Government Macroeconomic interventions

Question 1

Define automatic stabilisers

Answer 1

Changes in government spending and taxation that occurs to reduce aggregate demand without affecting any government policies. ( No Government action)

Question 2

Differentiate between budget surplus and budget deficit

Answer 2

Budget surplus can be defined as government spending exceeding government expenditure.

Budget deficit can be defined as government spending exceeding government spending.

Question 3

Differentiate between Cyclical and structural deficit.

Answer 3

Cyclical deficit is caused by a decline in economic activity.

Structural deficit is caused by an imbalance in government spending and taxation.

Question 4

What is Fiscal Policy ?

Answer 4

The use of taxation or government spending to manage aggregate demand.

Question 5

Differentiate between Indirect tax and direct tax.

Answer 5

Direct tax are taxes on income and wealth.

Indirect tax are tax on the purchase of goods or service

For additional information go to ch.22.3

Question 6

What are Sin taxes

Answer 6

Taxes imposed on products(Demerit goods) deemed harmful to consumers.

Question 7

Tax avoidance vs Tax evasion

Answer 7

Tax avoidance is the act of legally bending the system to pay less tax.

Tax evasion is the illegal non-payment or underpayment of paying less tax.

Question 8

What are the 2 types of fiscal policy?

Answer 8

• Contractionary Fiscal Policy, Expansionary Fiscal Policy,

Question 9

What is Contractionary Fiscal Policy?

Answer 9

A policy which reduces the overall government spending and increases the Tax rate in order to decrease Aggregate Demand

Question 10

What is Expansionary Fiscal Policy?

Answer 10

A policy which increases the overall government spending and reduces the Tax rate in order to increase Aggregate Demand

Question 11

How will Contractionary Fiscal Policy reduce demand-pull inflation?

Answer 11

By increasing both direct and indirect tax, the governments is discouraging consumers from purchasing goods that they “Want”, therefore reducing the overall Aggregate demand.

Question 12

Issue with contractionary fiscal policy

Answer 12

By indirect tax, workers may seek higher wages to maintain their disposable income. If granted by the firms, then the Cost of production will increase which will result in cost-push inflation

Question 13

How will expansionary Fiscal Policy increase Aggregate Demand.

Answer 13

Lopwered tax rates and increased goivernment spending will incentivise consumers to purchase instead of save; increasing the overall aggregate demand.

Question 14

What are some problems regarding expansionary fiscal policy?

Answer 14

It may not be very effective if households and firms are worried about the future, which instead of purchasing they will choose to save their disposable income.

Question 15

What is Monetary Policy?

Answer 15

It is a policy which the central bank utilisies the money supply, credit regulation,exchange rate and interest rates to influence Aggregate demand.

Question 16

Supply side Policy

Answer 16

Government policy which uses government policy tools such as government spending to increase the LRAS(Long run Aggregate supply)

Question 17

Give 3 examples of Supply Side Policies.

Answer 17

• Infrastructure Development
• Government spending on Education and training
• Investing on R&D(Research and Development) To pave the way for technological advancement.

Question 18

Which Government policies is aimed at increasing Aggregate Demand?

Answer 18

Monetary Policy & Fiscal Policy