Fiscal Policy

Question 1

Define the term indirect tax

Answer 1

A tax imposed on spending on goods and services

Question 2

Analyse the advantages and disadvantages for countries that do not impose sales taxes.

Answer 2

Advantages:
-Lower prices for goods and services increase purchasing power.
-Reduced tax burden may encourage domestic spending and economic growth.
-Eliminating the need for businesses to collect and remit sales tax, making it easier to calculate expenses
Disadvantages:
-Reduced government revenue
-Risk of Overconsumption of demerit goods.
-Funding challenges for healthcare and education

Question 3

Explain how taxes can be used to reduce the rate of inflation

Answer 3

Higher taxes can reduce disposable income, leading to decreased consumer spending and a decrease in aggregate demand.
Increasing taxes on consumption, such as sales taxes or value-added taxes (VAT), can discourage excessive spending and reduce demand-pull inflation.

Question 4

Analyze how an increase in taxation might conflict with any two macroeconomic objectives

Answer 4

-Higher taxes can reduce consumer and business disposable income, leading to decreased spending. Reduced consumer spending can result in lower aggregate demand, potentially slowing down economic growth.
-Increased taxation, especially on labour income, can lead to reduced disposable income for households. This might result in lower consumer spending, negatively affecting businesses and potentially leading to job cuts.

Question 5

Explain how a reduction in indirect tax might help to reduce the effects of a recession

Answer 5

-Lower indirect taxes, such as sales or value-added taxes (VAT), reduce the cost of goods and services for consumers, encouraging increased spending and increasing demand.
-Lower taxes can make essential goods and services more affordable for consumers, especially those with limited disposable income, helping to maintain their standard of living during a recession.
-Reduced indirect taxes can lower production costs for businesses, making it more attractive to invest in production and expand operations, potentially leading to increased job opportunities.
-It helps the poor as it reduces tax burden, allowing them to purchase basic necessities.

Question 6

Analyse 3 impacts of an increase in VAT

Answer 6

-This raises the prices of most goods and services, reducing consumers purchasing power. As a result, consumers may cut back on their spending. This can lead to a decrease in overall consumer demand for non-essential items and contribute to economic slowdown.
-Higher VAT is a cost that businesses often pass on to consumers in the form of higher prices. As prices rise, it can lead to demand-pull inflation
-Businesses may experience reduced profitability due to either absorbing some of the tax increase. In the long term, this could lead to cost-cutting measures, potential job losses, and reduced investments in expansion or innovation.

Question 7

Explain why expansionary fiscal policy can cause a budget deficit for a government

Answer 7

Expansionary fiscal policy can only be achieved by increasing government spending, which causes a budget deficit.

Question 8

How can a fiscal policy be used to promote economic growth?

Answer 8

-Increase government spending on infrastructure, education, and healthcare projects to stimulate economic activity and create jobs.
-Reduce taxes on individuals and businesses to boost disposable income and encourage spending and investment.
-Increased spending on education can create a bigger more skilled labour force increasing economic growth