Fiscal/ supply side policy

Question 1

What are the possible causes of a budget surplus?

Answer 1

high economic growth

periods of austerity

contractionary fiscal policy

Question 2

DIS of budget surplus

Answer 2

All depends on how the surplus originated

reduce GS= reduced AD, neg multiplier effect
damage SR growth
reduced capital spending, investment damage supply side & LR growth
reduce quality of public services through lower GS

(austerity/ contractionary policy) not beneficial during downturn of economy

Question 3

AD of budget surplus

Answer 3

reduced national debt
reduce opportunity cost of debt- interest
reduce effects of crowding out
less burden on future gen

more scope to meet future shocks

Question 4

What are the possible causes of a budget deficit?

Answer 4

down turn/ recession
expansionary policy

supply side improvement @ any stage in cycle

structural issues- ageing population, reliance on GS

Question 5

AD of budget deficit

Answer 5

increase GS, lower tax=Increase AD, SR EG
stimulate investment LR EG

Increase capital Gspending, LR EG, international comp, attract FDI

prevent recessions, mass unemployment, protect livelihoods, incomes, standard of living

Question 6

DIS of budget deficit

Answer 6

increased opportunity cost- interest payments
increased national debt
increase crowding out- reduce private I as h c o b

Question 7

Define national debt

Answer 7

the accumulation of the governments budget deficits

Question 8

Automatic stabilisers

Answer 8

without adjusting levels of taxation/ GS
the budget balance will change with the economic cycle due to natural differences in economic behaviour

during a up turn/ boom
higher tax rev, lower GS= surplus/ reduced deficit

during downturn/ recession
lower tax rev/ higher GS= deficit, larger deficit

Question 9

Progressive, proportional, regressive tax

Answer 9

progressive
as (income) rises so does proportion of (income) paid in tax
marginal rate increases
UK income tax

proportional
flat rate stays the same regardless of (income)
UK corporation tax

regressive
as (income) the proportion of (income) paid in tax falls
marginal rate falls
VAT as lower-income households have higher MPC

Question 10

Reasons for taxation

Answer 10

fund supply of merit goods
correct market failures 
redistribution of income/ wealth 
fund supply side policies
able to inject into economy

Question 11

Examples of taxes

Answer 11

Income- household’s income
Corporation- firm’s profits
VAT- indirect tax, tax on consumption increases cost of production
Stamp duty- purchase of residential property
NICS- wages