Fiscal Policy & Supply-Side Policies

Question 1

Explain expansionary fiscal policy

Answer 1

It increases the level of AD by increasing G or cutting taxes. This can:
-up consumption bc tax cuts
-up investment bc tax cuts
-up gov purchases bc gov spending is up
Shifts AD rightwards.

Question 2

Explain contractionary fiscal policy

Answer 2

It decreases the level of AD by decreasing consumption + investments + gov spending
Shifts AD left.

Question 3

Explain the Multiplier Effect

Answer 3

Defined as an initial change in an injection/leakage that leads to a much greater final change in national income. Consumption to one, income to another.
Multiplier = 1/(1-MPC)

Question 4

Explain the Marginal Propensity to Consume

Answer 4

Calculated as a change in C /a change in income.
Represents the amount of each extra £ that the consumer spends when given an extra £ in income.

Question 5

Types of Tax

Answer 5

1- Progressive tax
2- Regressive tax
3- Proportional tax
4-Direct tax
5- Indirect tax

Question 6

Principles of taxation

Answer 6

1- Canon of equality
2- Canon of certainty
3- Canon of convenience
4- Canon of economy

Question 7

What are the supply side objectives?

Answer 7

• Improve incentives
• Increase labour & capital productivity
• Increase investment & research
• Promote competition
• Promote non-inflationary growth

Question 8

What are the free-market supply side policies?

Answer 8

• Reducing trade union power
• Privatisation
• Deregulation
  -Income tax cuts
• Corporation tax cuts

Question 9

What are the interventionist supply side policies?

Answer 9

• Education & training
• Infrastructure
• Home building
• Subsidies