section 3 definitions

Question 1

What is fiscal policy?

Answer 1

The use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance

Fiscal policy aims to influence economic activity through government financial operations.

Question 2

What are fiscal rules?

Answer 2

A long term constraint on fiscal policy by putting numerical limits on the budget

These rules help maintain fiscal discipline over time.

Question 3

Define indirect tax.

Answer 3

Tax where the person charged with paying the money to the government is able to pass on the cost to someone else; a tax on consumption that increases costs for producers

Examples include sales tax and VAT.

Question 4

Define direct tax.

Answer 4

Taxes imposed on income and paid straight to the government by the individual taxpayer

Examples include income tax and corporate tax.

Question 5

What is progressive taxation?

Answer 5

Where those on higher incomes pay a higher marginal rate of tax; those on higher incomes pay a higher percentage of their income on tax

This system aims to reduce income inequality.

Question 6

What is proportional taxation?

Answer 6

The proportion of income paid on tax remains the same whilst the income of the taxpayer changes; everyone pays the same percentage of their income on tax

Also known as flat tax.

Question 7

Define regressive taxation.

Answer 7

Where the proportion of income paid in tax falls whilst the income of the taxpayer increases; those on lower incomes pay a higher percentage of their income on tax

This can increase income inequality.

Question 8

What are automatic stabilisers?

Answer 8

Mechanisms which reduce the impact of changes in the economy on national income

Examples include unemployment benefits and progressive taxes.

Question 9

What is discretionary fiscal policy?

Answer 9

Deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary fiscal policy

This is often used to respond to economic fluctuations.

Question 10

What is a balanced budget?

Answer 10

When government spending equals tax revenue

This indicates fiscal responsibility.

Question 11

Define budget deficit.

Answer 11

When the government spends more money than it receives

This can lead to increased national debt.

Question 12

What is the budget position?

Answer 12

The impact that taxes and government spending has on the future economy

This reflects the overall fiscal health of the government.

Question 13

What does budget surplus mean?

Answer 13

When the government receives more money than it spends

This can be used to pay down debt or invest in future projects.

Question 14

Define current government expenditure.

Answer 14

Spending on goods and services which are consumed and last for a short time

Examples include salaries and office supplies.

Question 15

What is capital government expenditure?

Answer 15

Government spending on investment goods such as new roads, schools and hospitals, which will be consumed in over a year

This type of spending aims to improve long-term economic productivity.

Question 16

What is a cyclical budget position?

Answer 16

A temporary budget position, which is related to the business cycle

This can fluctuate with economic conditions.

Question 17

Define structural budget position.

Answer 17

Budget which is either in a deficit or surplus due to an imbalance in revenue and expenditure of the government, as it exists at every point in the business cycle

This indicates underlying fiscal issues.

Question 18

What is the overall budget position?

Answer 18

An accumulation of deficits and surpluses over time to give the overall budget

This reflects the long-term fiscal health of the government.

Question 19

Define national debt.

Answer 19

The sum of government debts built up over many years

This represents the total amount owed by the government.

Question 20

What is crowding out?

Answer 20

When government borrowing discourages private sector investment or when government provision of a good or service prevents it being provided by the private sector

This can lead to reduced economic growth.

Question 21

What does crowding in mean?

Answer 21

When government borrowing leads to an increase in private investment

This can stimulate economic growth.

Question 22

What is the Laffer curve?

Answer 22

Shows that a rise in tax rates does not necessarily lead to a rise in tax revenue, due to the impact on incentives and work

This illustrates the relationship between tax rates and tax revenue.

Question 23

Define average tax rates.

Answer 23

The amount of tax paid as a proportion of income

This gives an overview of the tax burden on individuals.

Question 24

What is the marginal rate of tax?

Answer 24

The rate of tax applied to the next unit of currency in income e.g. the rate of tax on the next pound earned in the UK

This affects individual incentives to earn more.

Question 25

What is **monetary policy**?

Answer 25

The attempts of the central bank/regulatory authority to control the level of AD by altering base interest rates or the amount of money in the economy ## Footnote This is a key tool for managing economic stability.

Question 26

Define **money supply**.

Answer 26

Stock of money in the economy ## Footnote This includes cash, coins, and balances held in bank accounts.

Question 27

What are **interest rates**?

Answer 27

The price of money ## Footnote This influences borrowing and spending in the economy.

Question 28

What is **symmetric inflation targeting**?

Answer 28

When the Central Bank intervenes when inflation is too high or too low ## Footnote This aims to stabilize prices around a target level.

Question 29

What is **asymmetric inflation targeting**?

Answer 29

When the Central Bank only intervenes when inflation is too high, not when it is too low ## Footnote This can lead to neglect of deflationary pressures.

Question 30

Define **quantitative easing**.

Answer 30

When the central bank buys assets in exchange for money in an attempt to increase the money supply ## Footnote This is used to stimulate the economy during downturns.

Question 31

What is a **liquidity trap**?

Answer 31

When a change in the money supply does not change the interest rate, which means monetary policy cannot be used to influence consumption/investment ## Footnote This complicates economic recovery efforts.

Question 32

What are **supply-side policies**?

Answer 32

Government policies aimed at increasing the productive potential of an economy and shifting LRAS to the right ## Footnote These policies focus on improving efficiency and productivity.