TOPIC 3 - FISCAL POLICIES

Question 1

WHAT IS A FISCAL POLICY?

Answer 1

GOVT SPENDING AND TAXATION THAT IS USUALLY SET OUT IN THE BUDGET.

Question 2

WHAT IS CAPITAL EXPENDITURE?

Answer 2

REFERS TO LONG TERM INVESTMENT EXPENDITURE.

Question 3

WHAT IS CURRENT EXPENDITURE?

Answer 3

RELATES TO THE GOVT’S DAY TO DAY EXPENDITURE ON GOODS AND SERVICES.

Question 4

WHAT IS A TRANSFER PAYMENT?

Answer 4

PAYMENTS MADE BY THE STATE TO INDIVIDUALS WITHOUT THERE BEING AN EXCHANGE OF ANY GOODS OR SERVICES.

Question 5

WHY DOES PUBLIC EXPENDITURE CHANGE OVER TIME?

Answer 5

1. LEVEL OF TREND GDP
2. SIZE AND AGE DISTRIBUTION OF POPULATION
3. ECONOMIC CYCLE
4. DEBT INTEREST

Question 6

WHAT ARE THE 2 TYPES OF GOVT SPENDING?

Answer 6

1. AUTOMATIC STABILISERS
2. DISCRETIONARY

Question 7

WHAT IS A DIRECT TAX?

Answer 7

TAX LEVIED ON AN INDIVIDAL OR ORGANISATION.

Question 8

WHAT ARE EXAMPLES OF DIRECT TAXES?

Answer 8

1. INCOME TAX
2. CORPORATION TAX
3. INHERITANCE TAX

Question 9

WHAT IS AN INDIRECT TAX?

Answer 9

TAX LEVIED ON PURCHASING GOODS OR SERVICES.

Question 10

WHAT IS AN EXAMPLE OF INDIRECT TAXES?

Answer 10

1. VAT
2. EXCISE DUTY

Question 11

WHAT IS A PROGRESSIVE TAX?

Answer 11

MARGINAL RATE OF TAX INCREASES AS INCOME RISES CAUSING A FALL IN INEQUALITY.

Question 12

WHAT ARE EXAMPLES OF A PROGRESSIVE TAX?

Answer 12

1. INCOME TAX
2. CORPORATION TAX
3. NATIONAL INSURANCE

Question 13

WHAT IS A REGRESSIVE TAX?

Answer 13

MARGINAL RATE OF TAX FALLS AS INCOME RISES CAUSING A RISE IN INEQUALITY.

Question 14

WHAT ARE EXAMPLES OF REGRESSIVE TAXES?

Answer 14

1. VAT
2. COUNCIL TAX
3. BUSINESS RATES

Question 15

WHAT IS PROPORTIONAL TAXATION?

Answer 15

A CONSTANT MARGINAL RATE OF TAXATION.

Question 16

WHAT IS THE MARGINAL RATE OF TAXATION?

Answer 16

THE TAX RATE AN INDIVIDUAL WOULD PAY ON ONE ADDITIONAL POUND OF INCOME.

Question 17

WHAT IS THE LAFFER CURVE?

Answer 17

SOMETIMES INCREASING TAX MEANS THAT YOU GET LOWER TAX REV AS THERE IS LESS INCENTIVE TO WORK AND PEOPLE MAY EMIGRATE.

Question 18

WHAT IS A BUDGET DEFICIT?

Answer 18

WHEN GOVT SPENDING EXCEEDS TAX REV.

Question 19

WHAT IS NATIONAL DEBT?

Answer 19

ACCUMULATION OF BUDGET DEFICITS.

Question 20

WHO DOES THE GOVT BORROW MONEY FROM?

Answer 20

THE GOVT BORROWS MONEY FROM FINANCIAL MARKETS - ANYONE CAN BUY GOVT BONDS.

Question 21

WHAT ARE STRUCTURAL DEFICITS?

Answer 21

DEFICITS THAT EXIST EVEN IN A BOOM SUGGESTING THE GOVT IS SPENDING TOO MUCH.

Question 22

WHAT ARE CYCLICAL DEFICITS?

Answer 22

CAUSED BY THE ECONOMIC CYCLE (E.G AUTOMATIC STABILISERS AND EXPANSIONARY POLICY) IN A RECESSION SO CAN BE PAID FOR IN A BOOM WHEN SPENDING IS LOWER AND TAX RECEIPTS ARE HIGHER.

