economics unit 2 chapeter 6

Question 1

what is fiscal policy?

Answer 1

a policy that uses taxation and government spending to try and achieve the objectives of the government

Question 2

what is a balanced budget?

Answer 2

when government spending is equal to tax revenue

Question 3

what is a budget deficit

Answer 3

when government spending is greater than tax revenue

Question 4

what is budget surplus

Answer 4

when tax revenue is greater than government spending

Question 5

What is the multiplier effect?

Answer 5

a process by which an original change in incomes in the economy leads to a total change in incomes which is a multiple of the original change

Question 6

why would the government aim for a budget deficit?

Answer 6

they want to expand or reflate the economy

achieve economic growth and more employment

Question 7

why would the government aim for a budget surplus

Answer 7

they want to deflate or contract the economy

reduce inflation and balance of payments deficit

Question 8

How do you reflate the economy?

Answer 8

the gov aims for a budget deficit
it increases spending on its self this increases income for others
people can spend more and consumer expenditure rises
more income for firms which now need to produce more output to reach the extra demand therefore they employ more workers
the workers will in turn spend more
this creates a multiplier in effect on the economy
or
reduce taxes to increase disposable income

Question 9

How do you deflate the economy?

Answer 9

the government spends less on itself and aims for a budget surplus
this reduces income for others and consumer expenditure falls
less income for firms which produce less output as demand is not there therefore they have less workers
multiplier in reverse effect
lower inflation and balance of payments deficit
or
raise taxes so less disposable income

Question 10

evaluating the fiscal policy

Answer 10

not certain on how much of an effect it will have, for example people may decide to save there money instead spend it and the multiplier effect wont be as big reduces the effectiveness of fiscal policy.
conflict of objectives
takes time

Question 11

what is monetary policy

Answer 11

a policy aimed at affecting the total supply of money in the economy.

Question 12

what is interest rate policy

Answer 12

the use of interest rates to try a achieve the governments economic objectives

Question 13

what is the bank rate

Answer 13

the interest rate set by the bank of England, which effects all interest rates in the economy

Question 14

how does interest rate policy work

Answer 14

if they believe inflation is going to rise than they will raise interest rates this will decrease spending and demand will fall so there is less pressure on prices

• saving will be more rewarding and they may save more
• borrowing will be more expensive and they may postpone some expenditure
• borrowing for firms is more expensive and they cut bank on investment
• mortgage interest payments - as there payments rise with an increase in interest rates the disposable income falls
• exchange rate increases

Question 15

evaluate the effects of interest rate policy

Answer 15

time lags - takes 18 months for full effect
exchange rate - higher exchange rate leads to more expensive exports and cheaper imports, less competitive and a current account deficit

Question 16

what is supply side policies?

Answer 16

policies that increase the ability of the economy to supply more goods and services

Question 17

what are the supply side policies?

Answer 17

education and training
reducing direct taxes
reducing benefits
encouraging enterprise
encouraging new tech and innovation 
reducing monopoly power

Question 18

education and training

Answer 18

a higher human capital means more productive people therefore more output and more economic growth

• more uni places
• stay in education beyond 16
• training courses

Question 19

reducing direct taxes

Answer 19

increase incentives to work and get a promotion, low income earners receive a rise in pay and will gain more incentive
firms may be more willing to invest with a cut in direct taxes especially cooperation taxes

Question 20

reducing benefits

Answer 20

if benefits is reduced than people will work as it is an incentive, this will encourage low income earners to work as there pay will no longer be similar to those on benefits

Question 21

encouraging enterprise

Answer 21

new business could benefit from tax allowances, these include tax relief and capital allowances these are important as they could buy new equipment and are the future of output and employment

Question 22

encouraging new tech and innovation

Answer 22

the gov introduced capital allowances and schemes to encourage investment and research and development into new technology - this increase the productive capacity of the government

Question 23

reducing monopoly power

Answer 23

monopolies restrict output and increase prices, reducing monopoly power helps increase the total supply in the economy, it can stop mergers and force them to sell some of their operation

Question 24

evaluate the effects of supply side policies

Answer 24

long time to put into effect

face resistance - reducing benefits hurts the most vulnerable