macro booklet 3

Question 1

What is the fiscal policy?

Answer 1

direct government intervention by G or T to try to change AD

Question 2

What is Monetary policy?

Answer 2

indirect government intervention which is not carried out by the government itself. Using tools like changing the interest rate to try to influence AD

Question 3

What is the supply-side policy?

Answer 3

created directly by the government with the aim of influencing AS by reducing or increasing costs for businesses

Question 4

Which policies are demand side policies?

Answer 4

Fiscal and monetary

Question 5

What is a direct tax?

Answer 5

taxes that are charged specifically on an individual or business paying it

Question 6

What is an indirect tax?

Answer 6

taxes on goods and services

Question 7

What is the difference between a direct tax and an indirect tax?

Answer 7

direct taxes tax the person whereas the indirect taxes tax the goods or services

Question 8

What is an example of a direct tax?

Answer 8

Income tax

Question 9

What is an example of an indirect tax?

Answer 9

VAT

Question 10

What is the marginal tax rate?

Answer 10

the rate of tax we pay on the last £ that we earn

Question 11

What is progressive taxation?

Answer 11

It means that higher earners pay a higher percentage of their income to tax.

Question 12

What is proportional taxation?

Answer 12

everyone pays the same percentage of their income in tax?

Question 13

What is regressive taxation?

Answer 13

allows higher income groups to pay a lower percentage of income in tax and hits poorer groups the hardest. most regressive taxes are indirect taxes

Question 14

What is current expenditure?

Answer 14

The expenses of running a country from day to day

Question 15

what is capital expenditure?

Answer 15

The money spent on improving government provided facilities that will benefit the future as well as now.

Question 16

What is balanced budget?

Answer 16

When government expenditure=taxation revenue (G=T) This is aspirational for most governments

Question 17

What is a budget surplus?

Answer 17

Tax revenue is greater than government expenditure.(T>G)

Question 18

What is a budget deficit?

Answer 18

Government expenditure is greater than tax revenue (G>T) this has to be subsidised by the government borrowing the difference. This is also done by selling government bonds

Question 19

What are government bonds?

Answer 19

An investment where you loan money to the government in return for an agreed interest rate. These are paid back by the government in set intervals and are known as gilts.

Question 20

What is a structural deficit?

Answer 20

The part of the deficit that is not related to the state of the economy

Question 21

What is a cyclical deficit?

Answer 21

considers fluctuations in tax revenue and spending due to the economic cycle.

Question 22

What are automatic fiscal stabilisers?

Answer 22

changes in the size of the budget caused by changes in the economic cycle. E.g. in a period of high economic growth the economic stabilisers

Question 23

What is discretionary fiscal policy?

Answer 23

deliberately changing G&T to achieve macroeconomic objectives

Question 24

What is expansionary fiscal policy?

Answer 24

Increasing G or decreasing T

Question 25

What is deflationary fiscal policy?

Answer 25

Reducing G normally

Question 26

How does the government borrow money?

Answer 26

Selling government bonds known as GILTS

Question 27

How does the national debt occur?

Answer 27

Years of deficits that aren’t payed off

Question 28

The budget deficit should be no more than …% of GDP

Answer 28

3%

Question 29

The national debt should not exceed …% of GDP

Answer 29

60%

Question 30

Explain crowding out.

Answer 30

Government bonds are less risky and more of a safe investment than buying corporate bonds, this means investors are more likely to buy government bonds especially the UK ones as it is a well established economy. This means there is less investment in business bonds and so the businesses are crowded out

Question 31

What is the definition of crowding out?

Answer 31

the reduction in private sector investments induced by increased public sector spending.

Question 32

What is the argument against crowding out?

Answer 32

If you increase G, this will lead to less funds available for business investment(I) and to export goods or create new employment therefore the increase in G is outweighed by the decrease in C, I and X

Question 33

Why is private sector investment more efficient than public?

Answer 33

Government failure because of the public sector’s tendency to waste money whereas in the private sector they all focus on profit maximisation so everything is done with efficiency in their best interest

Question 34

What are some issues with the idea of crowding out?

Answer 34

if the economy is weak then the private sector wont be looking to expand. Others think that the higher G will increase crowding in because they it will lead to higher economic growth which gives the businesses more confidence which will increase GDP. This will result in the accelerator affect

Question 35

What is the formula to calculate the marginal tax rate?

Answer 35

the change in taxes paid/the change in taxable income

Question 36

Describe the Laffer Curve?

Answer 36

Tax revenue on the Y-axis and tax rate on the X-axis, a dome shape curve in the middle represents the revenue that is thought to be received at certain tax rates

Question 37

Explain the Laffer curve.

Answer 37

as you increase the tax rate you can increase the tax revenue you receive as you take a larger percentage of the economic agents income. However this only works up to a certain point as they will move out of the country if the tax rate is too high as everyone will want to keep their money and so the tax revenue the government would receive would decrease as the big earners all move away but the lower income households especially have no option but to stay. Higher tax rates are an incentive for workers and firms to not maximise profits.

Question 38

Why can the fiscal policy be highly effective?

Answer 38

Fiscal policy is more direct, it is the one that is quickest to react over monetary and supply-side policies, it can be used to achieve all of the macro-objectives, it works well with automatic fiscal stabilisers.

Question 39

Why is the fiscal policy more direct than other alternatives?

Answer 39

it can target the correct areas of the economy (they can target G or T to any area) there for not having to rely on economic agents responding to an indirect stimulus

Question 40

Why is the Fiscal policy quicker to act than the other methods?

Answer 40

The government can change G and T whenever they want (usually every quarter) therefore it can come into play quicker and it has more short term effects meaning it will operate best for short term needs (?)

Question 41

How does the Fiscal policy achieve all other objectives?

Answer 41

economic growth and low unemployment- multiplier effect and crowding in effect, Stable prices- prices can be brought back down by deflationary fiscal policy, Fairer distribution of income= controlled by progressive taxation. balance of payments- tariffs and subsidies

Question 42

how do automatic fiscal stabilizers work well with fiscal policy?

Answer 42

AFS naturally adjust in relation to the economic cycle

Question 43

what are the four reasons why relying on a well-informed government can lead to over reliance on the fiscal policy?

Answer 43

corruption- common in developing countries, political priorities- governments trying to win votes by making poor economic decisions, information failure- the government don’t identify the correct causes or consequences of a problem, inefficient procedures- excessive bureaucracy and long waiting times

Question 44

how does crowding out cause over reliance on on the fiscal policy?

Answer 44

Expan. fisc. poli. requires extensive government borrowing which means there is a smaller pot of borrowing money for businesses, meaning that they have less efficient users of funds