Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country’s economy.

Question 2

What are the types of fiscal policy?

Answer 2

Reflationary - Expansionary
Deflationary - Contractionary

Question 3

What is a Expansionary fiscal policy?

Answer 3

Involves boosting AD by increasing government spending or lowering taxes

Question 4

What is a Contractionary fiscal policy?

Answer 4

Involves reducing aggregate demand by reducing government spending or increasing tax revenue

Question 5

What budget is associated with a Contractionary fiscal policy?

Answer 5

Budget Surplus

Question 6

What budget is associated with an Expansionary fiscal policy?

Answer 6

Budget Deficit

Question 7

When would a government use a Contractionary fiscal policy?

Answer 7

During a boom or positive output gap

Question 8

When would a government use an Expansionary fiscal policy?

Answer 8

During a recession or negative output gap

Question 9

Why would a government use an Expansionary fiscal policy?

Answer 9

Increase economic growth
Decrease uneployment

Question 10

Why would a government use an Contractionary fiscal policy?

Answer 10

Reduce price levels
Improve Current account

Question 11

What are the negatives of a government using an Expansionary fiscal policy?

Answer 11

Increase inflation
Worsen current account

Question 12

What are the negatives of a government using an Contractionary fiscal policy?

Answer 12

Reduce economic growth
Increase uneployment

Question 13

What are 2 features of fiscal policy?

Answer 13

Automatic Stabilisers
Discretionary Policy

Question 14

What are automatic stabilisers?

Answer 14

Automatic changes to government responses to economic conditions

Question 15

What is discretionary policy?

Answer 15

When the government deliberately chooses to change level of spending and tax.

Question 16

What are the different types of budget positions?

Answer 16

Structural
Cyclical

Question 17

What are Structural Budgets?

Answer 17

A government’s long term fiscal stance

Question 18

What are Cyclical Budgets?

Answer 18

A government’s short-term fiscal stance

Question 19

What can government spending be split into?

Answer 19

Current Expenditure

Capital Expenditure

Question 20

What is current expenditure?

Answer 20

Current expenditure consists of day-to-day government spending on recurring items

Question 21

What is capital expenditure?

Answer 21

Capital expenditure comprises the buying, constructing or improving of physical assets.

Question 22

What should a tax be?

Answer 22

Cheap to collect

Easy to pay

Hard to avoid

Question 23

What shouldn’t taxes do?

Answer 23

Create a disincentive to work

Question 24

What is horizontal equity?

Answer 24

People with similar income and ability to pay tax should pay the same amount of tax

Question 25

What is vertical equity?

Answer 25

People with higher income and higher ability to pay tax should pay more

Question 26

What are the types of taxation?

Answer 26

Progressive Regressive Proportional

Question 27

What is progressive taxation?

Answer 27

A progressive tax is a tax in which the tax rate increases as the taxable amount increases

Question 28

What does progressive taxation achieve?

Answer 28

Vertical Equity

Question 29

What is regressive taxation?

Answer 29

Taxation where an individual’s taxes fall as a percentage of income as income rises

Question 30

What does regressive taxation cause?

Answer 30

Incentive to work Inequality

Question 31

What is proportional taxation?

Answer 31

Taxation where everyone pays the same proportion of tax regardless of income

Question 32

What does progressive taxation achieve?

Answer 32

Horizontal Equity

Question 33

What are taxes in the UK?

Answer 33

Income tax, VAT, Exercise Duties

Question 34

What are factors of the level of government spending?

Answer 34

Size and Structure of a country’s population

Question 35

How would government policies affect government spending?

Answer 35

Correcting Inequality and poverty will see an increase in spending

Question 36

What is a budget deficit?

Answer 36

A budget deficit occurs when a government's expenditure is greater than its revenue.

Question 37

What are the problems with excessive spending?

Answer 37

Demand - Pull Inflation High Interest Rates Increased debt

Question 38

What are the problems with excessive debt?

Answer 38

Less future borrowing Higher interest payments Less attractive to foreign direct investment

Question 39

How can a government correct a cyclical budget deficit?

Answer 39

It will be corrected when the economy recovers

Question 40

How can a government correct a structural budget deficit?

Answer 40

Raise Taxes Reduce spending

Question 41

Why aren’t government surplus good?

Answer 41

Suggests that either taxes are too high or spending is too low

Question 42

What are UK fiscal rules?

Answer 42

Public sector net financial liabilities (debt) should be falling, relative to the size of the economy, The government's day-to-day spending should be met by its revenues, meaning the current budget should be in surplus

Question 43

Why is following fiscal rules important?

Answer 43

It’s creates economic stability

Question 44

What’s the OBR?

Answer 44

Office for Budget Responsibility

Question 45

What does the OBR do?

Answer 45

Publishes reports analysing government spending Use long term projections to measure sustainability Assess performance of the government at following the fiscal rules

Question 46

How can fiscal policies reduce poverty?

Answer 46

Direct - Benefits, Provision of Goods and Progressive taxation Indirect - Economic Growth

Question 47

What are limitations of fiscal policy?

Answer 47

Time - Lag Conflicting Objectives Political Manipulation