Fiscal And Supply Side Policy

Question 1

A country’s banking system is an important part of the institutional structure of its economy because of its role

Answer 1

As a source of investment funds for business

Question 2

The consequence of increasing the interest rate when the exchange rate is rising is likely to be an increase in

Answer 2

A level of unemploymentr

Question 3

A large increase in borrowing by consumers is most likely to lead to a

Answer 3

Rise in imports into uk

Question 4

The monetary policy comm (mpc) of the boe meets each month to decide on the rate of interest that is most likely to help it achieve the gov inflation target
Mpc is most likely to increase interest rates if

Answer 4

The rate of growth of gdp is above the long term trend rate of growth

Question 5

Expansionary monetary policy is most likely tgo

Answer 5

Shift ad curve to right

Question 6

Monetary policy

Answer 6

Involves controlling the macroecon through changes in monetary vairables such as the money supply or interest rates
Changes in short term interest rates, principle tool of monetary policy in recent years
Ususally first line of defence
Easy to implement- meeting of mpc

Question 7

Mpc

Answer 7

Monetary policy comm- bofe
Central ank not gov
Changed 19970- balir moved out as believed politicians were using monetary policy for political gain

Question 8

How does monetary policy work

Answer 8

Aim to influence ad
Mpc sets interest ratee that it pays commercial banks on their deposits held at bofe
And rate it chanegs for short term lends to those same commercial banks and financial institutions

Question 9

Bank rate

Answer 9

Bank rate sets the benchmark/base ratee for all other interest rates charged throughout banks system in uk
Changes interest rates inflluence ad via transmission mechanism of monetary policy

Question 10

Time lags

Answer 10

May occur monetary policy- up to 2y before full effect of monetary policy will have its impact on whole economy
Aim gradually encourage consuemrs and busineses to adjust spending to keep inflationary prssure under control so econ can continnue to grow steadiily
Making forcasts of inflation and decide interest rate changes appropriate
But reaction of consumers and businesses to interest rates uncertain as are potential time lags 6

Question 11

Interest rates for other banks/financial organisation

Answer 11

Depend on legth of loan and level of risk
Variety of interest rates paid to savers depends on sums of money deposits and ease of access
Interest rates do tent to move in same direction0

Question 12

Impacts of changing interest rates on ad- via transmission mechanism- consumption

Answer 12

Increase interest rates, increase cost borrowing- therefore consumers borrow less to finance consumer spending on consumer durables- cars
Demand personal loans decreases0- consumers spend less on credit cards- w v high interst- 200%^
Encouragge save more- increase return
Discretionary income decrease as mortgage repayment increases
Cost of mortage increase, demand houses decreases, house pirces fall, wealth efecte worson
Mortagage equity withdrawal- mew- decrease- consumers fund spending by increasing sixe of their mortageg
Value of shhares on stock market most liekly decrease whhen interest rates rise- feel less welathy, decrease spending
Decrease consumer confidence- about future earnings or job security- act based on this security

Question 13

Impacts of changing in interest rates on ad- investment

Answer 13

Business investment in new caputal decrease as incrase interest rates
As borrowing fund capital expendaiture increase
Decrease business confidence in future demand, decrease investment0- in new plant, machinery, companies, new buildings, infrastructure

Question 14

Impacts of changes in interest rates on ad- via transmission mechanism- exports

Answer 14

Increase interest rates, increase change rate, decrease demand exports
Foreigners take adv of high interest rates and deposit cash with uk banks- increase demand sterling, hot money flows- cash for short term investment purpose
Reverse-if interest rates decrease- hot money flows out of pound sterling, decrease demand, depreciation of currency, demand exports increase esp demand elastic0- increase ad

Question 15

Lras impact o f changing interest rates via transmission mechanism

Answer 15

Increase interest rates may damage the supply side of the economy by increasing cost of borrowing
Firms more diff to invest in new capital and r&d
Damage competitivee adv longer term
Economists argue uncertainty caused by accelerating inflation is likely to be even more damge to supply side of ecoomy in lr

Question 16

Evaluation of effectiveness of monetary policy

Answer 16

Main objective of mpc to keep cpi inflation in line with target rate of 2%- aim promote macroecon stability
If mpc faills to keeep cpi inflation w/in target- govenor of bofe must make open letter of explanation to chancellor
Sucessful in demand pull inflation decreasing in recent years0
But blunt instrument when deealing with cost push- 20066-2008- iinflation increase due to cost push factors- oil and comodity prices (raw materials, wheat, copper)) increase
Less effective increase ad when stuck in recession and confidence - paradox of thrift
Could increase value of pound- decrease pirce imports

