Fiscal Policy an supply-side policies ( Macro )

Question 1

What does fiscal policy entail?

Answer 1

Manipulation of:
- Government spending
- Taxation
- Budget balance

Question 2

How can fiscal policy be used to influence aggregate demand?

Answer 2

• By increasing / decreasing government spending, a component of AD, which also increases or decreases budget surplus / deficit + also increasing or decreasing taxation

Question 3

How can fiscal policy be used to influence aggregate supply?

Answer 3

Done by shifting the LRAS curve, generally done by altering microeconomic incentives for economic agents:
- Income tax cuts ( make people work harder + encourages saving and investment )
- Cuts in value of unemployment benefits ( encourages unskilled and low-paid workers to choose work rather than unemployment )

Question 4

What’s the difference between a direct and indirect tax?

Answer 4

e.g income tax is direct tax because person who receives income is liable in law to have to pay tax to government, whilst on the other hand, tax on tobacco is indirect tax because the seller of the good, not buyer, is liable to pay the tax

Question 5

What’s the relationship between budget balance and national debt?

Answer 5

Budget deficit occurs when government spending exceeds flow of tax and other revenue sources, leading to heightened government borrowing to make up for the deficit, and when budget surplus, government can afford to pay back debt

Question 6

How can supply-side policies help improve the economy?

Answer 6

• Increasing personal incentives: makes it worthwhile for people to work harder through introduction of measures like cutting income tax
• Deregulating economy: can remove costs of complying with regulation and make entry to markets more accessible

Question 7

How do supply-side policies affect unemployment?

Answer 7

• By enabling output to grow quicker, supply-side policies increase demand for labour to produce extra output, thus reducing unemployment

Question 8

How can supply-side policies affect the UK’s external performance?

Answer 8

By improving both price and quality competitiveness, supply-side policies and supply-side private sector reforms can improve international performance