Macroeconomic Policies

Question 1

What are the two components of fiscal policy?

Answer 1

Taxation and Government Spending

Question 2

What is the main aim of expansionary fiscal policy?

Answer 2

To boost/increase aggregate demand

Question 3

What are the two measures that have to be taken to implement an expansionary fiscal policy?

Answer 3

Either increase government spending or reduce taxation

Question 4

What is the main aim of a contractionary fiscal policy?

Answer 4

To reduce aggregate demand

Question 5

What are the two measures that have to be taken to implement a contractionary fiscal policy?

Answer 5

Either decrease government spending or increase taxation

Question 6

At which two times in the economic cycle is an expansionary fiscal policy most likely to be used and why?

Answer 6

During a recession or a negative output gap, because it aims to increase AD to improve growth levels

Question 7

At which two times in the economic cycle is a contractionary fiscal policy most likely to be used and why?

Answer 7

During a boom or positive output gap because it aims to reduce AD if growth levels are too high

Question 8

Name 2 negative consequences of introducing an expansionary fiscal policy

Answer 8

1. Increased inflation

2. Worsening of the balance of payments

Question 9

Why will the balance of payments current account worsen if an expansionary fiscal policy was implemented?

Answer 9

Because incomes increase and so more is spent on imports

Question 10

Name 2 positive consequences of implementing a contractionary fiscal policy

Answer 10

1. Reduce price levels (avoiding high inflation)

2. Improve the balance of payments

Question 11

Why would a contractionary fiscal policy be likely to improve the balance of payments on current account?

Answer 11

Because incomes are decreasing, so less is spent on imports

Question 12

Why do incomes increase as a result of an expansionary fiscal policy?

Answer 12

Because taxation decreases and so consumers have more disposable income

Question 13

What is a structural budget position?

Answer 13

A government’s long term fiscal stance, their position over a whole period of the economic cycle

Question 14

What is a cyclical budget position?

Answer 14

A government’s short term fiscal stance

Question 15

What is a cyclical budget deficit?

Answer 15

A budget deficit caused by an expansionary cyclical budget

position

Question 16

What is a structural budget deficit?

Answer 16

A budget deficit caused by an expansionary structural budget
position

Question 17

What is progressive taxation? And what are the main aims of it?

Answer 17

Where an individual’s taxes rise as their income rises. Aims to redistribute income and reduce poverty.

Question 18

What is regressive taxation? And what is this system used by governments to encourage?

Answer 18

Where taxes for an individual fall as their income rises. Used to encourage supply side growth.

Question 19

What is proportional taxation? What is it also known as?

Answer 19

A system where everyone pays the same rate of tax regardless of their income, also known as a flat tax.

Question 20

Give 2 advantages of a proportional/flat tax?

Answer 20

• Simplifies the tax system

- Reduces the incentive to evade/avoid taxation

Question 21

In what year, under what chancellor, were the ‘fiscal rules’ introduced?

Answer 21

1997 - Gordon Brown

Question 22

What was the golden fiscal rule?

Answer 22

A government should only borrow money to fund capital expenditure and not current expenditure, during an economic cycle

Question 23

When was the golden rule scrapped and why?

Answer 23

In 2008, partly because of the financial crisis, but also because there was debate as to the definition of ‘economic cycle’

Question 24

What was setup in 2010 to help bring clarity and aide back to governmental fiscal policy?

Answer 24

The Office for Budget Responsibility, publishing reports on taxation, growth figures and public spending.

Question 25

What is capital expenditure?

Answer 25

Spending on things like infrastructure, investments to promote long run growth

Question 26

What is current expenditure?

Answer 26

Day-to-day government spending

Question 27

What are the 3 main components of monetary policy?

Answer 27

Interest Rates, the money supply and the exchange rate

Question 28

What is the main aim of a contractionary monetary policy and what is done to implement one?

Answer 28

It aims to reduce AD, through:

• Higher interest rates
• Restrictions on the money supply
• Strong exchange rate

Question 29

What is the main aim of expansionary monetary policy, and what is done to implement one?

Answer 29

Aims to increase AD, through:

• Lower interest rates
• Fewer restrictions on the money supply
• Weak Exchange Rate

Question 30

What is the main aim of monetary policy in the UK?

Answer 30

Price Stability (low inflation)

Question 31

Who sets interest rates in the UK? And to what target do they have to work towards?

Answer 31

The Bank of England’s Monetary Policy sets interest rates, aim order to meet the government’s 2% inflation target

Question 32

Name 4 effects likely to be caused by an increase in interest rates

Answer 32

Any 4:

• Less borrowing
• Less consumption
• Less investment by firms
• Less confidence among consumers and firms
• More saving
• A decrease in exports
• An increase in imports

Question 33

Why does the interest rate effect the exchange rate?

Answer 33

Because when interest rates are high in the UK for example, big banks and financial institutions wish to buy the pound so they can put their money into UK banks to reap the benefits of high interest rates on savings