13. Fiscal & Supply-Side Policies (AQA A Level Economics): Flashcards
Exam code: 7136
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Define fiscal policy.
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Cards in this collection (60)
Define fiscal policy.
Fiscal policy is the use of government spending and taxation to influence aggregate demand in the economy.
What is the aim of expansionary fiscal policy?
Expansionary fiscal policy aims to shift aggregate demand to the right by reducing taxes or increasing government spending.
True or False?
Contractionary fiscal policy involves increasing taxes or decreasing government spending.
True.
Contractionary fiscal policy raises taxes or cuts government spending to shift aggregate demand to the left.
A budget means that government revenue equals government expenditure.
A balanced budget means that government revenue equals government expenditure.
Define budget deficit.
A budget deficit occurs when government expenditure is greater than government revenue in a given period.
How is a budget deficit financed?
A budget deficit has to be financed through public sector borrowing, which adds to the public debt.
True or False?
Government spending is a withdrawal from the circular flow of income.
False.
Government spending is an injection that increases economic activity, whereas taxation is a withdrawal.
Define automatic stabilisers.
Automatic stabilisers are automatic fiscal changes that occur as the economy moves through the stages of the business cycle.
In a recession, progressive taxation means households are taxed , which helps keep real GDP higher than it would otherwise be.
In a recession, progressive taxation means households are taxed less, which helps keep real GDP higher than it would otherwise be.
Give one way fiscal policy can improve aggregate supply.
Fiscal policy such as education subsidies can raise human capital, boosting productivity and the economy's productive potential.
True or False?
A budget surplus means government revenue is greater than government expenditure.
True.
A budget surplus arises when government revenue exceeds government expenditure.
What is the aggregate demand formula used in fiscal policy analysis?
Aggregate demand is AD = C + I + G + (X − M).
Define direct tax.
A direct tax is a tax imposed on income and profits that is paid directly to the government by the individual or firm.
Define indirect tax.
An indirect tax is a tax imposed on spending, which the supplier is responsible for paying to the government.
True or False?
Value Added Tax (VAT) is an example of a direct tax.
False.
VAT is an indirect tax because it is levied on spending rather than on income or profits.
In a tax system, a larger percentage of income is paid in tax as income rises.
In a progressive tax system, a larger percentage of income is paid in tax as income rises.
Define regressive tax.
A regressive tax takes a smaller percentage of income in tax as income rises.
How does a proportional tax change as income rises?
Under a proportional tax, the same percentage of income is paid in tax at all income levels.
True or False?
All indirect taxes are regressive.
True.
Indirect taxes take a larger share of a lower earner's income, making them regressive.
What are transfer payments?
Transfer payments are government payments, such as unemployment benefits, for which no goods or services are exchanged.
True or False?
Capital expenditure includes government spending on new hospitals and infrastructure.
True.
Capital expenditure is investment in infrastructure and capital equipment, such as new hospitals, schools and rail projects.
Define the marginal tax rate.
The marginal tax rate is the tax paid on the last pound of income earned.
State two principles of a 'good' tax system.
A good tax system should be simple and fair, reflecting the taxpayer's ability to pay.
Privatisation, the sale of government-owned , is a source of government revenue.
Privatisation, the sale of government-owned assets, is a source of government revenue.
Define national debt.
The national debt is the cumulative total of past government borrowing which has to be repaid with interest.
What is the difference between a budget deficit and the national debt?
A budget deficit is an annual flow where spending exceeds revenue, while the national debt is the accumulated stock of past borrowing.
True or False?
The national debt is a flow measured over a single year.
False.
The national debt is a stock, the accumulated total of past borrowing; the budget deficit is the annual flow.
Define a cyclical budget deficit.
A cyclical budget deficit is the part of the deficit that is related to the economic cycle, rising in a recession and falling in a boom.
Define a structural budget deficit.
A structural budget deficit is the underlying deficit that persists independent of the business cycle.
During a , tax revenues fall and government spending rises, increasing a cyclical budget deficit.
During a recession, tax revenues fall and government spending rises, increasing a cyclical budget deficit.
What does the debt to GDP ratio measure?
The debt to GDP ratio measures the size of a country's national debt relative to the size of its economy.
