3.1 Signposting

Question 1

Why do Governments Levy Taxes?

Answer 1

1. To raise revenue to fund essential public expenditure and transfer payments
2. To redistribute income
3. To correct market failures
4. To manage the macroeconomy
5. Protectionism

Question 2

Governments Spend Money In The Economy To:

Answer 2

1. Influence the level of economic activity
2. Correct market failures and improve allocative efficiency
3. To reduce inequality and promotes equity

Question 3

Expansionary Fiscal Policy (Opposite for Contractionary)

Answer 3

1. Governments could reduce the marginal rate of income tax for those in lower income tax bands or increase the income tax free allowance
2. Governments could reduce the marginal rate of income tax on the rich (reducing the tax rate on the highest income tax bands)
3. Governments could reduce the level of regressive tax in the economy such as VAT and fuel duty
4. Governments can reduce the level of corporation tax, that is the tax on business profits
5. Governments can boost their spending in the economy for example by spending infrastructure, education, healthcare, public sector wages etc.

Question 4

What happens to Growth and Unemployment due to Expansionary Fiscal Policy?

Answer 4

1. Growth increases
2. Unemployment decreases

Question 5

Expansionary Fiscal Policy and LRAS

Answer 5

1. Governments, by reducing the level of corporation tax, will increase retained profits therefore there will be more investment into quantity and quality of factors of production
2. Governments can boost their spending in the economy by spending on infrastructure, education and healthcare. This improves quantity and quality of factors of production

Question 6

Expansionary Fiscal Policy Cons (Budget Deficit Cons)

Answer 6

1. Inflation in the economy is likely to increase
2. The deterioration of government finances
3. A large borrowing fuelled increase in government sector can crowd out the private sector
4. The length of time lags

Question 7

Counter for this point: 2. The deterioration of government finances

Answer 7

1. A budget deficit fuelled fiscal stimulus can increase AD and growth generating higher incomes and profits over time increasing the tax take for the government in the long run

Question 8

Contractionary Fiscal Policy Pros - Austerity Policy (Budget Surplus Pros)

Answer 8

1. Lower government borrowing and debt
2. Flexibility for government spending when necessary
3. Less crowding out and X-inefficiency
4. Can keep inflation low

Question 9

Contractionary Fiscal Policy Cons - Austerity Policy (Budget Surplus Cons)

Answer 9

1. Potential shock to the economy (recession)
2. Widening income inequality
3. Austerity policy can distort incentives by raising taxes

Question 10

Expansionary Fiscal Policy Evaluation (opposite for contractionary)

Answer 10

1. The initial level of economic activity
2. The level of consumer and business confidence in the economy
3. The state of government finances
4. Keynesian economists would argue that expansionary fiscal policy would crowd in the private sector
5. Role of automatic stabilisers
6. The size of multiplier
7. Laffer curve arguments

Question 11

Fiscal Policy and the Automatic Stabilisers

Answer 11

The stronger the automatic stabilisers are in an economy, the less the need is for discretionary fiscalm policy to actively manage the macroeconomy in times of recession and boom