Fiscal Policy 3

Question 1

Potential benefits of a budget deficit

Answer 1

• government borrowing can benefit growth

- the budget deficit as a tool of demand management

Question 2

How can government borrowing benefit growth

Answer 2

A budget deficit can be used to finance capital spending that leads to an increase in the stock of national assets. (Increased provision of public goods)

Question 3

How is the budget deficit a tool of demand management

Answer 3

Borrowing is a way of managing AD. Increased borrowing can be a useful stimulus to demand

Question 4

What is a fiscal multiplier effect

Answer 4

A change in the government budget deficit may lead to a more than proportional change in AD

Question 5

UK key policies for deficit reduction

Answer 5

• rise in standard rate of VAT to 20%
• rise in employee national insurance contributions
• welfare caps

Question 6

UK tax cuts

Answer 6

• corporation tax cuts
• freezing of fuel duties
• cuts in employer national insurance for long term unemployed

Question 7

How has the government been helped to lower interest rates on newly issued debt

Answer 7

Quantitative easing and by the decisions of the Bank of England to keep monetary policy interest rates at just 0.5% since March 2009.

Question 8

The UK government’s new fiscal rule (2015)

Answer 8

Fiscal dukes now include a target for a budget surplus by 2019/2020.
The economy will be viewed as being in ‘normal times’ if real annual growth is above 1%