Lesson 13 - Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

Changes in government spending and taxes

Question 2

What is the difference between the national debt and the budget deficit?

Answer 2

National debt
= total of what we owe

Budget deficit
= what we owe compared to national income

Question 3

What are demand side fiscal policies?

Answer 3

• government spending
• taxation

Question 4

What are supply side fiscal policies?

Answer 4

• spending on training and education
• corporation tax
• investment in infrastructure

Question 5

What are automatic stabilisers?

Answer 5

When changes in economic growth automatically change government spending and taxation

Question 6

What are discretionary stabilisers?

Answer 6

Adjustments to gov spending and taxation that the government chooses to make

Question 7

What are the causes and consequences of high unemployment?

Answer 7

Causes
- lack of demand
- skills no longer required
- choosing not to work
- between jobs

Consequences
- lower standard of living
- automatic fiscal implications

Question 8

What are the causes and consequences of inflation?

Answer 8

Causes
- high demand
- high priced imports
- large money supply
- high costs for firms
- high raw material costs (oil prices)

Consequences
- inflationary noise
- wage squeeze
- wage price spiral

Question 9

What are the causes and consequences of a global recession?

Answer 9

Causes
- war in the middle east led to high oil prices, which is what most of the economy relies on

Consequences
- demand leads abroad
- fall in AD abroad leaks to a fall in AD at home

Question 10

What are the causes and consequences of a large BoP deficit?

Answer 10

Causes
- strong pound
- not competitive due to a lack of productivity

Consequences
- demand and jobs leak abroad

Question 11

What is a fiscal policy solution for high unemployment and what are the possible issues?

Answer 11

Solution
- expansionary fiscal policy (less government spending, increase taxes)

Issues
- danger of demand pull inflation
- gov spending requires borrowing, which will lead to a high budget deficit + national debt

Question 12

What is a fiscal policy solution to inflation and what are the possible issues?

Answer 12

Solution
- contractionary fiscal policy (lower government spending and increase taxes)

Issues
- danger of a hard landing, which could lead to unemployment

Question 13

What is a fiscal policy solution to a global recession and what are the possible issues?

Answer 13

Solutions
- great depression insurance (stimulating when there is an emergency)

Issues
- requires a lot of borrowing
- danger of demand pull inflation if we are close to Yfe

Question 14

What is a fiscal policy solution to a large BoP deficit and what are the possible issues?

Answer 14

Solutions
- expenditure reducing methods (slowing down the economy to reduce demand for imports)
- expenditure switching methods (encouraging consumers to buy british goods)

Issues
- danger of unemployment
- free trade agreements discourage these policies

Question 15

What are expenditure reducing methods?

Answer 15

Contractionary policies to reduce spending on imports

Question 16

What are expenditure switching methods?

Answer 16

Encouraging consumers to buy UK goods