is the same across all people

Question 17

What are some direct and indirect affects that taxation can have on AD

Answer 17

• income tax = disposable income
• corporation tax = business investment
• tax on imports = trade
• national insurance = labour demand
• tax on wealth/ assets = consumption

Question 18

What are some indirect and direct affects that taxation can have on LRAS and SRAS

Answer 18

• work incentives/ more active labour supply
• inward migration of key workers
• capital investment
• enterprise/ rise in entrepreneurship
• incentives to study
• promote trade

Question 19

What is current spending

Answer 19

Day yo day running of the government eg: wages, raw materials etc.
it is renewed each year

Question 20

What is capital spending

Answer 20

Spending on physical assets and infrastructure
More long term spending

Question 21

What are transfer payments

Answer 21

Bette it’s and pensions for example, payments that are made from the government to people

Question 22

Why is government spending important for the economy

Answer 22

• used to manage the level of growth of AD to meet macro policy objectives
• promotes equity
• provides the necessary infrastructure for society
• provides a safety net system of welfare benefits
• provides a socially efficient level of public and merit goods and helps to overcome market failure

Question 23

What are the benefits of gov spending changes on AS

Answer 23

• welfare benefits reforms to create incentives to work and increase the labour supply
• firms spending on capital projects can be encouraged
• entrepreneurship can be encouraged
• human capital can be improved if education and training is subsidised

Question 24

Wha is the economic importance of education spending

Answer 24

• may increase the skills and productivity of workers, rising LRAS
• improvements in the human capital will lower structural unemployment
• more innovation and competitiveness

Question 25

What is the economics importance of gov spending on health

Answer 25

• improved health outcomes will boost the labour supply so will potentially raise LRAS
• improvement in productivity which could also push LRAS out
• lessens the risk of relative poverty

Question 26

What is universal credit

Answer 26

A benefit payment for people out of work, it includes:
- housing benefits
- child tax credit
- income support
- working tax credit
- income-based Jobseeker’s Allowance