9.2 Fiscal policy

Question 1

What is fiscal policy?

Answer 1

The manipulation of government spending, taxation and government borrowing to influence the level of economic activity.

Question 2

What goals does fiscal policy try to achieve?

Answer 2

• Keep inflation on target (2%)
• Stimulate economic growth and employment during times of recession
• Maintain a stable economic cycle that minimises

Question 3

If fiscal policy is said to be expansionary is the government trying to impact the economy positively or negatively?

Answer 3

Positively

Question 4

If fiscal policy is said to be contractionary is the government trying to impact the economy positively or negatively?

Answer 4

Negatively

Question 5

What methods are used in expansionary fiscal policy? (3)

Answer 5

• Cutting taxes
• Raising government spending
• Increasing the budget deficit

Question 6

What methods are used in contractionary fiscal policy? (3)

Answer 6

• Increasing taxes
• Cutting government spending
• Cutting the budget deficit

Question 7

What is direct tax?

Answer 7

Tax imposed on the income of individuals or profits of businesses

Question 8

What is indirect tax?

Answer 8

Tax imposed on goods or services

Question 9

What is hypothecated tax?

Answer 9

A tax with a specific purpose i.e sugar tax

Question 10

When does a budget deficit occur?

Answer 10

A budget deficit occurs when a government receives less income through tax receipts and other government revenue than it spends

Question 11

When does a budget surplus occur?

Answer 11

A budget surplus occurs when a government receives more income through tax receipts and other government revenue than it has to pay out in its spending plans

Question 12

What is the national debt?

Answer 12

The national debt is the total amount of money owed by the government

Question 13

Is Fiscal Policy good at improving economic growth?

Answer 13

Expansionary policy alone won’t increase the long-run growth rate, but will act as a short-run stimulus to economic growth. However, fiscal stimulus through tax cuts and increasing government spending may be employed to help lift a country out of recession, therefore smoothing out fluctuations in the economic cycle

Question 14

Is Fiscal Policy good at improving unemployment?

Answer 14

Higher government spending should lead to higher levels of employment. The use of fiscal policy to improve employment statistics is a vital part of economic policy.

Question 15

Is Fiscal Policy good at improving inflation?

Answer 15

In theory, expansionary policy will boost AD and create inflationary pressure, whilst contractionary policy will do the opposite.
In reality, it is very difficult to ‘fine tune’ the economy towards a 2% inflation target using broad instruments such as taxation and government spending.

Question 16

Is Fiscal Policy good at improving the balance of payments on current account?

Answer 16

The UK has a high propensity to import, so expansionary policy tends to limit our ability to achieve this target
However, the government could employ expenditure-switching policies by e.g. taxing foreign imports to make domestic goods more attractive

Question 17

What factor affect how effective fiscal policy is? (5)

Answer 17

Size
Timing
Multiplier
Rate of employment
Time to take effect