FISCAL POLICY

Question 1

What is fiscal policy ?

Answer 1

The GOVT’s use of spending , direct and indirect taxes , borrowing etc to affect the level of AD and growth

Question 2

What is the public sector ?

Answer 2

Businesses owned by the GOVT - whereas the private sector is privately owned

Question 3

Give examples of public sector corporations ?

Answer 3

Met office
OS
Channel 4
Network rail
Royal mail until 2013

Question 4

What is the key role of Fiscal policy ?

Answer 4

Finance GOVT spending
Provide welfare state security
Manage the economic cycle
Tackle market failures
Change final income and wealth

Question 5

What is GOVT spending ?

Answer 5

Spending by the public sector on goods and services such as education health care and defence

Question 6

What is GOVT current spending ?

Answer 6

The spending on public services

Salaries of NHS workers
Drugs used in healthcare
Road maintenance
Army logistics

Question 7

What is GOVT capital spending ?

Answer 7

Spending on new public infrastructure

Building new motorways
New NHS equipment
Extra defence equipment
Flood defence schemes

Question 8

What is the economic importance of GOVT spending ?

Answer 8

Key component of AD
Big regional impact of economy
Providing public and merit goods
Achieving greater equity

Question 9

What is the economic importance of education spending ?

Answer 9

May increase the skills and productivity of workers

Improvement of human capital can lower structural unemployment

More innovation / competitiveness

Question 10

What is the economic importance of healthcare spending ?

Answer 10

Improved health outcomes will boost active labour supply

Increased productivity

Lessened risk of relative poverty

Question 11

What are direct taxes ?

Answer 11

Taxes that cannot be legally shifted by the person legally liable to shift the tax onto someone else . Levied on income and wealth

Question 12

What is proportional tax ?

Answer 12

Proportion of tax paid stays the same as the income rises

Question 12

What is regressive tax ?

Answer 12

Proportion of income paid in tax falls as incomes increase

Question 12

What are indirect taxes ?

Answer 12

Tax that can be shifted by the person legally liable to pay the tax onto someone else ( via raising the price of good being sold by the taxpayer )

Question 13

What is progressive tax?

Answer 13

Proportion of income paid in taxes rises as income rise

Question 14

How does tax rates affect aggregate demand ?

Answer 14

It affects :

Income and disposable income
Corporation tax + business investments
National income and labour demand
Vat levels and consumer spending
Taxation and business r and d spending

Question 15

What is expansionary fiscal policy ?

Answer 15

Policy with aims to increase AD

Question 16

What are some examples of expansionary fiscal policy in action ?

Answer 16

Cut in income tax - boosts disposable income - adds to consumer demand

Cut in indirect taxes - lower prices - higher real income - adds to consumer demand

Cut in corporation tax - higher post tax profits - adds to business capital spending

Question 17

What is the effect of lower corporation tax on business ?

Answer 17

Businesses keep larger profits

Rise in planned investment

Increase in capital spending if they inject into the CFI

Creates multiplier effect on demand output and employment