Fiscal Policy

Question 1

Examples of policy instruments

Answer 1

Rate of interest
Rate of Tax
Levels of Gov Expenditure

Question 2

What’s the fiscal policy?

Answer 2

A policy instrument involving adjustment of levels of gov expenditure & tax to influence aggregate demand

It can be used to influence behaviour of firms & individuals (like gov placing heavy tax on cigs to discourage consumption)

Question 3

Why do Governments impose tax?

Answer 3

To pay for public services
To discourage certain activities
To control aggregate demand
To distribute wealth fairer by taxing wealthy more

Question 4

Examples of direct tax

Answer 4

Income tax
Social insurances tax
Corporation tax
Capital Gains tax
Inheritance tax

Question 5

Examples of indirect tax

Answer 5

Sales tax
Duties
Custom duties
Council tax
Business rates
Stamp duties

Question 6

Examples of environmental tax

Answer 6

Landfill tax
Climate change levies
Aggregates levy

Question 7

Main focuses for government spending in most countries?

Answer 7

Healthcare
Education
Defence
Interest
Public safety
Social Services

Question 8

Pros of gov expenditure on health care

Answer 8

Improved health outcomes will boost active labour supply
Will also increase productivity
Decreases risks of relative poverty

Question 9

Cons of gov expenditure on health care

Answer 9

Better health results can be achieved without an increase in health funding

Question 10

Pros of gov expenditure on education

Answer 10

May increase the skills & productivity of workers

Improvement in human capital will lower structural employment

More competitiveness

Question 11

Cons of gov expenditure on education

Answer 11

The effectiveness of education spending has been questioned

Money may be better spent targeting certain groups or ages

Question 12

What’s a fiscal deficit?

Answer 12

Gov spending > Gov revenue

The gov must borrow money to fund the deficit like from foreign banks/other govs

Question 13

What’s a fiscal surplus?

Answer 13

Gov revenue > Gov spending

The revenue could be used to repay government debts

Question 14

Impacts of a fiscal deficit?

Answer 14

with persistant deficits and rising national debt comes future generations being burdened with the debt of “today” as they’ll be paying for excesses of prev generations

Question 15

Impacts of a fiscal surplus?

Answer 15

the surplus can be used to:
-spend on the future provision of public services
-to lower taxes
- to repay some of the national debt (reducing future interest payments)

Question 16

Impact of a fiscal policy on macroeconomic objectives?

Answer 16

Fiscal policy used to influence aggregate demand

Gov may reduce a surplus by 1.spending more 2.taxing less (Expansionary fiscal policy) to stimulate the economy

gov may increase a surplus by 1.spending less 2. taxing more (contractionary fiscal policy) to reduce the size of a deficit

Question 17

Impact of contractionary fiscal policy on inflation

Answer 17

inflation’s caused by aggregate demand rising too quick.

Gov would raise tax hence reducing disposable income and reduce demand resulting in a relief in inflationary pressure

Question 18

Impact of expansionary fiscal policy on economic growth

Answer 18

increase in gov expenditure increases (like education) demand as if more civil servants are employed, there will be more demand for most goods & services considering people who were unemployed take up the new jobs

Decrease in tax generates more demand as firms & households will have more money to spend

Question 19

Impact of expansionary fiscal policy on unemployment

Answer 19

A decrease in tax can help stimulate demand and to meet this extra demand, firms will have to produce more and so more staff will be taken in and unemployment decreases

Question 20

Impact of contractionary fiscal policy on current account deficit

Answer 20

If there’s a large deficit on the current account, contractionary fiscal policy helps reduce aggregate demand for imports