CH31 Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

Decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy

Question 2

What is budget?

Answer 2

Government’s spending and revenue plans for the next year

Question 3

What are direct taxes?

Answer 3

Taxes levied on the income earned by firms and individuals

Question 4

Why do governments need to impose taxation?

Answer 4

-To pay for public services
-To discourage certain activities like smoking
-Taxes can be used to control AD

Question 5

What are indirect taxes?

Answer 5

Taxes levied on spending such as VAT

Question 6

What are some examples of indirect taxes?

Answer 6

VAT (Value Added Tax)

Question 7

What are some examples of enviornmental taxes?

Answer 7

Landfill tax: A tax levied on the disposal of waste in landfill sites

Question 8

What is fiscal defecit?

Answer 8

amount which government spending exceeds government revenue

Question 9

What is a fiscal surplus?

Answer 9

amount by which government revenue exceeds government spending

Question 10

What are the possible impacts of a fiscal surplus?

Answer 10

-It could lead to increased government spending into public services or used to lower taxes in the economy

Question 11

What are the possible impacts of a fiscal defecit on the country?

Answer 11

• If defecits build up, the national debt will increase in that country
  -Meaning the government will have to spend more money on repaying the debt instead of being spent on lowering taxes etc

Question 12

What is expansionary fiscal policy?

Answer 12

Fiscal measures designated to increase AD, spending and economic growth in the economy. Decreasing taxes and increasing government spending

Question 13

What is contractional fiscal policy?

Answer 13

Fiscal measures designated to reduce AD, Increasing taxes and decreasing government spending

Question 14

How can fiscal policy reduce inflation?

Answer 14

Contractional fiscal policy can reduce inflation as sometimes it may be caused by AD rising too quickly. The government would cut its own spending rates or raise taxation.

Question 15

How can fiscal policy stimulate economic growth?

Answer 15

Expansionary fiscal policy increases spending in the economy and will also increase AD. Economic growth is more likely to result from extra government expenditure, this is because money spent on investment is key to economic growth.

Question 16

How can fiscal policy reduce unemployment?

Answer 16

Expansionary fiscal policy can reduce unemployment by stimulating demand through increased government expenditure. If demand increases firms will need more workers, therefore more people will be employed.

Question 17

How can fiscal policy increase the current account balanced?

Answer 17

Contractionary fiscal policy will help reduce AD, which will then reduce demand for imports

Question 18

What is the impact of a fiscal surplus on a country?

Answer 18

-They can fund more edudcation and training programmes
-They can pay existing debts
- tax rates going down