Government Policies (Edexcel IGCSE Economics): Flashcards
Exam code: 4EC1
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- FrontFiscal Policy
Define fiscal policy.
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Cards in this collection (122)
Define fiscal policy.
Fiscal policy is the use of government spending and taxation to influence economic growth and achieve macroeconomic objectives.
Define direct tax.
A direct tax is a tax imposed on income and profits and paid directly to the government by the individual or firm.
Define indirect tax.
An indirect tax is a tax imposed on goods and services, which the supplier is responsible for paying to the government.
Define transfer payment.
A transfer payment is a government payment for which no goods or services are exchanged, such as unemployment benefits.
Who is responsible for setting fiscal policy?
The government is responsible for setting fiscal policy.
What is the main source of government revenue?
The main source of government revenue is taxation.
Give one reason why governments levy taxes.
Governments levy taxes to fund government expenditure, as well as to discourage demerit goods and redistribute income.
What does current expenditure refer to?
Current expenditure refers to the day-to-day spending required to run the government and public sector, such as public-sector wages.
True or False?
Capital expenditure is government spending on infrastructure, such as new hospitals and railways.
True.
Capital expenditure is spending on infrastructure and capital equipment, such as new hospitals, schools and high-speed rail. This differs from current expenditure, which covers day-to-day running costs.
True or False?
Fiscal policy is used to help the government achieve its macroeconomic objectives.
True.
Fiscal policy aims to stabilise economic growth, control inflation and maintain low unemployment.
A tax imposed on imported goods, used to reduce the volume of imports, is known as a .
A tax imposed on imported goods, used to reduce the volume of imports, is known as a tariff.
The government presents its fiscal policy each year when it delivers the annual .
The government presents its fiscal policy each year when it delivers the annual Budget.
Define fiscal deficit.
A fiscal deficit occurs when government revenue is less than government expenditure.
Define fiscal surplus.
A fiscal surplus occurs when government revenue is greater than government expenditure.
Define balanced budget.
A balanced budget occurs when government revenue equals government expenditure.
Define crowding out.
Crowding out occurs when government borrowing drives up interest rates, reducing private-sector borrowing and investment.
How is a fiscal deficit financed?
A fiscal deficit is financed through public sector borrowing.
What happens to national debt when a government runs a fiscal deficit?
National debt rises, as the government spends more than it receives and must repay the borrowing with interest.
Give one use of a fiscal surplus.
A fiscal surplus can be used to fund capital expenditure on infrastructure, or to pay back government debt.
Why might a fiscal surplus slow economic growth?
A surplus can slow growth because the government withdraws more through higher taxes than it injects through spending into the circular flow of income.
True or False?
A government may deliberately run a fiscal surplus to slow growth and reduce inflationary pressure.
True.
By withdrawing more through taxes than it injects through spending, a surplus can moderate economic growth and ease pressure on prices.
True or False?
A government can finance a fiscal deficit by borrowing from both domestic and foreign lenders.
True.
Public sector borrowing can come from domestic households and firms, or from foreign individuals and governments, and is added to the national debt.
Rising national debt places a burden on future , who must repay it through higher taxes.
Rising national debt places a burden on future generations, who must repay it through higher taxes.
Repaying debt creates an as future governments may have to cut spending on services.
Repaying debt creates an opportunity cost as future governments may have to cut spending on services.
Define expansionary fiscal policy.
Expansionary fiscal policy involves decreasing taxes and/or increasing government spending to grow the economy.
Define contractionary fiscal policy.
Contractionary fiscal policy involves raising taxes or decreasing government spending to tackle inflationary pressures.
Define fiscal policy.
Fiscal policy is the use of government spending and taxation to help achieve the government's macroeconomic objectives.
What is expansionary fiscal policy used to achieve?
Expansionary fiscal policy is used to stimulate growth and create employment.
How might contractionary fiscal policy affect the current account?
A current account surplus may occur, as households reduce their spending on imports.
How does a cut in corporation tax affect economic growth?
A cut in corporation tax raises firms' net profit and investment, so economic growth increases.