Question 17

Examples of coost push inflation recent years

Answer 17

2011- 5.2%- commodity prices, weak pound, increase cost imports, gov increase vat to 200^%
Inflation peak 11.1^% oct 2022- high energy prices and wheat (r-u), weak pound- collapse confidence truss
Credit crunch- cost push 5.2%0- but bofe not increase interest rates so not push int o deeper recession

Question 18

Paradox of thrift

Answer 18

Save rather spend
Job security- as firms cut costs as decrease ad- cut back spending
Made redundancies- cant spend more
Wealth efect- assets stocks and property decreae value prce

Question 19

Fiscal policy

Answer 19

Use of taxation, gov spending and gov borrowing to achieve macroecon obejctives

Question 20

Fiscal automatic stabilisers

Answer 20

Dont require any change in gov polciy
Therefore not considered expansionary or contractionary fiscal policy

Question 21

Automatic stabilisers- output fall

Answer 21

Tax revenue automatically decrease
Incomes and revenuue decrease when ad fall
Lower income, lower tax rates
Gov spending increase automatically, increase welfare and unemployment beneffits

Question 22

Automatic stabilisers- output increase

Answer 22

Tax revenue increase
Income tax and firms revnuue increase0 move higher tax bracket
Welfare fall

Question 23

Blair gov- auutomatic stabilisers?

Answer 23

No resorted to active or expansionary fiscal policy to deal with credit crunch recession in 2009

Question 24

Direct taxation

Answer 24

Largely taxes on income paid directly to gov by individual tax payer
Income households and coperations
Tax liability cannot be passed onto others q

Question 25

Direct tax rates

Answer 25

Personal tax allowance- 12.5k Income tax rates, 00%, 20%(above 12.5), 40% over 50k, 45% over 150k but loose tax allowance over 100k National houshold contributions on workers

Question 26

Why may a gov wish to increase income tax

Answer 26

Increase rveenue to avoid borrowing when increase spending Decrease ad- contractionary fiscal policy- decrease disposable income- ad falls as consumer spending a componeent of ad If progressive- increase equality as redistribution of wealth

Question 27

Indirect taxation

Answer 27

Largely on spending Vat 20%^ Excise duties- tobacco, alcohol, sugar, tax, fuel duties - demerit goods Depends on price leasticity and supply for good- firms may be able to shift burden of tax onto consumer Recent decades- shift away from using direct taxations as part of discretionary fiscal policy

Question 28

Adv indirect taxation

Answer 28

Influence spending pattern Correct externalities Incentive effect Flexibility

Question 29

Indirect tax- influence spenidng patterns

Answer 29

Indirect tax changes are arguably more effective in changing overall patterns of demand for particular g Change relative rpices and discourage consumption of demerit goods

Question 30

Indirect tax- correct externalities

Answer 30

Indirect taxes for negative externalities The polluter pays principel for internalising external cost of production and consumption

Question 31

Incentive effects- indirect tax

Answer 31

Indiect taxes have less impact upon individual work v leisure changes May increase indirect taxes rather than direct tax flexibility

Question 32

Disadv indirect tax

Answer 32

Distribution effects- regressive effect of many indirect taxes to make disrtibution of income more unequal Inflationary pressures- increase can trigger cost push inflation Crime- create incentives to avoid indirect taxes- eg smuggling ciggarettes Stealth taxes- lack of announcement means people unaware of how much pay in indirect atxes- goes against ‘certainty principle’ of good tax system

Question 33

Proportional tax

Answer 33

Everybody pays ssame % of their income Egg russia at 13%

Question 34

Progressiive taxation

Answer 34

More earnt, bigger ^% of income spent in tax Uk

Question 35

Regressive taxation

Answer 35

Low income groups pay bigger proportion of incomee in tax Criticism of indirect tax- vat

Question 36

Main objectives of uk tax system

Answer 36

Funds gov spendng- able to borrow moeny up to a certan extent but majority must come from taxation to avoid inflationary pressure Manage economy as a whole- macroecon performance- eg alter taxes and rates to influence econ growth , inflation, unemployment, bop Decrease certain tax- microecon supply side benefits such as more incentives Redistribution of iincome- fairness in society Correct market failure- micro econ improvement workings of market, indirect taxes on demerit goods fund to decrease negative externalities

Question 37

Horizontal equity

Answer 37

Where people or firms with same income and financial circumstances pay same amount of tax

Question 38

Verticle equity

Answer 38

When amount that people pay is based on their ability to pay High income groups pay income more than low incomes

Question 39

Principles of taxation

Answer 39

Decide if tax is good or bad from economic pov Economical Equity Convevnience Certainty Efficiency, flexible- modern principels, ones above canons

