Fiscal Policy

Question 1

Define Fiscal Policy?

Answer 1

A collection of policies about government decisions and actions on taxation and government spending, and government borrowing.

Question 2

What is the relationship with tax and AD and AS?

Answer 2

• Tax goes up, AD goes down, AS goes down

- Tax goes down, AD goes up, AS goes down

Question 3

What is the relationship between Government Spending, AD and AS?

Answer 3

• GS goes up, AD goes up, AS goes up

- GS goes down, AD goes down, AS goes down

Question 4

What is the purpose of fiscal policy?

Answer 4

• Influence AD and AS
• Soothing cyclical fluctuations
• Changing income distribution
• Altering the balance between the public and private sector
• Balancing the government budget

Question 5

What is fiscal policy to increase economic activity known as?

Answer 5

• Expansionary policy

- Reflationary policy

Question 6

What is fiscal policy to decrease economic activity known as?

Answer 6

• Contractionary policy

- Deflationary policy

Question 7

Give an example of automatic stabilisers for rising AD?

Answer 7

• There’s a risk of AD > AS - which may lead to inflation
  
  • Tax: more tax will be paid
    
    • more withdrawn from the circular flow
  • Benefit: less benefits will be paid
    
    • less injected in the circular flow
  • A brake is applied to economic growth, the rise in AD slows down.

Question 8

Give an example of automatic stabilisers for falling AD?

Answer 8

• There’s a risk of high unemployment and insufficient output- negative output gap
  
  • Tax: less tax will be paid
    
    • less money withdrawn
  • Benefits: more benefits will be paid
    
    • more injections into the circular flow
• A brake is applied to recession, the fall in AD slows down

Question 9

What are the issues concerning a government policy and how well it will work?

Answer 9

• Flexibility
• Visibility
• Reach
• Conflicting effects
• Time lags
• Forecast accuracy

Question 10

Explain flexibility?

Answer 10

• How easy a policy is to implement

- How frequently it can be changed

Question 11

Explain visibility?

Answer 11

• How aware households and firms are
• different taxes have different disabilities
  
  • governments tend to: change VAT rather than income tax, change national insurance rather than income tax

Question 12

Explain Reach?

Answer 12

-How many people are affected

Question 13

Define a time lag?

Answer 13

-The time between the occurrence of the problem and the desired effect of a policy applied to it

Question 14

What are the three stages of a time lag?

Answer 14

• Recognition lag
• Implementation lag
• Behavioural lag

Question 15

Explain recognition lag?

Answer 15

-The time taken to realise that a problem exists

Question 16

Explain Implementation lag?

Answer 16

-The time taken to put a policy in place

Question 17

Explain behavioural lag?

Answer 17

-The time it takes for households and firms to react to a policy

Question 18

What are the problems with forecasting?

Answer 18

• To achieve the desired effect of an AD/AS policy the future has to be predicted:
  
  • future economic performance has to be predicted correctly
  • the extent of the effect of automatic stabilisers
  • the multiplier effect

Question 19

Define the government’s budget?

Answer 19

The difference between a government’s income and its spending

Question 20

When is the governments budget balanced?

Answer 20

Income=Spending

Question 21

When is the Governments budget in a surplus?

Answer 21

Income > spending

Question 22

When is the governments budget in a deficit?

Answer 22

Spending > Income