What effect does raising income tax have on consumption?
Raising income tax reduces households' discretionary income, so consumption falls.
What may happen to unemployment under contractionary fiscal policy?
Unemployment may increase as output falls and fewer workers are required.
True or False?
Expansionary fiscal policy can increase environmental damage.
True.
As industrial output and economic activity expand, environmental damage may rise.
True or False?
Cutting government spending reduces the tax revenue available to redistribute income.
True.
Lower output means less corporation tax is collected, leaving less revenue to redistribute to lower-income households.
Expansionary fiscal policy tends to raise the rate of as spending and investment increase.
Expansionary fiscal policy tends to raise the rate of inflation as spending and investment increase.
Under contractionary fiscal policy, the pace of economic growth down.
Under contractionary fiscal policy, the pace of economic growth slows down.
Define monetary policy.
Monetary policy involves adjusting the central bank's interest rate and the money supply to influence total demand in an economy.
Define money supply.
The money supply is the amount of money in circulation in an economy at any given moment in time.
Define base rate.
The base rate is the interest rate at which the central bank lends money to commercial banks.
Define interest rate.
The interest rate is the percentage charged for borrowing money or the percentage offered for saving money.
Who is usually responsible for setting monetary policy?
The central bank is usually responsible for setting monetary policy.
Which committee sets the base rate in the UK?
The Monetary Policy Committee (MPC) under the Bank of England sets the UK base rate.
What is the UK's inflation target rate?
The UK's inflation target rate is 2% CPI.
What does it mean that the central bank is the 'lender of last resort'?
It means commercial banks can borrow from the central bank when they face short-term liquidity issues.
True or False?
One role of the central bank is to regulate commercial banks to protect consumers.
True.
High levels of asymmetric information in financial markets mean commercial banks must be regulated to protect consumers.
True or False?
A change in the base rate can take up to two years to fully affect the economy.
True.
Some effects, such as mortgage rate changes, are immediate, but the full effects of an interest rate change can take up to two years.
One role of the central bank is acting as banker to the .
One role of the central bank is acting as banker to the government.
The Monetary Policy Committee meets roughly times a year to set policy.
The Monetary Policy Committee meets roughly eight times a year to set policy.
Define quantitative easing.
Quantitative easing (QE) is a monetary policy tool in which the Central Bank creates new money to buy assets, increasing the money supply to stimulate economic activity.
Define expansionary monetary policy.
Expansionary monetary policy (loosening) is used to generate economic growth, using tools such as reducing interest rates and increasing quantitative easing.
Define contractionary monetary policy.
Contractionary monetary policy (tight) is used to slow economic growth or reduce inflation, using tools such as increasing interest rates and decreasing or stopping quantitative easing.
What are the two main tools of monetary policy?
The two main tools of monetary policy are adjusting interest rates and quantitative easing.
Which institution sets monetary policy?
Monetary policy is set by the Central Bank.
How does a rise in interest rates affect consumers' existing loan repayments?
A rise in interest rates makes existing loan repayments, such as mortgages and credit cards, more expensive, reducing discretionary income and consumption.
Why did most central banks raise interest rates in 2022–2024?
Most central banks raised interest rates to address the high levels of inflation seen during 2022–2024.
In QE, what asset does the Central Bank buy back?
In QE the Central Bank buys back previously issued government bonds from commercial banks, financial institutions and households.
True or False?
Quantitative easing is a type of fiscal policy.
False.
Quantitative easing is a monetary policy tool used by the Central Bank.
True or False?
Higher interest rates tend to reduce business investment.
True.
Higher interest rates make borrowing and existing loan repayments more expensive, so firms undertake less capital investment.
Quantitative easing was widely used after the financial crisis and during the Covid pandemic.
Quantitative easing was widely used after the 2008 financial crisis and during the Covid pandemic.
To carry out QE, the Central Bank first creates new electronic reserves, or .
To carry out QE, the Central Bank first creates new electronic reserves, or digital money.
Define contractionary monetary policy.