Question 23

WHY DO FISCAL DEFICITS AND NATIONAL DEBT MATTER?

Answer 23

1. INTER-GENERATIONAL OPPORTUNITY COSTS
2. CROWDING OUT
3. INFLATION
4. FUTURE BORROWING (FCREDIT RATING)
5. ATTRACTING FDI

Question 24

WHAT IS MEANT BY INTER-GENERATIONAL OPPORTUNITY COSTS?

Answer 24

BUDGET DEFICITS CREATED BY THE CURRENT GENERATION WILL HAVE TO BE PAID OFF BY BUDGET SURPLUSES FROM FUTURE GENERATIONS.

Question 25

HOW DO FISCAL DEFICITS AND NATIONAL DEBT CAUSE INFLATION?

Answer 25

BUDGET DEFICIT INCREASES AD AS INJECTIONS ARE GREATER THAN WITHDRAWALS WHICH CAN CAUSE INFLATION AT FULL CAPACITY.

Question 26

HOW DO FISCAL DEFICITS AND NATIONAL DEBT AFFECT FUTURE BORROWING?

Answer 26

A LARGE NATIONAL DEBT MAY MAKE IT HARDER TO BORROW ADDITIONAL FUNDS AND MIGHT LEAD TO DOWNGRADING OF A COUNTRY'S CREDIT RATING CAUSING THE IR ON BORROWING TO INCREASE.

Question 27

HOW DO FISCAL DEFICITS AND NATIONAL DEBT PREVENT FDI?

Answer 27

MNC'S ARE ATTRACTED BY STABILITY AND HIGH NATIONAL DEBTS ARE MORE LIKELY TO LEAD TO FINANCIAL PROBLEMS.

Question 28

WHAT ARE EXPANSIONARY FISCAL POLICIES?

Answer 28

1. INCREASING GOVT SPENDING 2. CUTTING TAXES

Question 29

WHAT ARE DEFLATIONARY FISCAL POLICIES?

Answer 29

1. CUTTING GOVT SPENDING 2. INCREASING TAXES

Question 30

WHAT ARE THE ADVANTAGES OF EXPANSIONARY FISCAL POLICIES?

Answer 30

1. INCREASED ECONOMIC GROWTH 2. DECREASED UNEMPLOYMENT 3. POSITIVE MULTIPLIER EFFECT 4. POSITIVE ACCELERATOR EFFECT 5. CROWDING IN

Question 31

WHAT ARE THE DISADVANTAGES OF EXPANSIONARY FISCAL POLICIES?

Answer 31

1. INCREASED INFLATION 2. WORSENING OF CURRENT ACCOUNT 3.. INCREASED NATIONAL DEBT 4. OPPORTUNITY COST 5. RICARDIAN EQUIVALENCE

Question 32

WHAT IS THE ACCELERATOR EFFECT?

Answer 32

CHANGE IN INCOME LEADS TO GREATER CHANGE IN CAPITAL EXPENDITURE.

Question 33

WHY MIGHT A COUNTRY NOT ACTIVELY TRY TO REDUCE ITS NATIONAL DEBT?

Answer 33

1. SELF-DEFEATING AUSTERITY 2. CAPITAL EXPENDITURE 3. CYCLICAL DEFICIT 4. SIZE OF DEBT AS % OF GDP 5. HIGH ECONOMIC GROWTH

Question 34

WHAT R DISCRETIONARY FISCAL POLICIES?

Answer 34

INTENTIONAL GOVT POLICIES TO INCREASE/DECREASE SPENDING OR TAXATION

Question 35

WHAT R AUTOMATIC STABILISERS?

Answer 35

AUTOMATIC FISCAL CHANGES AS THE ECONOMY MOVES THROUGH THE ECONOMIC CYCLE E.G INCREASE IN BENEFITS DURING RECESSIONS.

Question 36

WHAT IS RICARDIAN EQUIVALENCE?

Answer 36

RATIONAL CONSUMERS ANTICIPATE THE FUTURE SO IF TAX CUTS R FINANCED BY GOVT BORROWING, THEY ANTICIPATE FUTURE TAX RISES SO THEIR CONSUMPTION DOESN'T CHANGE. INCENTIVE TO SAVE TO OFFSET FUTURE TAX RISES.

Question 37

WHY MAY A GOVT ABANDON A BUDGET SURPLUS TARGET?

Answer 37

FALLS IN GROWTH MEANING THE ECONOMY IS IN NEED OF GOVT SUPPORT FOR LONGER TO ENSURE STABLE GROWTH.