Government in Action

Question 1

What is fiscal policy?

Answer 1

A macroeconomic policy that can influence resource allocation, redistribute income and reduce the fluctuations of the business cycle. Its instruments include government spending and taxation and the budget outcome

Question 2

What are the economic objectives of fiscal policy? (x4)

Answer 2

• Stabilising the level of economic activity
• Maintaining low inflation
• Reducing the level of unemployment
• Achieving general policy goals relating to the distribution of income and Australia’s place in the global economy

Question 3

What is The Budget?

Answer 3

The tool of the government for the implementation of fiscal policy. It shows the government’s planned expenditure and revenue for the next financial year

Question 4

What are the areas of Commonwealth Government revenue?

Answer 4

• Income tax
• GST
• Excise and custom duties
• Other tax revenue
• Non-tax revenue

Question 5

What are the areas of Commonwealth Government expenditure?

Answer 5

• Social security and welfare
• Education
• Health
• Infrastructure
• Environment

Question 6

Explain the expansionary fiscal policy stance (What is it, Aim & Impact)

Answer 6

• The government may reduce tax revenue and increase government expenditure, creating a smaller surplus or a bigger deficit than previously.
• It aims to increase the level of economic activity by stimulating aggregate demand
• This should lead to a reduction in unemployment since in order to increase production, firms must employ extra resources. However, if the economy grows too quickly, inflation may rise

Question 7

Explain the contractionary fiscal policy stance (What is it, Aim & Impact)

Answer 7

• The government may increase tax revenue or decrease government expenditure, creating a smaller deficit or larger surplus than it had previously
• It aims to decrease the level of economic activity by dampening aggregate demand
• This would reduce inflation, but it risks increasing unemployment if demand is reduced too much

Question 8

What are automatic stabilisers?

Answer 8

Instruments inherent in the government’s budget that counterbalance economic activity. In a boom, they decrease economic activity and during a recession, they increase economic activity e.g. a progressive tax system and unemployment benefits

Question 9

Explain what happens to general economic conditions and the budget outcome during an INCREASE in the level of economic activity

Answer 9

When the economy is growing, income levels increase, leading to a rise in taxation revenue for the government. Unemployment falls, reducing government expenditure on unemployment benefits. The budget outcome is a smaller deficit or bigger surplus.

Question 10

What do automatic stabilisers do during a period where there is an INCREASE in economic activity?

Answer 10

Automatic stabilisers would lead to an automatic contraction in aggregate demand, thus having a stabilising effect even without any deliberate government policy action

Question 11

Explain what happens to general economic conditions and the budget outcome during a DECREASE in the level of economic activity

Answer 11

In times of recession, income levels fall, leading to a fall in taxation revenue. Unemployment rises, increasing government expenditure on unemployment benefits. The budget outcome is a smaller surplus or bigger deficit

Question 12

What do automatic stabilisers do during a period where there is a DECREASE in economic activity?

Answer 12

Automatic stabilisers would stimulate aggregate demand, causing an expansion in aggregate demand even without any deliberate change in government policy

Question 13

Explain the two components that result in changes in the actual budget outcome (x2)

Answer 13

• Automatic changes to government revenue and expenditure brought about by changes in the level of economic activity (cyclical component)
• Deliberate revenue and expenditure changes initiated by the government (structural component)

Question 14

What does the structural component of the budget outcome do?

Answer 14

It is the key driver of the government’s fiscal policy stance

Question 15

How does the media influence government policies?

Answer 15

They can influence government policy as political leaders may pursue policies that can win positive media coverage, even if the policies are of limited benefit

Question 16

How do parliament and political parties influence government policies?

Answer 16

Economic reform must be supported by the government in power

Question 17

How do businesses influence government policies? (growing business prosperity)

Answer 17

Growing businesses are crucial for a nation’s prosperity, also reflecting the public influence that businesses can have in public debates as well as the financial influence that businesses have over political parties

Question 18

How do climate and environment groups influence government policies?

Answer 18

The environmental movement has helped make the environment an important issue for policy makers

Question 19

How do welfare agencies influence government policies?

Answer 19

They influence the policy process by using the media to bring attention to their message and pressure the government

Question 20

How do international influences influence government policies?

Answer 20

Governments are wary of making policy decisions that would be unpopular with international financial markets. If financial markets lose confidence in the government’s economic management, they could face a fall in their exchange rate, higher interest rates on government borrowing markets, and this has tended to result in lower budget deficits as well as a stronger commitment to microeconomic reform