Theme 2: Fiscal Policy

Question 1

What fiscal policy might the government use to get the economy out of recession?

Answer 1

They will therefore choose to decrease taxes in order to encourage consumption. They will also spend more money. By decreasing tax and increasing spending they will need to borrow more money, which will worsen the budget deficit.

Question 2

What is expansionary fiscal policy?

Answer 2

When the government increases government spending and cuts taxes. To expand the economy.

Question 3

What is a downside of expansionary fiscal policy?

Answer 3

Worsens the budget deficit.

Question 4

What is contractionary fiscal policy?

Answer 4

When the government decreases government spending and increases taxes. Causing the economy to contract. BUT improves the budget deficit.

Question 5

What is fiscal policy?

Answer 5

When the government changes its taxes and government spending to influence the economy.

Question 6

What are examples of fiscal policy

Answer 6

1. Changing income tax
2. Changing benefits
3. Changing corporation tax
4. Healthcare and Education
5. VAT
6. Infrastructure spending

Question 7

Show one advantage and one disadvantage of lowering the income tax rate for high earners

Answer 7

+ increase disposable income for the rich. This will increase consumption and aggregate demand, and lead to the multiplier effect.

-reduce the government’s revenue from income tax, which will decrease government spending and decrease aggregate demand.

Question 8

What are two benefits of increasing income tax?

Answer 8

Higher government revenue and causes AD to shift to the left which decreases price level leading to reduced inflation.

Question 9

What is a risk of increasing income tax

Answer 9

May lead to the downward multiplier effect and/or may reduce government reveue as people may try and avoid it now.

Question 10

Explain one advantage and one disadvantage of raising the income tax rate for high earners.

Answer 10

+ Price level down and control inflation. Balance its budget.

-Reduce real GDP. Increase tax evasion and avoidance which could even mean that income tax revenue decreases.

Question 11

What are benefits

Answer 11

Benefits are payments or transfers made by the government to unemployed or low income or low-income workers.

Question 12

Why do benefits not increase the government spending portion of the AD formula?

Answer 12

As the government isn’t buying anything they’re just transferring money to low income households. Which increases consumption.

Question 13

What is the benefits trap?

Answer 13

When workers are better off staying unemployed and claiming benefits than working and earning disincentivising unemployed people from getting a job.

Question 14

One advantage and one disadvantage to the government reducing spending on benefits

Answer 14

+Improved budget deficit and may get people out of the benefit trap.

-Consumption will fall. Income inequality will worsen

Question 15

What is corporation tax?

Answer 15

A tax on profits made by a firm.

Question 16

What is an advantage and a disadvantage of increasing corporation tax?

Answer 16

+Increase tax revenue, improving the budget. Or increased revenue could lead to increase in government spending.

-Reduce investment in capital causing their machinery to depreciate. which will likely cause them to be less productive and shift LRAS inwards.

Question 17

What is a supply side disadvantage to increasing corporation tax?

Answer 17

Firms wont be able to invest in new machinery to replace their old which will result in their machinery depreciating and so LRAS will shift to the left.

Question 18

What is a positive impact and a negative impact of a decrease in corporation tax?

Answer 18

+Lower costs shifting SRAS to right.

+Increase investment

• Less tax rev
• Extra profits may be kept by owners not invested leading to increased inequality

Question 19

Explain one advantage and one disadvantage to the government spending more on healthcare and education.

Answer 19

+Make work forces healthier and more productive shifting LRAS to the right.

-Spending will worsen the budget deficit. Money could be wasted on useless degrees or cosmetic surgery.

Question 20

What are a strength and a weakness of cutting funding for healthcare and education?

Answer 20

+Improve budget. Force to become more efficient and productive. School fees forces students to enter the labour market straight after school.

-Reduction in spending on healthcare and education means that the workforce is less productive, so LRAS will shift left, reducing real GDP.

Question 21

Explain one advantage and one disadvantage of the government increasing VAT

Answer 21

+Increase in VAT will increase tax revenue for the government which will improve the budget deficit.

-Increase the cost for firms, which will shift SRAS inwards. Reducing economic growth and lead to cost push inflation.

Question 22

Crowding out

Answer 22

When government spending increases, the government demands more borrowed money, land, labour and capital. The price and interest rate increases which increases costs for firms and reduces supply.