fiscal policy

Question 1

what is fiscal policy

Answer 1

fiscal policy refers to the use of government spending and taxation to influence the economic environment

Question 2

How much money has Rishi Sunak invested in education.

Answer 2

£96 billion has been used for tutoring and catch up lessons for the work missed out in lockdown

Question 3

What are the two benefits in a fall in income tax?

Answer 3

1. Increased incentive to work
2. Greater disposable incomes leading to greater consumption.
3. Trickle down effect- as those high income earner earn more the may chose to invest

Question 4

Economic activity

Answer 4

The activity of making, purchasing and selling of goods and services

Question 5

reasons for an expansionary fiscal policy

Answer 5

1. boost growth
2. reduce unemployment
3. redistribute income

Question 6

reasons for deflationary fiscal policy

Answer 6

1. reduce inflation
2. reduce budget deficit
3. reduced current account deficit

Question 7

how can a deflationary fiscal policy cause a current account surplus

Answer 7

with increase taxes incomes are likely to fall and people are less likely to import as a result

Question 8

what is a budget deficit

Answer 8

the amount the the government has to borrow each year as a result of G spending> G Income

Question 9

what is national debt

Answer 9

the total amount of money that the government owes to private sector and other purchasers of UK gilts.

Question 10

negatives of running a budget deficit

(crowding out analysis

Answer 10

when the government runs a high budget deficit for a long time and needs to borrow money it will issue more government bonds

with an increase in supply the market price for bonds falls and the yield may exceed 1% (current bank rate)

The government may finance their debt in the short term

But as banks chose to buy bonds therefore decreasing their supply of money falls meaning less loans can be lent out at a lower interest rate. This may cause interest rates to rise and investment may fall as a result.

Question 11

draw the crowding out diagram

Answer 11

//

Question 12

when may crowding out be particularly harmful

Answer 12

when recovering from a recession such as covid.

Question 13

when may operating on a budget deficit be ok

Answer 13

(structural). the golden rule says the government is able to borrow as long as it funds capital spending such as investment on the HNS or the HS2

as it improves the quality and quantity of the workforce therefore shifting out lras

(cyclical). when avoiding deflation and the real wage unemployment associated with it (hysteresis)

Question 14

how to calculate the yield on bonds

Answer 14

yield= (coupon/market price)X100

Cooper is always on top

Question 15

why may crowding out be particularly likely in the UK

Answer 15

as the bank rate is currently at 0.75% many banks will chose to invest in bonds which have a higher coupon

Question 16

what the relationship between the market price and the yield of a bond

Answer 16

as its an inverse relationship

Question 17

how much money did the furlough scheme cost the government

Answer 17

the government spent 70 billion pounds on the furlough scheme

Question 18

what is the UKs national debt as a percentage of GDP

Answer 18

96%

Question 19

negatives of running a budget deficit

Answer 19

1. intergenerational inequality
2. falling credit ratings
3. crowding out.

Question 20

examples of interventionist market failure

Answer 20

1. hs2
2. education and vocational training
3. health care

Question 21

market based supply side policies

Answer 21

1. privatisation- creates profit motive

2. deregulation

Question 22

problems with privatisation

Answer 22

1. may cause mass unemployment as firms seek to make profit gains and cut labour costs

Question 23

labour market policies

Answer 23

1. reduce income tax
2. reducing welfare benefits
3. reducing the power of trade unions
4. removing the NMW

Question 24

what causes the economic cycle

Answer 24

1. fluctuations in ad
2. external shocks
3. multiplier

Question 25

conflict of actual growth | demand

Answer 25

1. demand pull inflation if there is no spare capacity 2. balance of trade deficit (assuming its not export led growth) 3. high national debt (if fiscal stimulus is being used) 4. inequality (if tax system isn't progressive).

Question 26

Problems with removal of trade unions and NMW

Answer 26

workers may be exploited without them

Question 27

why is falling credit ratings negative for the UK government

Answer 27

Moodys have downgraded credit ratings from Aa2 to Aa3 following the uncertainty caused by Brexit. This may make government borrowing harder as investors may be less trusting that they will get repaid. When demand is low for bond the yield increases on existing bonds making new bonds less attractive and government debt more expensive This may harm economic development and less spending in goods such as education is likely

Question 28

examples of countries that have a credit rating of AAA

Answer 28

Germany Australia Netherlands Canada Investors may instead chose to buy these government bonds and development and economic growth may improve here

Question 29

evaluation of the credit raters

Answer 29

These credit raters have imperfect information and a country may be down graded unfairly only Moodys down graded the UK whereas the other didn't

Question 30

what does the government need to consider when choosing to run a budget deficit

Answer 30

1. current national debt (94% of GDP which is the highest value since the 1960s) 2. how big the negative output gap is 3. how effective monetary policy is

Question 31

cyclical budget deficit

Answer 31

a budget deficit that is dictated by the economic cycle Eg less tax revenue is earned as business make less profits and more unemployment benefits are required

Question 32

why are we not worried about a cyclical budget deficit

Answer 32

as it is an automatic stabiliser as earnings increase as a result of the fiscal stimulus the economy may experience fiscal drag. Increased earning= increased tax revenue= repaid budget deficit

Question 33

structural budget deficit

Answer 33

one that happens at full capacity

Question 34

how can lowered tax improve the supply side of the economy

Answer 34

1. increases incentive to work as workers can keep a larger percentage of their income 2. encourages workers to get training and education to get the jobs they wanted increasing the quality of the workforce 3. this increases the supply of labour increasing the competition for jobs 4. firms could lower wages and produce the same amount at a lower cost

Question 35

causes of a structural deficit

Answer 35

1. fiscal stimulus (such as the furlough scheme)- even when the economy recovers the government will still owe the spending on fiscal spending 2. ageing population- increased spending on pensions. 3. Dutch disease- when the government builds when the economy is rich but can't continue to finance spending when economy is poor

Question 36

explain the dutch disease

Answer 36

the dutch economy was reliant on tulips. a rise in tulip prices meant that many firms earned higher profits meaning tax revenue increased this financed government spending when the price of tulips fell the government no longer had access to tax revenue and they became less able to finance the public spending

Question 37

evaluation of a structural deficit

Answer 37

1. how much is being spent (less than 3% of GDP) | 2. what it is being spent on

Question 38

why is the cost of borrowing so low.

Answer 38

1. QE has increased the demand in secondary markets 2. market value of bonds increases 3. this pushes the yields down 4. so new debt could be issued at a lower coupon 1. years of low bank rates increases asset prices. 2. savers withdraw they cash to invest in bonds

Question 39

how expensive have debt interests been

Answer 39

since 2020 the Government has been spending around £800 million pound on interest payments