Fiscal Policy

Question 1

What does fiscal policy involve

Answer 1

Using government spending, taxation and borrowing to affect the level and growth of AD, output and jobs

Question 2

What is fiscal policy also a way of doing

Answer 2

Changing the pattern of spending on goods and services.
Also redistributing income and wealth.
Correcting free-market failures.

Question 3

What to changes in fiscal policy affect

Answer 3

AD and AS

Question 4

What is a bond yield

Answer 4

The rate of interest paid on government debt

Question 5

What is a budget (fiscal) deficit

Answer 5

The budget deficit is the difference between what the government receives in revenue and what it spends

Question 6

What is a cyclical fiscal deficit

Answer 6

The size of the deficit is influenced by the state of the economy - in a boom tax receipts are relatively high and spending on unemployment benefit is low

Question 7

What is direct taxation

Answer 7

Taxes on income, profits and wealth, paid directly by the bearer to the tax authorities

Question 8

What is fiscal policy

Answer 8

Taxation and spending measures that allow the government to guide the economy

Question 9

What is indirect taxation

Answer 9

Taxes on expenditure e.g. VAT. They are paid to the tax authorities, not by the consumer, but indirectly by the suppliers of the goods or services.

Question 10

What is national debt

Answer 10

Debt is the total amount owed by the government that has accumulated over the years.

Question 11

What is a structural fiscal deficit

Answer 11

The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the deficit will not disappear when the economy recovers.

Question 12

What are public sector businesses

Answer 12

Owner and operated by the governments

Question 13

What is the public sector

Answer 13

Not profit driven (yet the private sector usually is)

Question 14

Examples of public sector businesses / corporations

Answer 14

Channel 4

Royal Mail

Question 15

Key roles for fiscal policy

Answer 15

• financing government spending
• changing final income and wealth
• providing a welfare state safety-net
• managing the economic cycle
• improving long run competitiveness
• tackle important market failures

Question 16

Fiscal policy and AD

Answer 16

Fiscal policy has been seen as an instrument of demand management.

Question 17

Keynesian view of fiscal policy

Answer 17

Fiscal policy can have powerful effects on AD, output and unemployment when the economy is operating below full capacity and national output, and where there is a need to provide a demand-stimulus

Question 18

Monetarist view on fiscal policy

Answer 18

They believe that GS and tax hanged only have a temporary effect on AD, output and jobs and that the tools of monetary policy are a more effective instrument in controlling inflation and maintains macroeconomic stability.

Question 19

What do the multiplier effects of an expansionary fiscal policy depend on

Answer 19

How much spare productive capacity the economy has; how much of any increase in disposable income is spent rather than saved or spent on imports.

Question 20

What would a contractionary fiscal policy (commonly known as fiscal austerity) involve

Answer 20

• cut in government expenditure
• increase in direct and/or indirect taxes
• attempt to reduce the size of the budget deficit

Question 21

What can spending on the public sector involve

Answer 21

• transfer payments
• current government spending
• capital spending

Question 22

What are transfer payments

Answer 22

Welfare payments made available through the social security system including child benefits and state pension

Question 23

What is current government spending

Answer 23

Spending on state-provides goods and services

Question 24

What is capital spending

Answer 24

It includes infrastructure spending such as new motorways and roads. Public sector investment spending adds to the economy’s capital stock and can have important demand and supply side effects in the LR.

Question 25

What are the justifications for government spending

Answer 25

• to provide a socially efficient level of public goods and merit goods (overcome market failure)
• provide welfare benefits
• provide necessary infrastructure
• manage AD
• promoting equity
• improved economic efficiency and competitiveness

Question 26

What is direct taxation

Answer 26

Levied on income, wealth and profit

Question 27

What are indirect taxes

Answer 27

Taxes on spending e.g. excise duties

Question 28

What is a progressive tax

Answer 28

The marginal rate of tax rises as income rises

Question 29

What is a proportional tax

Answer 29

Where the marginal rate of tax is constant

Question 30

What is a regressive tax

Answer 30

The rate of tax falls as income rises

Question 31

Income tax in the U.K.

Answer 31

Progressive
Basic rate = 20%
Higher rate = 40%

Question 32

What is corporation tax

Answer 32

Tax on business profits.

There is a tax free allowance for businesses making low annual profits.

Question 33

What is value added tax

Answer 33

A tax that is charged on most goods and services that VAT registered businesses provide in the U.K.

Question 34

How does the UK redistribute income

Answer 34

Tax and welfare systems

Question 35

Why is the UK tax and welfare system mildly progressive

Answer 35

Because it leads to a smaller gap between households when final income is measured