True or False?
Crowding out occurs when government borrowing raises interest rates and reduces private sector investment.
True.
Selling bonds to fund borrowing raises interest rates, reducing the incentive for firms and consumers to borrow and invest.
When was the Office for Budget Responsibility established?
The Office for Budget Responsibility (OBR) was established in 2010.
State one role of the Office for Budget Responsibility.
The OBR provides independent forecasts of economic performance and public finances, assessing the sustainability of government spending.
True or False?
A budget surplus can be used to reduce the national debt.
True.
A budget surplus can reduce general government debt and lower the future cost of servicing that debt.
A budget deficit must be financed through public sector , which adds to the national debt.
A budget deficit must be financed through public sector borrowing, which adds to the national debt.
Define supply-side policies.
Supply-side policies are government policies aimed at increasing the productive potential of the economy by shifting long-run aggregate supply outwards.
True or False?
Supply-side policies aim to shift the long-run aggregate supply (LRAS) curve outwards.
True.
Supply-side policies raise the productive potential of the economy, shifting LRAS outwards.
What are the two categories of supply-side policy?
Supply-side policies are either interventionist (government-led) or free-market (market-based).
Define the natural rate of unemployment.
The natural rate of unemployment is the level of unemployment that exists when the economy is operating at its full potential output.
Which types of unemployment does the natural rate of unemployment include?
The natural rate of unemployment includes frictional and structural unemployment but excludes cyclical unemployment.
The natural rate of unemployment excludes unemployment, which fluctuates with the business cycle.
The natural rate of unemployment excludes cyclical unemployment, which fluctuates with the business cycle.
True or False?
Investment in education and training reduces structural unemployment.
True.
A more skilled workforce can better meet the demands of a changing economy, reducing structural unemployment.
State two goals of supply-side policy.
Supply-side policy aims to promote long-term economic growth and lower inflation (average price levels).
True or False?
Supply-side policy refers to government action, whereas supply-side improvements are actions taken by firms.
True.
Supply-side policy is government-led, while supply-side improvements are specific actions taken by firms.
Supply-side policies improve labour market , allowing workers to move more easily between jobs.
Supply-side policies improve labour market flexibility, allowing workers to move more easily between jobs.
How can supply-side policies improve the current account of the balance of payments?
By boosting international competitiveness, supply-side policies can raise net exports and improve the current account.
Define supply-side improvements.
Supply-side improvements are specific actions taken by firms to enhance their efficiency, quality and competitiveness.
Define free-market supply-side policies.
Free-market supply-side policies aim to free up markets and improve incentives in order to increase long-run aggregate supply.
Define interventionist supply-side policies.
Interventionist supply-side policies require government intervention to raise the full employment level of output.
True or False?
Deregulation is an example of a free-market supply-side policy.
True.
Deregulation reduces firms' costs of production, a market-based way of increasing aggregate supply.
Give one example of an interventionist supply-side policy.
Increased government spending on education and training raises workforce skills and productivity.
transfers state-owned firms to private ownership, encouraging new firms to enter and compete.
Privatisation transfers state-owned firms to private ownership, encouraging new firms to enter and compete.
True or False?
Government investment in infrastructure is an interventionist supply-side policy.
True.
Infrastructure spending is government-led and improves the movement of people and goods, raising aggregate supply.
How can cutting income tax act as a supply-side policy?
Lower income tax increases the incentive to work, boosting productivity and long-run aggregate supply.
What is the effect of successful supply-side policies on the LRAS curve?
Successful supply-side policies shift the long-run aggregate supply (LRAS) curve to the right.
True or False?
A disadvantage of interventionist supply-side policies is that they are expensive and funded by taxation or borrowing.
True.
Interventionist policies are costly to implement and are paid for through tax revenue or increased government borrowing.
Reducing union power lowers wage protection, cutting firms' costs of production.
Reducing trade union power lowers wage protection, cutting firms' costs of production.
State one disadvantage of free-market supply-side policies.
They can worsen equity, as labour market reforms lower workers' wages and widen income inequality.
Define a national minimum wage.
A national minimum wage is a legally imposed wage level, set above the market rate, that employers must pay their workers.
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