Fiscal Policy

Question 1

Fiscal Policy

Answer 1

The use of taxation and government spending to control the macroeconomic performance of the economy

Question 2

Key roles of fiscal policy (6)

Answer 2

• Financing government spending
• Changing distribution of income and wealth
• Providing a welfare state safety net
• Managing the economic cycle

• Improve long-run competitiveness
• Tackling MF/ negative externalities

Question 3

Top three areas of government spending

Answer 3

• Education
• Social care
• Health care

Question 4

Current spending

Answer 4

Spending on providing public services

Question 5

Examples of current spending (4)

Answer 5

• Salaries of NHS workers
• Road maintenance
• Drugs used in health care
• Army supplies (ammunition)

Question 6

Capital spending

Answer 6

Spending on new public infrastructure

Question 7

Examples of capital spending (4)

Answer 7

• Construction of new motorways and bridges
• New NHS equipment
• Flood defence schemes
• Extra defence equipment

Question 8

Expansionary fiscal policy

Answer 8

Occurs when the gov increases spending and reduce taxes this is normally done during a recession/downturn in order to boost AD

Question 9

Contractionary fiscal policy

Answer 9

Occurs when the gov decreases spending and increases taxes this normally during a boom phase in order to reduce AD

Question 10

When is it appropriate to use expansionary policy?

Answer 10

• When used when there is slack in the economy, this will grow the economy with little to no effect on inflation
• If used when there is little slack, inflation will rise significantly and only small growth will be seen

Question 11

Discretionary policy

Answer 11

Deliberate changes in government spending and taxation with the aim of influencing economic activity

Question 12

Automatic stabilisers

Answer 12

Mechanisms which reduce the impact of changes in the economy

Question 13

Fiscal policy cushioning the fall explain

Answer 13

• If demand deficient UE occurs and there is no social protection incomes will fall dramatically
• Leading to minimal spending and causing a massive slump
• Gov spending in the form of social protection cushions the fall in incomes and therefore spending

Question 14

Fiscal policy ‘tame the flame’ explain

Answer 14

• In a boom stage spending will increase dramatically with no taxes
• This will lead to huge inflationary pressures, asset bubbles, instability and serious repercussions
• Taxes tame the amount of spending, reducing the consequences dramatically

Question 15

Largest gov tax earnings (5)

Answer 15

• Income
• National Insurance
• VAT
• Corporation
• Excise duties

Question 16

Cyclical deficit

Answer 16

When governments operate a deficit and have to borrow money due to the state of the economy ie recession or downturn

Question 17

Structural deficit

Answer 17

When governments operate a deficit and borrow regardless of the state of the economy ie overspending/ inefficient use of revenue