THE ECONOMIC ENVIRONMENT - FISCAL POLICY AND TAXATION

Question 1

What is fiscal policy

Answer 1

Fiscal policy is the use of government spending and taxation to influence economic activity

Question 2

What are direwct taxes

Answer 2

Direct taxes are taxes on income. They affect incentives to work: Income tax, corporate tax

Indirect taxes are taxes on spending. They affect the production and consumprtion choices: Vat, Duties

Question 3

What happens when cutting indirect taxes

Answer 3

Increases workers incentives to work as income taxes fall

New workers enter workforce

Workers are highly motivated

Increases profitability as corporate taxes fall

More incentive for new businesses to enter the market

Increased incentuves to take risks

Question 4

What happend when cutting indirect taxes

Answer 4

Falls in VAT reduce selling prices and should increase sales

Falls in costs of production encourage businesses to increase output

Unlickely to be reduced on some items. I.E cigarettes, alcohol etc

Question 5

What is a budget deficit

Answer 5

A budget deficit is expansionary and occurs when the government injects more money into the economy than it withdraws through taxation: Government spending > taxation

Question 6

What is a budget surplus

Answer 6

A budget surplus is contractionary and occurs when the government injects less money into the economy than it withdraws through taxation: Taxation > government spending