Fiscal and Supply Side Policies

Question 1

Fiscal policy

Answer 1

• The manipulation of government spending and taxation to influence the economy
• It is demand side and influences AD

Question 2

Expansionary fiscal policy

Answer 2

• Aims to increase AD
• Involves increasing spending or cutting taxation

Question 3

Contractionary fiscal policy

Answer 3

• Aims to decrease AD
• Involves increasing taxation or cutting spending

Question 4

Impact of fiscal policy on AS

Answer 4

• Reduced corporation tax may lead to increased spending on infrastructure
• Increased spending on education or training schemes may up skill workers, improving productivity

Question 5

Budget deficit

Answer 5

Expenditure exceeds tax receipts

Question 6

Budget surplus

Answer 6

Tax receipts exceed expenditure

Question 7

Government debt

Answer 7

The accumulation of a budget deficit over time

Question 8

Direct taxes

Answer 8

• Paid directly to the government by individuals or organisations
• Levied on income, profits or wealth

Question 9

Indirect taxes

Answer 9

• Collected by producers/sellers on behalf of the government
• Levied on expenditure

Question 10

Types of indirect taxation

Answer 10

• Ad valorem
• Specific taxes

Question 11

Ad valorem taxes

Answer 11

Percentage taxes

Question 12

Specific taxes

Answer 12

A set tax per unit

Question 13

Proportional tax

Answer 13

A fixed rate for all tax payers, regardless of income

Question 14

Progressive tax

Answer 14

The average tax rate paid increase as income increases

Question 15

Regressive tax

Answer 15

The rate of tax does not relate to income, meaning the proportion of income paid as tax is higher for those on lower incomes than those on higher incomes

Question 16

Limitations of fiscal policy

Answer 16

• Time lags
• Crowding out
• Political constraints
• Risk of a worsening budget deficit

Question 17

Types of government spending

Answer 17

• Current government expenditure
• Capital government expenditure
• Transfer payments

Question 18

Current government expenditure

Answer 18

Reoccurring pending on goods and services that are consumed and last for a short period of time

Question 19

Capital government expenditure

Answer 19

Spending on assets that can be used multiple times

Question 20

Transfer payments

Answer 20

Welfare payments from the government

Question 21

Cyclical budget deficit

Answer 21

Temporary budget deficit that occurs during recessions when governments increase spending to stimulate the economy

Question 22

Structural budget deficit

Answer 22

A deficit which is due to an imbalance in the revenue and expenditure of the government, so it exists at every point in the business cycle

Question 23

Consequences of a budget deficit

Answer 23

• Higher borrowing and interest payments
• Risk of crowding out if borrowing raises interest rates
• Inflationary pressure if the economy is near full capacity

Question 24

Consequences of a budget surplus

Answer 24

• Can reduce national debt and interest payments whilst building fiscal headroom for future downturns
• Can lead to underinvestment into public services
• May cause contractions in AD

Question 25

Consequences of government debt

Answer 25

- If debt-to-GDP ratio is too high, markets may lose confidence, increasing borrowing costs - However, debt can be used to fund capital investment with long-term returns

Question 26

Role of the OBR

Answer 26

- Provides 5 year forecasts for the UK economy, including the impact of changes announced in the budget - They judge the economies performance against the government's fiscal targets

Question 27

Supply side policies

Answer 27

Policies that aim to increase the economies productive capacity by improving the quantity and/or quality of factors of production

Question 28

Types of supply side policy

Answer 28

- Free market - Interventionist

Question 29

Free market policies

Answer 29

Supply side policies that limit government intervention to allow the free market to eliminate imbalances

Question 30

Types of free-market policies

Answer 30

- Increasing incentives (e.g decreasing tax) - Promoting competition (e.g privatizing the public sector) - Reforming the labor market (e.g reducing NMW)

Question 31

Interventionist policies

Answer 31

Supply side policies that involve the government intervening in the market

Question 32

Examples of interventionist policies

Answer 32

- Promoting competition (e.g by reducing monopoly power of some firms) - Reforming the labor market (e.g retraining/relocation schemes schemes) - Infrastructure improvements (e.g building new roads/schools)

Question 33

Evaluation for supply side issues

Answer 33

- Time lags - Costs (initial and opportunity cost) - Equity/equality issues - Quality of implementation