Yr1 Fiscal and Supply Side Policies

Question 1

PART 1

Answer 1

FINANCIAL POLICY

Question 2

What are the 2 things controlled by fiscal policy?

Answer 2

• government spending
• taxation

Question 3

What is the definition + example of indirect tax

Answer 3

A tax imposed by the government that increases the supply cost of producers

VAT

Question 4

What is the definition + example of direct tax?

Answer 4

Tax that is levied directly on an individual or organisation

On income, wealth, or profit e.g. corporate tax

Question 5

What is the definition + example of progressive tax?

Answer 5

A tax rate that increases (or progresses) as taxable income increases

UK tax brackets

Question 6

What is the definition + example of proportional tax?

Answer 6

Apply at a constant tax rate to all income levels

National Insurance Contribution

Question 7

What is the definition + example of a regressive tax?

Answer 7

A tax that remains constant and is only paid if you purchase a product/service

Taxes on alcohol or VAT

Question 8

What is the definition of fiscal policy?

Answer 8

Involves the use of government spending and taxation to achieve the governments policy targets

Question 9

NEED CASE STUDY DATA

Question 10

What does a balanced budget mean?

Answer 10

G =T

Question 11

What does a budget deficit mean?

Answer 11

G > T

Question 12

What does a budget surplus mean?

Answer 12

G < T

Question 13

How is fiscal policy used to create expansionary policies for the economy?

Answer 13

• used to incr AD
• incr gov spending
• decr taxation

Question 14

How is fiscal policy used for contractionary policy objectives for the economy?

Answer 14

• decr AD
• decr gov spending
• incr taxation

Question 15

What is discretionary fiscal policy?

Answer 15

Involves making discrete changes to G, T and the budget deficit to manage levels of AD

Question 16

What is crowding out?

Answer 16

A situation in which an incr in G displaces private sector spending, with little or no incr in AD

Question 17

What is the name of the diagram which shows at what level tax should be at?

Answer 17

Laffer Curve

Question 18

What are the benefits + positives of fiscal policy?

Answer 18

• can direct spending to specific purposes
• can use taxation to discourage negatives externalities
• short lag time

Question 19

What are the criticisms of fiscal policy?

Answer 19

• disincentives of tax
• side effects on public spending e.g. repayments of interest rates on debt, incr taxes to pay off debt + inequality gap in I
• poor info (lack of research)
• time lag
• impacts on other components of AD
• budget deficit
• crowding out

Question 20

What does a successful fiscal policy depend on?

Answer 20

• size of the multiplier
• the state of the economy
• others factors in the economy

Question 21

What does the laffer curve represent + what’s its shape?

Answer 21

Represents the relationship between tax rates and amount of tax revenue collected by governments

Parabola shaped

Question 22

PART 2

Answer 22

SUPPLY-SIDE POLICY

Question 23

What are supply side policies?

Answer 23

They are policies designed to make industries and markets operate more efficiency and thereby contribute to a faster rate of growth of real national output > they can improve the productive potential/ capacity of an economy leading to an increase in LRAS

Question 24

What aspects of the economy do supply-side policies effect?

Answer 24

Incr LRAS

Question 25

What are the 2 approaches of supply-side policies + their definition

Answer 25

1. Market Led Policies
   - designed to make markets work better and give the private sector more freedom
   - to improve efficiency
   - easier to operate within a market
2. Interventionist Policies
   - to overcome different types of market failure

Question 26

What are 8 examples of UK supply side policies?

Answer 26

1. Privatisation of the Royal Mail
2. Patent box incentive
3. Share gas tax cuts
4. Corporation tax
5. Modern apprenticeships
6. Welfare caps/reforms
7. Infrastructure
8. Launch of Green Investment Bank

Question 27

What are the drivers of economic growth linked to supply side policies? (4)

Answer 27

• productivity improvements
• labour market participation
• innovation and enterprise
• capital investment

Question 28

What are the 8 key UK supply side challenges?

Answer 28

1. Productivity gap
2. High youth unemployment
3. Low trend growth GDP
4. Rise of emerging nations
5. Deep regional economic divide
6. Structural trade deficit (Balance of Payments)
7. Low investment and research
8. Rising inequality/relative poverty

Question 29

What are the two ways of illustrating supply side policies on graphs?

Answer 29

1. Shifting the LRAS curve leftwards
2. Shifting the long run aspect of the Keynesian AS curve leftwards and SR stays the same (long time to implement)

Question 30

Advantages of supply side policies? (5)

Answer 30

1. Improvements in unemployment
2. Decr inflationary pressure
3. Raises living standards
4. Improves competitiveness
5. More flexible to external demand + supply side shocks

Question 31

Disadvantages of supply side policies? (4)

Answer 31

1. Lag time
2. Cost
3. Inequality
4. Businesses may lose out
   - less profit due to competition policy

Question 32

What does the impact of supply side policies depend on?

Answer 32

1. Time lags (depend on type of policy and country involved)
2. Level and growth of AD (makes business investment and innovation viable)
3. Level of inequality that occurs
4. Sustainability
5. What other countries are also doing