Question 40

Economical taxation

Answer 40

Tax should be simple and easy to colect So revenue is maximised compared to coost of collection

Question 41

Equity taxation

Answer 41

Taxes should be fair and based on taxpayer ability to pay Justification for progressive nature of income tax Horiontal and verticle equity

Question 42

convenience of taxation

Answer 42

Payment method and timing should be convenient to the taxpayer

Question 43

Certainty of taxation

Answer 43

Tax payers hsould understand how system works Cleaer, what, when and how to pay Taxes diff to evade

Question 44

Efficient tax systeem

Answer 44

Meets its aims whilst minimising neagtive distortions Eg decrease individual incentives to work save and invest

Question 45

Flexible tax system

Answer 45

Structure and rates of taxation must be capable of easy alteration in responsible to changing economic conditions

Question 46

Hypothication of taxes

Answer 46

Taxes raised for specific purpose- revenue earmarked for particular use Large proportion of tax on cigarettes for smoking related disorders Reveal how much individuals are prepared to pay for partiuclar services- if still ocnusme Eg,. Tv licnce0- tax cover cost of bbc

Question 47

Pigouvian taxes

Answer 47

Take money from those creating negative externalities Spend revenue on compensating those who suffer the spillover or r=negative consequencees Some argue fuel tax and improt tax used to subsidise investment in alternatives to fossil fuels

Question 48

Benefit principel

Answer 48

Argument taxes should be linked to the benefits that taxpayer recive from teh tax

Question 49

Gov spending categories

Answer 49

Current spenidng0 Capital spending Transfer payments

Question 50

Current spending- gov spending

Answer 50

Wages public sector wrkers and consumables- medicine in hospital Less sensible to borrow for

Question 51

Capital spending

Answer 51

Spending on infrastructure Growing economu by increasing productve capacity, supply side0 Building schools, hospitals More sensible to borrow for - long term benefits

Question 52

Transfer payments0- gov spending

Answer 52

Transer of income from tax payers to those recieving beneifts/pensions One group to another

Question 53

Budget deficit

Answer 53

Occur when gov spending exceeds gov rev from taxation and other sources of income- eg. Prescription charges Borrowing for just one yeaar

Question 54

Budget surplus

Answer 54

Gov revenue exceeds gov spending

Question 55

Balanced budget

Answer 55

Gov revenue equals gov spenidng Last seen in 2000-2001

Question 56

How to fix budget deficit

Answer 56

Eliminate by cut back public spending or raise tax- long term implications Infrasturcture less- damage supply side Increase tax- decrease incentive work save and invest

Question 57

If budget surplus- how to fix

Answer 57

Gov use exess rev or other expendaiture to repay preious borrowing Private sector debt repayment- psdr

Question 58

National debt

Answer 58

Accumulated borrowing How much state owes Peaks in wars and recessions

Question 59

Cyclical deficit

Answer 59

Gov in debt during recession

Question 60

Structural deficit

Answer 60

Gov in debt during growth phase Current spending

Question 61

Expansionary fiscal policy

Answer 61

Discretionary /active fiscal policy Deliberate chanegs in direct/indirect taxation and gov spenidng to influence ad Successful 1949-79

Question 62

How expansionary fiscal policu works

Answer 62

In recession gov boost public spendng/cut direct taxes to stimulate ad an set off positive multiplier

Question 63

Cut income tax- expansionary fiscal policu

Answer 63

Give consumer more disposable income- increase demand for sonsumer g&s Retailer increase order from manufacturer- take on more workers, increase investment, more capital spending Demand new premises, factories and homes increase- increase consumption workers Net injection exceed net withdrwawal positive multiplier Increase sales- firms more profitable and falling unemployment means income increase Increased income from employyment and dividens from rising profit- increase ad until econ settle at higher equilibrium

Question 64

Cut vat- expansionary fiscal policy

Answer 64

Hope decrease prices would encourage consuemrs to spend more on other g&s boosting ad Cut cost in production Eg. In 2009 lack of confidence- cut vat from 17.5 to 15%^ rather cut in direct tax

Question 65

Increase gov spending on infrastructire projects- expansinary fiscal policu

Answer 65

If felt that tax saved or spent on imports Eg build road andd rail networks- Increase effieciency in transport Or build new schools and hospotal- expanding social capital Both create work for construction workers- increasing iincome Some extra income spent local g&s creating more jobs and income and profitcs- positive multiplier (iff injections exceed withdrawals) increase gdp

Question 66

impact increase gov spending- expansionary fiscal policu

Answer 66

Increase in recession- counteract. Fall in public spening Important debt repayed when economy recover High levels of borrowing in econ danger- crowding out effect

