FISCAL POLICY

Question 1

WHAT DOES FISCAL POLICY CONSIST OF?

Answer 1

Government spending and Taxation

Question 2

LOOSE FISCAL POLICY

Answer 2

High government spending and low taxation

Question 3

TIGHT FISCAL POLICY

Answer 3

Low government spending and high taxation

Question 4

WHEN WOULD LOOSE FISCAL POLICY BE USED?

Answer 4

It would most likely be used within a recession or when there is a negative output gap.

Question 5

WHAT LOOSE FISCAL POLICY MAY DO?

Answer 5

➸An increase in aggregate demand
➸Increased economic growth
➸Reduces unemployment
➸Increases inflation
➸Worsens the current account

Question 6

WHEN WOULD TIGHT FISCAL POLICY BE USED?

Answer 6

It would most likely be used in a ‘boom’ or when there is a positive output gap

Question 7

WHAT TIGHT FISCAL POLICY MAY DO?

Answer 7

➸Reduces economic growth
➸Increases unemployment
➸Reduces price levels and improves the current account

Question 8

AUTOMATIC STABILISERS

Answer 8

The governments fiscal policies may automatically react to changes in the economic cycle

Question 9

STRUCTURAL BUDGET POSITION

Answer 9

This is the governments long term fiscal stance

Question 10

CYCLICAL BUDGET POSITION

Answer 10

This is the governments short term fiscal stance

Question 11

HORIZONTAL EQUITY

Answer 11

People who have similar incomes and ability to pay taxes should pay the same amount of tax

Question 12

VERTICAL EQUITY

Answer 12

People who have higher incomes and greater ability to pay taxes should pay more tax than those on lower incomes.

Question 13

PROGRESSIVE TAX

Answer 13

When someone’s taxes rise as their income rises

Question 14

REGRESSIVE TAX

Answer 14

When someone’s taxes fall as their income rises

Question 15

BENEFIT OF REGRESSIVE TAX

Answer 15

➸Encourages supply side growth
➸Hopes that the economy will benefit off of the trickle down effect
➸Incentive to work harder and earn more income

Question 16

PROPORTIONAL TAX

Answer 16

When people pay the same amount of tax regardless of their income