Y1 30

Question 1

Fiscal policy definition

Answer 1

Macro economic policy that involves changes to the government spending in taxation in order to influence A.D. in the economy

Question 2

Expansionary fiscal policy

Answer 2

Increase in AD

Question 3

Contractionary fiscal policy

Answer 3

Decrease in AD

Question 4

Aims of expansionary fiscal policy

Answer 4

Boost growth
Reduce unemployment
Increase inflation
Redistribute income

Question 5

Expansionary fiscal policy
Boosting growth

Answer 5

If economic growth is sluggish or if the economy is in a recession, a boost to growth might be necessary
If AD increases, we get that boost in growth

Question 6

Expansionary fiscal policy
Reducing unemployment

Answer 6

Cyclical unemployment in recession if Eddie shifts right there is going to be more goods and services being produced in the economy
Firms are therefore going to need more workers to produce output
Labour is a derived demand therefore unemployment will fall

Question 7

Expansionary fiscal policy
Increase inflation

Answer 7

Increase demand pull inflation A.D. shifts right
We get more inflation in theory, but in reality not really because it’s not the government job to control inflation
In theory we can say inflation rate is below may be a slight increase in inflation is desirable through expansionary fiscal policy

Question 8

Expansionary fiscal policy
Re-distributing income

Answer 8

Reduce income inequality via government spending on welfare benefits which is a top up on income for those who have lower incomes but also reduction in tax rates for those and lower income tax bands
Or maybe a reduction in regressive taxation will help reduce income inequality in the economy

Question 9

Contractionary fiscal policy aims

Answer 9

Reduce inflation
Reduce budget deficit
Re-distribute income
Reduce current account deficit

Question 10

Contractionary fiscal policy
Reducing inflation

Answer 10

Call the economy down if the economy is overheating with high rates of demand inflation reductions in A.D. via fiscal policy can help reduce the demand inflation
Only theory banks control inflation

Question 11

Contractionary fiscal policy
Reduce budget deficit

Answer 11

Reduce the amount of borrowing that the government is doing yearly
Therefore, reduce the overall level of debt that the government has

Question 12

Contractionary fiscal policy
Redistributing income

Answer 12

Not linked to A.D.
Could be via higher taxation on the rich to gain that money and distribute it via income top ups for the poor to reduce income inequality in society

Question 13

Construction fiscal policy
Reducing current account deposit

Answer 13

If is reduced because of construction fiscal policy incomes will be lower in the economy and therefore less sucking in of imports unless expenditure of imports

Question 14

Expansionary fiscal policy examples
Increase in aggregate demand

Answer 14

Increase in A.D. equals higher incomes in the economy leading to more spending more A.D. more income more spending coming into a virtual cycle ending in an even higher increase in AD and economic growth

Question 15

Expansionary fiscal policy
Reduction in income tax tax

Answer 15

Could be in tax for those and higher income tax brackets
Could be cut and tax for those and lower income tax brackets
Could be widening on tax bands
In theory it will increase disposable income of households in the economy and will increase the marginal propensity for them to consume therefore it will increase consumption in the equation and boost AD

Question 16

Expansionary fiscal policy
Reductions in corporation tax

Answer 16

If corporation taxes cut, it’s going to increase retain profit for businesses
This will increase their marginal to invest
Investment in the equation boost AD

Question 17

Expansionary fiscal policy
Reduction in aggressive taxation

Answer 17

Progressive taxes, burden the poor more than the rich
If progressive tax is cut, it increases the disposable income for the poor for the rich
As the poor have a very high marginal propensity to consume it could boos AD RIGHT

Question 18

Expansionary fiscal policy
Increasing government spending

Answer 18

Increase in government spending means more investments in healthcare education infrastructure public access wages and boost G in the AD equation

Question 19

Expansionary fiscal policy
Reduction in income tax LRAS

Answer 19

Incentive for the inactive of in the population population to become active
Those in the labour force incentive to work harder therefore it increases the quantity and quality of labour and boosts LRAS

Question 20

Expansionary fiscal policy
Cut in corporation tax LRS

Answer 20

Boosts investment boosts A.D.
The investments also boosts LRAS via the increase in quantity and quality of capital but also via an improvement in productive efficiency in the economy

Question 21

Expansionary fiscal policy
Increases in government spending LRAS

Answer 21

If government spending on education and health, it could boost the productivity of labour and therefore boost the quality of labour and increase LRS
Also increases in government spending on infrastructure can increase the productive efficiency in the economy also potentially boost the quantity of capital