Revision

Question 1

What is current spending ?

Answer 1

Spending on day to day maintenance in the economy

Question 2

What is capital spending ?

Answer 2

Spending on infrastructure and upgrades

Question 3

What is welfare spending ?

Answer 3

Spend on pensions and benefits

Question 4

What is debt interest spending ?

Answer 4

Cost of servicing debt

Question 5

What are some reasons for GOVT spending ?

Answer 5

Affecting AD during a recession

Reduce income inequality ( welfare spending )

Correcting MF - encouraging use of merit good via taxes on bad goods

Question 6

What is an indirect tax ?

Answer 6

Taxes that on spending that can be passed onto the consumer

Question 7

What is a specific indirect tax ?

Answer 7

Tax per unit sold

Question 8

What is an valorem indirect tax ?

Answer 8

A percentage tax like VAT

Question 9

What is direct tax

Answer 9

Taxes on income personally or for businesses

Question 10

What is a reasons for GOVT taxes ?

Answer 10

Raise Revenue to fund services

To control inflation

Reduce income inequality ( tax rich and reduce tax for poor )

Correct MF ( increased cost of production of bad goods )

Question 11

What is a progressive tax ?

Answer 11

As income rises , average rate of tax increases ( income tax )

Question 12

What is a regressive tax ?

Answer 12

As incomes rise , the average rate of tax falls as a proportion of income ( ciggy duties )

Question 13

What is a proportional tax ?

Answer 13

As incomes rise , average rate of taxes remain the same

Question 14

What is the aim of expansionary fiscal policy ?

Answer 14

Boost AD during a recession

Reduce unemployment - more AD = more demand for labour

Increase and control inflation targets

Question 15

What are some examples of expansionary fiscal policy ?

Answer 15

Lower Income tax = higher disposable income = Higher propensity to consume = larger AD

Lower corporation tax = greater retained profit = more investment = Higher AD and LRAS

Question 16

How does Expansionary Fiscal policy affect LRAS ?

Answer 16

Lower income tax motivates people to join the workforce and be more productive to earn more money

Lower Corporation tax = more money invested in quality and quantity of factor inputs

Question 17

What are some issues with expansionary fiscal policy ?

Answer 17

Higher Demand pull Inflation

Increases current account deficit

Worsening GOVT finances ( borrowing increases + debt interest )

If consumers not confident , they may save tax cuts instead of spending

Question 18

What are some evaluation points on the use of expansionary fiscal policy ?

Answer 18

Depends on the size of the output gap - if small then it wont be effective

Size of the multiplier = if large then impact will be large ( greater risk of DPI )

Question 19

What is an automatic stabiliser ?

Answer 19

Fiscal policy tools to influence GDP and counter fluctuations in the economic cycle

Question 20

What are the Stabilisers in a boom ?

Answer 20

Higher incomes = more tax rev = more average tax paid = reduced consumption

Lower unemployment = lower spend on welfare

Question 21

What are the stabilisers during a recession ?

Answer 21

Lower incomes = Lower tax paid = Prevents low consumption as it it is spent

Higher unemployment = more spent on welfare

Question 22

What is a budget deficit ?

Answer 22

Govt spending is greater than tax revenue ( money coming in )

Question 23

What are the pros of a budget deficit ?

Answer 23

Higher AD = Higher growth = lower unemployment

Higher GOVT spend on education etc = greater LRAS

Incentives to work and increase productivity = greater LRAS and tax rev

Question 24

What are the cons of a budget deficit ?

Answer 24

Poorer GOVT finances = higher national debt = lower confidence

Increased demand pull inflation

Current account deficit as higher incomes increases imports reducing a country’s export competitiveness

Question 25

What is the evaluation points of a budget deficit ?

Answer 25

Depends on the stage on the economic cycle = good in recession to reduce - output gap and increase employment

Confidence om GOVT could affect saving rates during a tax cut

Role of stabilisers - if strong then they reduce the need of expansionary FP

Question 26

What is a budget surplus ?

Answer 26

When tax revenue is greater than GOVT spending

Question 27

What are the pros of a budget surplus ?

Answer 27

Improves state of govt finances - promotes confidence and improves credit lines

attracts FDI

lower inflation and better current acount deficit lowering import spending

Question 28

What are the cons of a budget surplus ?

Answer 28

Could cause a demand side shock - lower demand and higher unemployment

Lower govt spending can cause MF which can affect AS

Lower returns from tax revenue due to lower growth

Risk of income inequality from reduced welfare spending

Question 29

What are some evaluation points about a budget surplus ?

Answer 29

If finances are bad then austerity is needed - if stable then opposite

If too harsh ( gdp falls lower than debt then finances look worse and reduced FDI )

Depends on the stage of the economic cycle - use in a boom to cool down DPI - recession = opposite

Question 30

What is contractionary fiscal policy ?

Answer 30

Reducing the budget deficit and also shrinking debt and AD to cover long term costs