Fiscal Policy

Question 1

Fiscal policy

Answer 1

The manipulation of taxation and government spending in order to influence AD

Question 2

Expansionary Fiscal policy

Answer 2

It is the increase in government spending however the argument to this is that it can result in crowding out
Increases AD:
- Boost economic growth
- Reduces (cyclical) unemployment
- Increases (demand pull) inflation
- Redistributes income

Question 3

Contractionary Fiscal policy

Answer 3

It is the reduction in government spending
Decreases AD:
- Reduces (demand pull) inflation - ‘cool’ down the economy
- Redistribute income
- Reduce budget deficit and national debt
- Reduce current account deficit

Question 4

Reasons for government spending

Answer 4

• AD management
• Re-distribute income and wealth
• Government spending to provide public and merit goods, and correct market failure such as exteralities

Question 5

Increased role of the public sector caused by

Answer 5

• Increased intervention to tackle market failure
• An ageing population - Health, pensions and social care
• High income elasticity of demand for government services
• ‘Displacement theory’

Question 6

The budget: The government can:

Answer 6

• Spend a greater amount than it collects in tax (Budget deficit)
• Spend a smaller amount than it collects in tax (Budget surplus)
• Spend the same amount than it collects in tax (Balanced budget)

Question 7

Direct tax

Answer 7

• A tax that must be paid by a specific individual or business
• They can act as a disincentive to enterprise employment but are easier to make progressive so may be seen as fairer
• Affect AD via C and I

Question 8

Direct tax advatages

Answer 8

• Less inflationary as they do not directly impact the price level
• Can act as automatic stabilisers to flatten the trade cycle
• Progressive

Question 9

Direct tax disadvantages

Answer 9

• Possible fiscal drag
• Can be a disincentive to work
• Less flexible - Can only be changed in budget
• Poverty traps - Where tax means someone is better off on benefits than in work

Question 10

Indirect tax

Answer 10

• A tax paid on the expenditure or value added on goods or service
• The burden of the tax can be passed on in the form of higher prices
• These are simple to collect and difficult to avoid but they can be inflationary and they are regressive so may seen as unfair
• These tend to affect AD via C and SRAS via firms costs

Question 11

Indirect tax advantages

Answer 11

• Consumer has choice whether to pay
• Can be used to discourage demerit goods
• Cheaper to administer

Question 12

Indirect tax disadvantages

Answer 12

• Inflationary
• Tend to be more regressive
• Not transparent