Fiscal policy

Question 1

What is fiscal policy?

Answer 1

Using taxation and government spending to control inflation

Question 2

What is the target inflation in the UK

Answer 2

2% 1% or 3%

Question 3

What are the effects of fiscal policy

Answer 3

Changes to growth, unemployment and Circ flow (multiplier effect)

Question 4

What are the different types of fiscal policy

Answer 4

Expansionary
- Increase spend, decrease tax
Contractionary
- Decrease spend, increase tax

Question 5

What are the negatives of expansionary policy

Answer 5

Increases government debt with debt

Question 6

What are the pros of expansionary policy

Answer 6

• Cutting taxes increase consumption
• Government spending on infrastructure and projects to increase potential

Question 7

What are the pros of contractionary policy

Answer 7

• Tax can decrease consumption
• Cutting tax can stop budget deficit
  Interest can be relayed into the economy

Question 8

What are the cons of contractionary policy

Answer 8

• Lower living standards
• Less investment so lower potential growth
• May damage employment and circular flow

Question 9

What is a budget surplus and deficit

Answer 9

Deficit is when gov spend is higher than tax rev
Surplus is when gov spend is less than tax rev

Question 10

How does expansionary policy effect demand and supply and evaluate each

Answer 10

Consumption increases and therefore AD does (higher inflation - could have lower BoP)
Lower corp tax would increase investment (usefulness dependant on AD increase otherwise output gap)

Question 11

How does contractionary policy effect the economy

Answer 11

Lower AD as consumption falls
Better balance of payments too
Reduction in GDP

Question 12

What are the Pros and Cons of Fiscal policy

Answer 12

Economic growth
- It’s a short run method and wont increase long run
- good for recessions
- Time lag

Unemployment
- Gov spending could lead to employment
- Opportunity cost

Inflation
- Very hard to fine tune the adjustment in inflation and is a general tool
- Other changes that would effect supply

Balance of Payments and Current account
- High propensity to import so expansionary may have less effects

Question 13

What are the trade offs of Fiscal policy

Answer 13

Expansionary
- Higher output
- Lower Unemployment

Contractionary
- Increase Unemployment
- Damage GDP

Question 14

What are some of the determinants of Fiscal policy

Answer 14

Size of the change in spending and tax

Size of the multiplier on demand

How close economy is the full employment

Time lag