Fiscal policy and supply side policies

Question 1

Fiscal policy

Answer 1

demand management tool made up of tax, gov spending and gov borrowing

aims to raise revenue for spending and redistribute income

Question 2

Expansionary fiscal policy

Answer 2

during recession

to increase AD

Question 3

Contractionary fiscal policy

Answer 3

to decrease AD

Question 4

Fiscal drag

Answer 4

incomes rise with inflation but tax brackets are not aligned with inflation

stealth tax

Question 5

Supply side impacts of gov spending

Answer 5

reduced inequality

improved education and labour productivity

potential inefficiency of spending

potential crowding out

more public goods

Question 6

Demand side impacts of gov spending

Answer 6

potential higher economic growth

higher tax or higher borrowing

inflation

higher bond yields

Question 7

Evaluate gov spending

Answer 7

depends on whether spending is current (AD) or capital (LRAS)

Question 8

Fiscal policy on SRAS

Answer 8

changes in VAT

changes in environmental tax

changes in tariffs

changes in subsidies

Question 9

Fiscal policy on LRAS

Answer 9

changes in tax rates affecting incentives to work

R+D

higher spending on education and training

changes in corporation tax affect foreign investment

Question 10

Crowding out

Answer 10

Gov borrows money
⬇️
Interest rates rise because DM>SM
⬇️
Cost of borrowing is too high for private firms
⬇️
they are crowded out from borrowing

Question 11

Budget balance

Answer 11

relationship between gov spending and gov revenue

Question 12

Budget deficit

Answer 12

gov spending > gov revenue

Question 13

Budget surplus

Answer 13

gov revenue > gov spending

Question 14

Office for budget responsibility

Answer 14

provides forecasts for coming 5 years assessing impact of policy decisions

Question 15

5 main roles of OBR

Answer 15

forecasts

evaluating performance

sustainability analysis

evaluation of risks

scrutinising tax

Question 16

national debt

Answer 16

the cumulative total of past government borrowing which has to be repaid with interest

Question 17

What do Keynesian economists believe in regards to budget balance

Answer 17

the government should ‘run a budget deficit’ to finance spending and stimulate economic growth

Question 18

What is the problem with ‘running a budget deficit’

Answer 18

this increasing debt puts a greater burden on the population that will have to repay it in the future

Question 19

Cyclical budget deficit

Answer 19

related to economic cycle and aggregate demand

During a recession, there is an increase in government expenditure, leading to a greater budget deficit

Question 20

Structural budget deficit

Answer 20

not related to state of economy

uncompetitive industries

poor productivity

structural unemployment

Question 21

Factors leading to structural budget deficit

Answer 21

ageing population (gov spends more on pensions)

tax avoidance—less revenue

underinvestment in training

Question 22

Consequences of a budget deficit

Answer 22

National debt rises

Inflationary pressures

Economic shocks

lower Economic growth in the long run

Question 23

Debt to GDP ratio

Answer 23

measures the size of a country’s debt in relation to size of the country’s economy

Question 24

Problems with high debt to GDP ratio

Answer 24

Higher anual cost of repaying

Opportunity cost of what else could be spent on

Worsens UK’s credit rating

Crowding out

Question 25

Solutions to budget imbalance

Answer 25

cut spending increase tax econ growth bailout (loans from bank) supply side focus

Question 26

Evaluate solving budget imbalance

Answer 26

depends on the type of budget deficit Structural—long term decline in industries needs to be corrected Cyclical—reduce negative impacts of recession

Question 27

Principles of taxation

Answer 27

Economy—loss must be low relative to yield Certainty—timing and amount must be certain to payer Convenient—timing and means must be convenient to payer Equity—taxes levied according to ability to pay

Question 28

Progressive tax

Answer 28

higher income earners pay higher proportion of their total income MPC falls MPT rises

Question 29

Proportional tax

Answer 29

proportion of income is equal for all income levels

Question 30

regressive tax

Answer 30

higher income earners pay lower proportion of their income

Question 31

Direct tax

Answer 31

on income (income tax, NI, corporation)

Question 32

Indirect tax

Answer 32

on goods and services (VAT, council)

Question 33

Evaluate the use of indirect taxes

Answer 33

regressive effect increasing income inequality

Question 34

Laffer curve

Answer 34

illustrates the trade off between tax rates and total tax revenue

Question 35

Supply side policies

Answer 35

by government with aim to improve productive potential of economy(LRAS) interventionist

Question 36

Supply side improvements

Answer 36

can be experienced in private sector without government intervention Free market

Question 37

Interventionist approach

Answer 37

free market can’t achieve desired objectives without intervention

Question 38

Evaluate interventionist aproach

Answer 38

can help correct market failure but gov intervention can cause new problems—gov failure (HS2)

Question 39

Free market approach

Answer 39

minimal government intervention

Question 40

Examples of supply side policies

Answer 40

Tax cuts- business and firms have more money to invest Deregulation—can reduce the costs of doing business and encourage innovation Education and training—increase labour skills Infrastructure investment—increases efficiency of economy

Question 41

Evaluate the use of fiscal policy, monetary policy and supply side policies

Answer 41

Depends on the level of output Recession (negative output gap)—expansionary FP and MP Growth—contractionary FP and MP Inflation (positive output gap)—supply side policies

Question 42

Interventionist SSP examples

Answer 42

Gov spending training and education gov spending on infrastructure subsidies to firms to encourage investment

Question 43

Free market SSP examples

Answer 43

Tax reforms—lower income and corporation tax Labour market reform—reduce trade union power, min wage and benefits Competition Policy— privatisation, deregulation and trade liberalisation

Question 44

Evaluate supply side policies

Answer 44

no guarantee of success cost time lag output gap need for targeted ssp negative stakeholder impacts