Fiscal Policy

Question 1

Define Fiscal Policy.

Answer 1

Involves the use of government spending, taxation & government borrowing to influence the pattern of economic activity and also the level and growth of AD, output and employment.

Question 2

What is a budget deficit.

Answer 2

It occurs when government spending exceeds government revenue (G>T).
It is an injection into the circular flow of income and is called expansionary fiscal policy.

Question 3

What is a balanced budget

Answer 3

when government spending equals government revenue (G=T).

Question 4

What is a budget surplus.

Answer 4

Occurs when government spending is less than government revenue (G

Question 5

What is a cyclical budget deficit.

Answer 5

The part of the budget deficit that arises during a slowdown/recession and falls during a recovery/boom.

Question 6

What is a structural budget deficit.

Answer 6

The part of the budget deficit that is not affected by the economic cycle but results from structural change in the economy.

Question 7

Define National Debt.

Answer 7

The stock of all government debt that hasn’t been paid back to the debtors.

Question 8

What is public sector borrowing.

Answer 8

Borrowing by the government to finance a budget deficit.

Question 9

Demand-side fiscal policy

Answer 9

Changes in fiscal policy to increase or decrease AD.

Question 10

Expansionary Fiscal Policy

Answer 10

Fiscal Policy used to increase aggregate demand, e.g. more government spending than revenue.

Question 11

Contractionary Fiscal Policy

Answer 11

Fiscal Policy used to reduce aggregate demand, e.g. more taxation than spending.

Question 12

Supply-side fiscal policy

Answer 12

Changes in fiscal policy to increase productive capacity.

Question 13

Progressive taxation

Answer 13

A tax which rises in line with income.

Question 14

Regressive taxation

Answer 14

When the proportion of income paid on tax falls as income rises.

Question 15

Proportional taxation

Answer 15

When the proportion of taxation stays the same as income rises.

Question 16

Direct Tax

Answer 16

A tax which cannot be shifted onto someone else. These are normally levied on income and wealth.

Question 17

Indirect Tax

Answer 17

A tax which can be shifted onto someone else. E.g. by raising the price of a product being sold. These are levied on spending.

Question 18

What are 2 policies that could be involved in expansionary fiscal policy?

Answer 18

Cutting taxes and increasing government spending.

Question 19

Which type of fiscal policy involves increasing taxes and/or reducing government spending?

Answer 19

Contractionary Fiscal Policy.

Question 20

Fiscal Austerity

Answer 20

Refers to decisions made by a government to reduce the amount of government borrowing by either cutting government spending and/or increasing taxation.

Question 21

What are the 3 types of government spending?

Answer 21

Transfer payments, e.g. benefits.
Current government spending, e.g. state-provided g/s.
Capital spending, e.g. spending on infrastructure.

Question 22

What are the 5 reasons governments spend?

Answer 22

Public goods and merit goods.
Safety-net system of welfare benefits.
Necessary infrastructure.
Managing the level and growth of AD.
Promoting equity.

Question 23

Automatic Stabillisers

Answer 23

Changes in tax revenues and government spending that change automatically as the economy moves through the cycle.

Question 24

Discretionary Fiscal changes

Answer 24

Deliberate changes in direct and indirect taxation and government spending, e.g. a decision by the government to increase income tax.

Question 25

What is the biggest source of income for the UK government?

Answer 25

Income Tax

Question 26

Corporation Tax

Answer 26

A tax on business profits. (19% in the UK)

Question 27

Value Added Tax (VAT)

Answer 27

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

Question 28

Hypothecated Tax

Answer 28

A tax levied to raise money for a specific purpose. E.g. National Insurance Contributions (NICs)

Question 29

What is a levy & why do governments levy taxes?

Answer 29

When you levy something, you impose something or put something in place.
Governments levy taxes to raise revenue to finance government expenditure. They also do it to change patterns of economic activity. As well as this, it helps to redistribute income and discourages consumption & production.