Chapter 13

Question 1

What is fiscal policy

Answer 1

The use by the government of government spending and taxation to try to achieve the governments policy objectives

Question 2

What is a balanced budget

Answer 2

Achieved when government spending equals government revenue

Question 3

What is demand side fiscal policy

Answer 3

Used to increase or decrease the level of aggregate demand through changes in government spending, taxation and the budget balance

Question 4

What is deficit financing

Answer 4

Deliberately running a budget deficit and then borrowing to finance the deficit

Question 5

What is expansionary fiscal policy

Answer 5

Uses fiscal policy to increase aggregate demand and to shift the AD curve to the right

Question 6

What is contractionary fiscal policy

Answer 6

Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left

Question 7

What is discretionary fiscal policy

Answer 7

Involves making discrete changes to G, T and the budget deficit to manage the level of aggregate demand

Question 8

What is crowding out

Answer 8

A situation in which an increase in government or public sector spending displaced private sector spending with little or no increase in aggregate demand

Question 9

What is supply side fiscal policy

Answer 9

Used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest ad be entrepreneurial.
Interventionist supply side fiscal policies such as the financing of retraining schemes for unemployed workers are also designed to improve supply side performance

Question 10

What are supply side policies

Answer 10

Government economic policies which aim to make markets more competitive and efficient increase production potential and shift the LRAS curve to the right. Supply side fiscal policy is arguably the most important type of supply side policy but there are also non fiscal supply side policies

Question 11

What is total managed expenditure

Answer 11

The total amount that the government spends . It splits into the amount that government departments such as defence have been allocated to spend and spending that is not controlled by a government department including welfare, pensions and national debt interest payments.

Question 12

What is the office for budget responsibility

Answer 12

Advisory public body that provides independent economic forecasts and analysis of the public finances as background to the preparation of the UK budget

Question 13

What is direct tax

Answer 13

A tax that cannot be shifted by the person legally liable to pay the tax onto someone else. Direct taxes are levied on income and wealth.

Question 14

What is indirect tax

Answer 14

A tax that can be shifted by the person legally liable to pay the tax onto someone else. Indirect taxes are levied on spending

Question 15

What is regressive taxation

Answer 15

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

Question 16

What is proportional taxation

Answer 16

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

Question 17

What is the principle of taxation

Answer 17

A criterion used for judging whether a tax is good or bad

Question 18

What is national debt

Answer 18

The stock of all past government borrowing that has not been paid back

Question 19

What is cyclical budget deficit

Answer 19

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

Question 20

What is structural budget deficit

Answer 20

The part of the budget deficit which is not affected by the economic cycle but results from structural change in the in the economy affecting the governments finances and also from long term government policy decisions

Question 21

What are automatic stabilisers

Answer 21

Fiscal policy instruments such as progressive taxes and income related welfare benefits that automatically stimulate aggregate demand in an economic downswing and depress AD in an upswing thereby smoothing the economic cycle

Question 22

What are supply side policies

Answer 22

Government economic policies which aim to make markets more competitive and efficient increase production potential and shift the LRAS curve to the right.

Question 23

What is supply side economics

Answer 23

A branch of free market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets and through this the performance of the economy

Question 24

What are supply side improvements

Answer 24

Reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive.

Question 25

What are interventionist policies

Answer 25

Occurs when the government intervened in and sometimes replaces free markets. Interventionist supply side policies include government funding of research and development

Question 26

What are market based supply side policies

Answer 26

Policies free up markets, promote competition and greater efficiency, and reduce the economic role of the state

Question 27

What is privatisation

Answer 27

Involves shifting ownership of state owned assets to the private sector

Question 28

What is marketisation

Answer 28

Involves shifting provision of goods or services from the non market sector to the market sector

Question 29

What is deregulation

Answer 29

Involves removing previously imposed regulations. It is the opposite of regulation

Question 30

What were some of the Keynesian views that strongly influenced the use of fiscal policy in the decades before 1979?

Answer 30

• Unregulated market economy results in unnecessarily low economic growth, high unemployment, and volatile business cycles
• a lack of AD caused by the tendency of the private sector to save instead of invest can mean the economy can settle into an under-full employment equilibrium characterised by demand deficient unemployment
• supply-side fiscal policy is treated as subordinate, output would respond to demand stimulation
• the government spending multiplier is high

Question 31

What are the types and reasons for public expenditure?

Answer 31

• investment into new capital projects and infrastructure such as new NHS hospitals
• expenditure to meet annual running costs from such projects e.g paying teachers salaries
• transfers, state pension and unemployment-related benefits, merely redistributes income and spending power
• interest payments on national debt

Question 32

What are supply-side improvements, what distinguishes them from supply-side policies?

Answer 32

-supply-side improvements are undertaken by the private sector itself as a result of entrepreneurs realising they must make their firms more efficient
-supply-side policies are part of the means of achieving this desirable outcome
-in the free market view, supply-side policies are often counter-productive in that they don’t bring about supply-side improvements
-this is not necessarily true n the case of interventionist policies which provide training, infrastructure and other external economies that reduce firms’ costs
-

Question 33

What are some examples of microeconomic supply-side policies?
industry policy measures

Answer 33

• privatisation
• Marketisation
• deregulation
• internal markets
• subsidising spending on research and development

Question 34

What are some examples of microeconomic supply-side policies?
Labour market measures

Answer 34

• lower rates of income tax
• reducing state and welfare benefits relative to average earnings
• changing the unemployment law to reduce the power of trade unions
• repealing legislation which limits employers’ freedom to employ
• more flexible pension arrangements
• improving the training of labour

Question 35

What are some examples of microeconomic supply-side policies?
Financial and capital market measures

Answer 35

• deregulating financial markets
• encouraging saving
• promoting entrepreneurship
• reducing public spending and public sector borrowing