Contractionary monetary policy raises interest rates (or reduces QE) to slow economic activity and ease inflationary pressure.
Define expansionary monetary policy.
Expansionary monetary policy lowers interest rates (or increases QE) to make borrowing cheaper and boost total demand.
How does contractionary monetary policy tend to affect the current account?
The current account is likely to worsen, as exports become more expensive and overall trade slows.
What tends to happen to unemployment under contractionary monetary policy?
Unemployment tends to increase under contractionary monetary policy as output falls and fewer workers are required.
How can expansionary monetary policy make exports less competitive?
Rising inflation increases price levels, which makes exports more expensive and reduces foreign demand for them.
What is a risk of expansionary monetary policy for inflation?
The extra money supply from expansionary monetary policy may lead to rapid inflation and can inflate asset prices such as houses.
How does expansionary monetary policy affect the current account through imports?
Demand for imports may increase because households have more money to buy foreign goods, worsening the current account.
True or False?
Expansionary monetary policy may fail to boost spending if consumer confidence is low.
True.
Households may not borrow more even when interest rates fall, so the impact of monetary policy is less predictable than fiscal policy.
True or False?
As interest rates approach zero, further cuts become less effective.
True.
Interest rates have limits on downward adjustment, so the closer they get to zero the less effective changes are.
Under contractionary monetary policy, economic growth slows down as loans get more .
Under contractionary monetary policy, economic growth slows down as loans get more expensive.
Monetary policy can be adjusted more frequently than fiscal policy, around times per year.
Monetary policy can be adjusted more frequently than fiscal policy, around 4–8 times per year.
Under expansionary monetary policy, unemployment is likely to as spending rises.
Under expansionary monetary policy, unemployment is likely to fall as spending rises.
Define supply-side policy.
Supply-side policy aims to increase the total supply, or productive potential, of the economy by improving the quality or quantity of the factors of production.
Define privatisation.
Privatisation is the transfer of government-owned assets or firms into the private sector, usually by the sale of company shares.
Define deregulation.
Deregulation is the process of removing government controls and laws from markets to increase competition and encourage new firms to enter.
Give one benefit of successful supply-side policy.
Supply-side policy can generate long-term economic growth, as well as lowering average price levels and creating new jobs.
How is supply-side policy shown on a PPC?
Supply-side policy is shown by an outward shift of the production possibility curve.
How does spending on education and training increase supply?
Spending on education and training raises the quality of the workforce, so productivity and the supply of output increase.
How does lowering income tax act as a supply-side policy?
Lowering income tax incentivises workers to work harder and encourages more people to join the labour force, as they keep more of their earnings.
Give one way regional policies can raise total supply.
Regional policies raise supply by encouraging firms to relocate to high unemployment areas, improving transport links or subsidising firms to hire locally.
True or False?
Increasing interest rates is a supply-side policy.
False.
Increasing interest rates is contractionary monetary policy, not a supply-side policy.
True or False?
Deregulation aims to decrease firms' costs of production.
True.
Regulation raises production costs, so deregulation decreases costs and may result in greater supply.
Restructuring the benefits system can incentivise unemployed people to seek work.
Restructuring the unemployment benefits system can incentivise unemployed people to seek work.
Reducing tax allows firms to keep more profit to invest in machinery and technology.
Reducing corporation tax allows firms to keep more profit to invest in machinery and technology.
Infrastructure spending on road and rail networks improves links for goods and workers.
Infrastructure spending on road and rail networks improves transport links for goods and workers.
Define disinflation.
Disinflation is a fall in the rate of inflation, which supply-side policies can cause by increasing supply and reducing prices.
Define negative externality.
A negative externality is a cost imposed on a third party, such as the environmental damage from large infrastructure projects.
How do supply-side policies affect economic growth?
Supply-side policies increase the rate of economic growth by raising potential national output and higher real GDP.
How can supply-side policies reduce unemployment?
Supply-side policies reduce unemployment by improving the quality of the workforce through education and training, raising demand for labour.
How do supply-side policies help reduce inflation?
