fiscal policy

Question 1

What is fiscal policy

Answer 1

A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy

Question 2

What are fiscal policy instruments

Answer 2

governement spending and taxation

Question 3

What are direct taxes and state three examples

Answer 3

• Tax levied on an individual or organisation
  + income tax
  + national insurance contributions
  + corporation tax (firms pay, levied on their profits)

Question 4

What are indirect taxes and state examples

Answer 4

• Taxes levied on goods or services
  + VAT (20%)
  + excise duties (petrol, drink and tobacco)
  + council tax paid by homeowners on the notional value of a property

Question 5

Define corporation tax

Answer 5

tax on the profits made by companies, in the UK the main rate of
corporation tax is 19% and is expected to fall to 18% by 2020.

Question 6

Define excise duties

Answer 6

ndirect taxes levied on specific goods, typically alcoholic beverages,
tobacco and fuels. (levies on volume of goods bought)

Question 7

Define national debt

Answer 7

government’s total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time.

Question 8

Define personal allowance

Answer 8

the amount of income you can earn before you start paying income tax. It is currently £12,570

Question 9

Define taxation

Answer 9

the imposition of taxes on streams of income, commercial activities and wealth by the government

Question 10

Define budget balance

Answer 10

the annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G<T, there is a budget surplus.

Question 11

What is expansionary monetary policy

Answer 11

Lowering interest rates or increasing QE

Question 12

What is contractionary monetary policy

Answer 12

raising interest rates or reducing QE

Question 13

What is the problem with taxing people

Answer 13

Taxes and spending have an impact on inequality, so some decisions aimed to reduce/increase demand may increase income inequality. They also have an impact on incentives, for example high taxes reduce incentives

Question 14

Long term problems of fiscal policy?

Answer 14

Government spending also impacts LRAS. For example, by cutting government spending to reduce AD, the government may be reducing the quality of education or spending on research and technology

Question 15

What other problems are there with fiscal policy?

Answer 15

o Expansionary fiscal policy is difficult to undertake during a period of austerity. The government needs to consider the effect of policies on the budget.
o The impact of fiscal policy depends on the multiplier : the bigger the multiplier, the bigger the impact on AD. Classical economists argue that the multiplier is almost zero whilst Keynesian economists argue that it can be large if targeted correctly.

Question 16

Define austerity

Answer 16

Economic policy aimed at reducing a government’s deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments

Question 17

What is a neutral stance

Answer 17

No net effect on AD

Question 18

What are automatic stabilisers

Answer 18

• Some of a government’s fiscal policy may automatically react to changes in the economic cycle.
• During a recession, government spending will increase because the government will pay out more benefits, e.g. JSA. The government will also receive less tax revenue, e.g. due to unemployment.
  -These automatic stabilisers reduce the problems a recession causes, but at the expense of creating a budget deficit.
• During a boom, the automatic stabilisers create a budget surplus as tax revenue increases and government spending on benefits falls.

Question 19

What is discretionary fiscal policy

Answer 19

• This is where governments deliberately change their level of spending and tax.
• At any given point a government might choose to spend on improving the country’s infrastructure or services, and increase taxes to pay for it.
• On other occasions the government might take action because of the economic situation, e.g. during a recession the government might spend more and cut taxes to stimulate aggregate demand

Question 20

Define automatic stabilisers

Answer 20

automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a
recession.