Yr 11: Fiscal Policy

Question 1

What is fiscal policy?

Answer 1

The use of taxation and government spending to stabilise the business cycle

Question 2

What are the 3 budget outcomes?

Answer 2

Surplus, balanced, deficit

Question 3

What are the 3 fiscal stances?

Answer 3

Contractionary, neutral, expansionary

Question 4

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $60m and spending of $65m. What is the government’s budget outcome in Year 2?

Answer 4

$5m deficit

Question 5

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $60m and spending of $65m. What is the government’s fiscal stance in Year 2?

Answer 5

Contractionary

Question 6

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $60m and spending of $60m. What is the government’s budget outcome in Year 2?

Answer 6

Balanced budget

Question 7

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $60m and spending of $60m. What is the government’s fiscal stance in Year 2?

Answer 7

Contractionary

Question 8

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $40m and spending of $60m. What is the government’s budget outcome in Year 2?

Answer 8

$20m deficit

Question 9

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $40m and spending of $60m. What is the government’s fiscal stance in Year 2?

Answer 9

Neutral

Question 10

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $40m and spending of $35m. What is the government’s budget outcome in Year 2?

Answer 10

$5m surplus

Question 11

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $40m and spending of $35m. What is the government’s fiscal stance in Year 2?

Answer 11

Contractionary

Question 12

In Year 1, the government has tax of $50m and spending of $70m. In Year 2, the government has tax of $60m and spending of $85m. What is the government’s fiscal stance in Year 2?

Answer 12

Expansionary

Question 13

How could a government be in a surplus and have an expansionary fiscal stance at the same time?

Answer 13

If the government’s surplus decreased from the previous year

Question 14

What is the difference between discretionary and non-discretionary changes to fiscal policy?

Answer 14

Discretionary is a deliberate change to spending or taxation, whereas non-discretionary changes occur automatically with the business cycle

Question 15

What is an example of a discretionary change to tax?

Answer 15

The government raises the percentage paid as tax for income tax or company tax

Question 16

What is an example of a non-discretionary change to tax?

Answer 16

Due to an upturn in the business cycle, individuals earn more and therefore pay more tax

Question 17

What is an example of a discretionary change to government spending?

Answer 17

The government spends to build infrastructure, or chooses to increase how much is paid to a person on welfare

Question 18

What is an example of a non-discretionary change to government spending?

Answer 18

Due to a downturn in the business cycle, more people are unemployed and apply for welfare payments

Question 19

Why is fiscal policy considered an automatic stabiliser?

Answer 19

In an upturn, taxation will rise automatically (because of higher employment and incomes) and gov spending will fall automatically (because of fewer people on JobSeeker). Therefore, the budget automatically adjusts to counteract changes in the business cycle

Question 20

If tax or government spending changes with the business cycle, it is considered…

Answer 20

Non-discretionary (or a ‘cyclical component’ of the budget)

Question 21

If tax or government spending changes because of a deliberate government decision rather than a change in the business cycle, it is considered…

Answer 21

Discretionary (or a ‘structural component’ of the budget)

Question 22

How does the time it takes to conduct fiscal policy compare with the time it takes to conduct monetary policy?

Answer 22

Fiscal policy takes longer to implement because it has to pass through Parliament, whereas monetary policy can be done immediately by the RBA board

Question 23

What was the Australian Government’s budget balance in 2019 (as a percentage of GDP)?

Answer 23

0%

Question 24

What was the Australian Government’s budget balance in 2021 (as a percentage of GDP)?

Answer 24

-6.5%

Question 25

What was the Australian Government’s budget balance in 2023 (as a percentage of GDP)?

Answer 25

0.8%

Question 26

What was the size of the Australian Government’s fiscal stimulus during the pandemic?

Answer 26

$291 billion

Question 27

What were 3 discretionary measures taken as part of the Australian Government’s fiscal stimulus in the pandemic?

Answer 27

1) $100b on JobKeeper
2) One-off cash payments to welfare recipients
3) Temporarily doubled the rate of JobSeeker

Question 28

What is the difference between JobKeeper and JobSeeker?

Answer 28

JobKeeper was a temporary program in the pandemic for firms who were heavily impacted by lockdowns to continue to pay their staff’s wages

JobSeeker is the welfare payment provided to people who are unemployed

Question 29

Why did the Government target welfare recipients with cash payments in the pandemic?

Answer 29

Welfare recipients have a lower income so have a higher MPC, increasing the multiplier effect of the initial injection

Question 30

What was a non-discretionary change the Government’s fiscal policy during the pandemic?

Answer 30

The number of people on JobSeeker increased by 50% in 2020

Question 31

How well has the Australian Government used fiscal policy to stabilise the business cycle?

Answer 31

It worked very well in the pandemic to prevent growth falling and unemployment rising as much as it did in other countries. But it has not been tightened enough since the end of lockdowns, which has contributed to a sharp increase in inflation.

Question 32

What were the main features of the Government’s fiscal policy in 2023?

Answer 32

• A contractionary stance and a budget surplus, but this was entirely due to non-discretionary changes to the budget (mainly high profits for mining firms)
• Increased subsidies for child care and low-income earners’ electricity bills, in order to directly reduce the effects of inflation
• Increased JobSeeker by $40 per fortnight