Question 67

Adv cut direct taxes

Answer 67

Increase spending as disposible income increases Increase mpc- positive multiplier if increase net injections Ad to right

Question 68

Disadv cut direct taxes

Answer 68

Lead to increase psnb Decrease rveneu Additional money saved or pay off existing debts- paradox of thrift Spent imports- not beneficial to local g&s- no increased incentive for firms to invest

Question 69

Pro cut indirect tax

Answer 69

Sras to right- cut cost of production Increas ad as less expensive- increase spending on other g&S

Question 70

Disadv cut indirect taxes

Answer 70

May lead to increase psnb May increase demand demerit goods

Question 71

Increase gov spending adv

Answer 71

Road and rail network improved- transport mroe goods, decrease cost for firms Expand social capital- new schools and hospitals Creates jobs workers, boosts income, spent local g&s, creating more jobs, further boost income Lras to rght- long term benefit- supply side Multiplier and create more jobs

Question 72

Increase gov spending- disadv

Answer 72

Increae psnb Time lags- planning permisson and get programmes started- eg in 2009 recession- labour bought forward infrastructure n pipeline Crowd out private sector spending and investment- damage competitiveness in industry longer term

Question 73

Multiplier effect

Answer 73

Increase gdp+ multiplier x increas enet injections into circular flow of inocme 1=mps+mpt+mpm+mpc Multiplier = 1/1-mpc = 1/mps+mpm+mpt

Question 74

Negatiev multiplier

Answer 74

Decrease gdp= increase net withdrawals x multipier

Question 75

Effectiveness of expansionary fiscal policy depends on

Answer 75

Multiplier efect If have higher margiinal propensity to consumer- higher multiplier

Question 76

History of fiscal policy- 1945 to 1970s

Answer 76

Discretionary expansionary fiscal policu Sucesfulin keeping unemployment low and stable economic growth 1970s oil price crisis

Question 77

1979-1008 fiscal policy istory

Answer 77

Automiatic stabilisers not effective Stagflation- increase unemployment, increase accelerated cost push inflation End of 1970s- expansionary- artificiail econ growth when supply side econ (structural weakeness) unable to grwo fast enough for existing demand Poorly judged and misused00- accelerating inflation and increase inports ‘unecessary and decrease cmpetitiveness of british businesses

Question 78

Recession 2000/01- fiscal policy history

Answer 78

Collapse dot com bubble and 911 Bush cut tax and increase spending-sucess Uk econ-avoid recessioin-supply side fiscal rather expansionary fsical Not structural deficit as capital not current spending

Question 79

2009 credit crunch recession-fiscal policy

Answer 79

Lbaour use of expansionary Positive multiplier to lift out Infrastructure projects bought forward and bail out banks Psnb increase- current capital and tranfer (increase unemployment

Question 80

2010-2016 fiscal

Answer 80

Osbiurne cut budget Austerity decrease gov spending Cut welfare 26k to 20k max Vat increase 17.5 to 20% Cut local authoritie -libraries Cut surestart scheme -intridyce more single motehrs into work with better childcare

Question 81

Contractionary fiscal policy

Answer 81

Decrease ad ti decrease inflationary pressures Increase direct tax, decrease disposabke inckne- decrease ad when in positive output gap

Question 82

Single currency

Answer 82

Used in european single currency Reduce domestic inflation Us firms took adv of ireland in single currency Increase fdi- foreign direct investment, increase net injection , positve multiplier, increase gdp, positive output gao, fuel inflationary demand ohkk Increase direct tax to redhce ad

Question 83

Fiscal supply side policies

Answer 83

Aim to shift lras to right Increase efficiency and boost productive capacity Largely targeted private sector aiming to improve quality factor inputs- esp capital labour and entrepreneurship More poduction at lower price level

Question 84

Main categories of supplyy side policies- not all fiscal

Answer 84

Competition policy Increase incentives to work save and invest Creation more flexible labour market Policies to encourage increased investment in infrastucture and r&d

Question 85

Creation more flexible labour market- supply side

Answer 85

Eg deregulation- easier to hire and fire staff, increase spending on education and training - fiscal

Question 86

Competition policy

Answer 86

Deregulation Decrease barriers to entry Make markets more competitive- eg privatisation

Question 87

Increase incentives to work save and invest- supply side

Answer 87

Lower taxes- high income- save, low- no work Decrease welfare benefits- welfare refomr, decrease replacement ratio

Question 88

Policies to encourage increased investiment in infrastructure and r&d- supply side

