Fiscal policy

Question 1

What is fiscal policy?

Answer 1

Changes in taxation and government spending to meet the macroeconomic objectives

Question 2

What is the key source of government revenue?

Answer 2

Taxation

Question 3

What is current spending?

Answer 3

Government spending on the day-to-day running of the public sector

Question 4

What is capital spending?

Answer 4

Government spending to improve the productive capacity

Question 5

What are transfer payments?

Answer 5

Government payments to individuals for which no service is given in return

Question 6

What is a balanced budget?

Answer 6

Government receipts = government spending

Question 7

What is a budget deficit

Answer 7

Government spending > government receipts

Question 8

What is a budget surplus?

Answer 8

Government receipts > government spending

Question 9

What is demand side fiscal policy?

Answer 9

Changes in the level or structure of government spending and taxation aimed at influencing the components of AD

Question 10

What is discretionary fiscal policy?

Answer 10

The deliberate manipulation of government spending and taxation to influence the economy

Question 11

What is expansionary fiscal policy?

Answer 11

Increasing levels of government spending relative to tax

Question 12

What is contractionary fiscal policy?

Answer 12

Increasing levels of tax revenue relative to government spending

Question 13

If the government increases expenditure on roads, what will happen? Why?

Answer 13

Multiplier effect
This will generate income for households
Workers will spend their money in the economy
Providing additional income stream

Question 14

What does the size or value of the multiplier effect depend on?

Answer 14

The size of the injections or withdrawals from the circular flow of income

Question 15

What is supply-side fiscal policy?

Answer 15

Changes in the level of government spending and taxation designed to improve the supply-side of the economy

Question 16

What are the supply-side effects of fiscal policy? (5) (LCERI)

Answer 16

Labour market incentives 
Capital spending 
Entrepreneurship 
Research and development 
Improvements in human capital

Question 17

How does fiscal policy affect labour market incentives?

Answer 17

Income tax cut = workers are able to take home more pay per hour = incentive to work harder

Question 18

How does fiscal policy affect capital spending?

Answer 18

Increase in government spending = more investment

Question 19

How does fiscal policy affect entrepreneurship?

Answer 19

Government spending might be used to fund an expansion in the rate of new business start ups

Question 20

How does fiscal policy affect research and development?

Answer 20

Government spending can be used to encourage an increase in research and development

Question 21

How does fiscal policy affect improvements in human capital?

Answer 21

Government spending on education and training programmes = better quality of workforce

Question 22

What is the unemployment trap?

Answer 22

Where individuals receive more in benefit payments than they would be paid if they were in a job