Fiscal policy

Question 1

Loose fiscal policy

Answer 1

Done to boost aggregate demand by increasing government spending and lowering taxes, increase growth and employment but increases inflation and the budget defecit

Question 2

Tight fiscal policy

Answer 2

Done to reduce aggregate demand by reducing government spending and increasing taxation, reduces economic growth and increases unemployment but reduce inflation and improve BofP

Question 3

Automatic stabilisers

Answer 3

Fiscal policy will happen automatically, during recession they will be paying more benefits so increase gov spending and also receiving less tax revenue due to unemployment

Question 4

Discretionary policy

Answer 4

Deliberately Change policy in tax and spending to improve infrastructure for example

Question 5

Tight monetary policy

Answer 5

Reducing aggregate demand through its interest rates, restriction on money supply in credit availability and strong exchange rate

Question 6

Loose monetary policy

Answer 6

Increasing aggregate demand through low interest rates, less restricted money supply and credit availability and weak exchange rate

Question 7

Structural budget position

Answer 7

Budget position over a whole period of the economic cycle long term

Question 8

Cyclical budget position

Answer 8

Budget position in the short term dependent on the economic cycle short term

Question 9

Difference between capital and current expenditure

Answer 9

Capital is on assets like infrastructure and current is repeated on on things which are used up quickly like wages

Question 10

Horizontal equity

Answer 10

People who have similar incomes should pay similar tax

Question 11

Vertical equity

Answer 11

People with higher incomes should pay more tax than those with lower incomes

Question 12

Progressive taxation

Answer 12

Taxes rise as their incomes rise, this is done as a percentage and reduces poverty with redistribution of income.

Question 13

Regressive taxation

Answer 13

Taxes fall as their income rises, gives higher incomes incentive to work harder and earn more so economy will benefit from trickle down effect.

Question 14

Trickle down effect

Answer 14

Higher incomes for the rich will mean they invest more in businesses which creates more jobs.

Question 15

Proportional tax

Answer 15

Everyone pays the same proportion of tax regardless of their income, promotes horizontal equity and reduces incentive to evade tax.

Question 16

Negatives of proportional tax

Answer 16

• don’t have vertical equity
• brings in less tax revenue

Question 17

Laffer curve what does it show

Answer 17

Shows how increasing direct tax leads to a decline in tax revenue as people have less incentive to work

Question 18

What is the x and y axis for the laffer curve

Answer 18

X = tax rate
Y = tax revenue

Question 19

Example of a progressive and regressive tax in the UK

Answer 19

Progressive - income tax
Regressive - VAT

Question 20

problems with fiscal policy

Answer 20

• time lag in recognising need for a change in fiscal stance
• imperfect information as multiplier and size of output gap are difficult to gage
• magnitude of increase
• response lag

Question 21

Evaluation points for tight fiscal policy

Answer 21

unemployment - Labour intensity of an area
Debt - government will need to increase spending in the long term to pay unemployment benefits
Sustainability - Gov spending drop means less subsidies for sustainable production