Answer 88

Subsidies (gov pays) or tax break for r&d- inflation reduction plan biden Provided directly- gov spending- fiscal Telecoms, ewater, electricity

Question 89

Fiscal supply sider policies

Answer 89

Decrease direct tax or increase tax allowances Changes to welfare benefit system Increased spendiing education and training Increased capital spending infrastructure Encourage investment in r&d

Question 90

Decrease direct tax or increase tax allowances- fiscal supply side

Answer 90

Enhance incentive to work save and invest, lower unemployment trap Increase save- banks more cash to lend to businesses and entrepreneurs More busiinesses ratani more profit for reinvestment Shareholders retain more dividens, encourage individuals to invest in cpmanies by-purchasing stocks Important taxes arent reduced so much that gov no revenue to deliver effective public services

Question 91

Changes to welfare benefit system- fiscal supply side

Answer 91

Increase incentives find work, decrease uneemployment trap Thatcher- increase benefits in line with inflation rather av earnings Blair- working tax credit meant workers recieived extra benefits Incapacity benefits decreaes for thhose deemed less sick and capable of carying on with soem sort of wokrk Current con gov- decrease working tax credit, raise national living wage to 10.42 pounds Taxpayer not subsidising underpaying employer Welfare benefits combined uc- no more than 20k per year

Question 92

increase spending education and training- fiscal supply side

Answer 92

Increase occupational mobility Increase efficiency and effectiveness of labour in lr 0v expensive and time lag Current con gov- apprenticeship levy give large firms funds to train mroe employees

Question 93

Encourage investment in r&d- fiscal upply side

Answer 93

Gov fund r&d in defence o rhealthcare Tax credit, tax allowances, gov grants (subsidies, influence q+q of r and d by prvate sector V expensive and diff enforce patents on international market

Question 94

Effectiveness of supply side policies- free marketeer

Answer 94

No-classical Private sector more likely to deliver technical and allocative efficiency Concerned risk gov failure

Question 95

Keynsian interventionist approach to supply side policies

Answer 95

Market failre concern Carefully target gov spending n merit goods and infrastructure, r&d, education and training Lead to crowding in effect- firms attracted to areas with good infrasturcture, good controls within r&d and more skilled workforce

Question 96

Crowding out effect

Answer 96

Gov spending/borrowing displaces private sector spending/borrowing Increase gov borrowing, increase interest rates, increase cost of borrowing private esector jobs, deter from investing, decrease ad in short term Longer term- low levels of investment- less competitive industries, decrease domestic sales and exports, decrease econ growth lr

Question 97

Keynsian argument of crowding out efefct

Answer 97

Sensiblee borrow in recession Injection compensating decrease private sector spending During recession, privaet sector, investment falls

Question 98

Most economists wouuld argue that crowding out effect

Answer 98

Takes place during period of econmic growth Fund current expendaitrue- unsustainable in lr0- structural budget deficit But if on capital- kensians may argue- then justified as leads to stronger econ growth i n longer term

Question 99

Neutral fiscal stance

Answer 99

Gov runs a balanced budgeht Designed to have a benigni mpact on level of econ activity

Question 100

Demand management

Answer 100

Influence level of ad in econ Eg through contractionary fiscal poliu Create greater stability and smoothing out fluctuations in econ cycle Eg inject extra demand - cut in taxes or increase gov spending- when private sector demand too low- opp if demand pull inflation In past- gov attempt to fine tune econ by fiscal policy- most accept now not so precise

Question 101

Psnb

Answer 101

Public sector net borrowing Diff between tax rev and gov expendatityre Borrow from banking sector or non bank private sector- insurance companies, pension fynds, hedge funds, individuals- sell bonds

Question 102

Benefits of budget deficit

Answer 102

Finance capital spending- eg build new roads ro schoools- boot lr supply side of econ- brown justify post 2001 Keynsian- yes- boost ad to lift out of recesion

Question 103

An increase in teh exchange rate is most likely to contribute to

Answer 103

A reduction of inflation

Question 104

Public expenditure is gov spending on goods and services folllowing their consideration of

Answer 104

Collective needs

Question 105

A structural budget deficit can occur when

Answer 105

The econ is at full emp

Question 106

If there is a budget deficit that is addressed by the gov increasing tax the likely impact of this measure to rebalance the budget is

Answer 106

Reduced ad

Question 107

Tax against multinational often avoid

Answer 107

But under oecd rule smust prove that pay at least 15% tax rate in each and every couontry they operate Estimates it would raise 220bn dollars globally per year

Question 108

Inhibitiing factors to global consistent tax

Answer 108

Ie saudi arabia does not even have corpoerate tax system but instead has a tax system based on islamic principles