Fiscal Policy

Question 1

What is fiscal policy

Answer 1

Fiscal policy is the use of taxation, government spending and government borrowing to manage aggregate demand and achieve macroeconomic objectives

Question 2

What is fiscal policy used for

Answer 2

• chnages spending patterns on goods and services
• helps redistribute income and wealth as well as alleviate poverty
  -can affect aggregate demand and aggregate supply

Question 3

What is automatic fiscal policy (give example)

Answer 3

Automatic fiscal policy is when changes in fiscal policy occur naturally due to changes in aggregate demand
- for example a fall in aggregate demand will lead to an increase in givemrent spending on welfare benefits and unemployment benefits to provide a safety net

Question 4

What are some justifications for government spending

Answer 4

1) helps achieve a socially efficient level of public goods and correct market failure
A) tends be a lack of public goods under provision of private sector
B) improved and affordable public services allow for productivity and human capital gains which leads to overall societal gains

2) provides a safety net for low income earners
A) welfare benefits and unemployment benefits help low income earners stay out of poverty decreasing poverty and inequality

3) provides necessary infrastructure to increase lras
4) stimulate economic growth -> infrastructure -> international competitiveness

Question 5

How does government spending decrease poverty and inequality

Answer 5

• welfare state transfers such as welfare and unemployment benefits increase the disposable income of the low income earners which allows them to buy goods and services which are needed to sustain a good standard of living, also increases their income so the gap between higher income and lower income is less

Question 6

What are the two types of taxes

Answer 6

• direct taxation is tax levied on income, wealth and profit
  E.g - corporation tax, income tax and inheritance tax -> burden cannot be passed on

-indirect tax is tax levied on spending
E,g - duties on fuel cigarette and alcohol -> burden can be passed on -> charged to producers but paid by consumers dependant on ped

Question 7

How can level of taxation change growth or level of AD

Answer 7

• chnages in tex have a direct impact on disposable income -> consumption
• changes in corporation tax have an effect on post tax profit -> investment levels
• chnages in VAT have effect on retail prices -> consumption
• changes in national insurance have effect on amount of employees -> employment and incomes -> consumption

Question 8

How can taxation affect SRAS and lras

Answer 8

• decreased income tax -> incentive to join work and higher skilled migrants -> increase labour and productivity
• decrease corporate tax leads to investment in capital goods which increase production possibility
• low business tax can attract foreign direct investment

Question 9

What is a budget deficits and budget surplus

Answer 9

• budget deficit is when government spending is more than total tax revenues
• budget surplus is when government spending is less than total tax revenues

Question 10

What is public sector borrowing and hwo is is achieved

Answer 10

Public sector borrowing is the amount of money the government needs to borrow to finance their pending
- achieved through selling of government bonds

Question 11

What is national debt

Answer 11

National debt is the measure of accumulated debt of the government

Question 12

What causes a budget deficit

Answer 12

• recession which leads to rising unemployment and therefore lower tax revenues
• decrease in consumer spending which leads to less vat revenue as well as lower business profits and corporation tax revenue
• economic inactivity which leads to increases welfare benefits
• fiscal policy uses
• increase in debt interest
• demographic chnages -> ageing population-> increased state pensions

Question 13

What is the difference between discretionary fiscal and automatic stabilisers

Answer 13

• discretionary fiscal policy is deliberate chnages to taxes and government soenjfn
• automatic stabilisers are changes in gov spending and taxes which occur automatically due to economy progressing in business cycle

E.g going into a boom leads to higher taxes to control growth and lower welfare benefits
Going to into recession leads to increased government spending for welfare benefits

Question 14

What is fiscal austerity

Answer 14

When the government uses comtractionsry fiscal policy to control the budget deficit
- done through reduced government spending and increased tax revenues
Givermet spending can be reduced by public sector freeze and decreasing welfare benefits
Higher taxes such as vat and corporation