Supply-side policies reduce inflation because lower taxes, privatisation or deregulation cut the cost of production and increase supply.
How can supply-side policies improve the current account?
Increased supply lowers prices, making a nation's exports more competitive, so net exports and the current account improve.
Give one drawback of supply-side policies for income distribution.
The distribution of income may worsen, as deregulation offers less protection against low-wage employment and tax cuts reduce redistribution.
True or False?
Supply-side policies deliver their full effects almost immediately.
False.
Supply-side policies often take many years, up to 20 in some cases, to fully develop.
True or False?
The overall benefits of supply-side policies outweigh their negatives.
True.
The benefits of supply-side policies are generally considered to far outweigh their drawbacks.
Many economies fail to develop supply-side policies because of and changing government priorities.
Many economies fail to develop supply-side policies because of political change and changing government priorities.
Privatisation and deregulation encourage new firms to the market, which stimulates economic growth.
Privatisation and deregulation encourage new firms to enter the market, which stimulates economic growth.
Define government controls.
Government controls are direct interventions — such as regulation, legislation, fines and pollution permits — used to correct market failure so that markets work more efficiently.
Define cost-push inflation.
Cost-push inflation occurs when rising costs of production push up the general price level.
How can government controls affect the redistribution of income?
Government controls can raise costs that disproportionately affect lower-income earners, such as a tax on car emissions. However, as industrial pollution is concentrated in low-income areas, controls can also help protect the worse off in society.
How can emissions controls slow economic growth in the short run?
Emissions controls increase costs for firms, reducing investment and therefore slowing economic growth in the short run.
What was Anglian Water fined in 2023, and why?
In 2023, Anglian Water was fined £2.65 million for violating environmental permits in the North Sea, which increased its costs.
How might environmental controls increase unemployment?
Environmental controls can make workers in some industries, such as coal-powered plants, redundant, increasing unemployment.
How can environmental controls worsen the current account?
Higher-cost exports become less desirable abroad, so exports fall and imports rise, worsening the current account.
How can government controls create jobs despite raising costs?
Government controls can drive innovation and create employment opportunities in green industries.
True or False?
In the long run, emissions controls can give firms an incentive to transition to cleaner energy.
True.
In the long run, emissions controls incentivise a shift towards cleaner energy sources and help protect the environment.
True or False?
Government controls only ever benefit macroeconomic objectives.
False.
In the short term, controls such as regulation, fines and permits can negatively affect some objectives, for example by slowing economic growth.
True or False?
In the 2019 EU survey, Romania most strongly favoured environmental protection over economic growth.
True.
Romania had the strongest opinion, with 87% of respondents wanting environmental protection over economic growth.
By reducing the negative externalities from pollution and resource depletion, government controls improve overall .
By reducing the negative externalities from pollution and resource depletion, government controls improve overall sustainability.
Pollution permits, fines and regulation raise costs of production, which can lead to inflation.
Pollution permits, fines and regulation raise costs of production, which can lead to cost-push inflation.
Define trade-off (between macroeconomic objectives).
A trade-off occurs when achieving one macroeconomic objective comes at the cost of worsening progress towards another.
Define opportunity cost (in policy terms).
Opportunity cost is the progress towards another macroeconomic objective that is given up when a government pursues one objective.
Define contractionary monetary policy.
Contractionary monetary policy involves raising interest rates to ease demand-side inflationary pressure.
Why does moving closer to low unemployment tend to raise inflation?
As unemployment falls, fewer workers are available, so firms must offer higher wages, causing cost-push inflation.
How can faster economic growth conflict with low inflation?
Growth moves the economy towards full employment, bidding up wages and rents, which can cause cost-push inflation above the 2% target.
Why is there a trade-off between economic growth and environmental protection?
Economic growth often increases pollution and the depletion of non-renewable resources, so faster growth harms the environment.
How can raising interest rates slow economic growth?
Higher interest rates raise the cost of borrowing for firms, reducing investment and slowing economic growth.
How can expansionary fiscal policy cause inflation?
Higher government spending can create excess demand and a shortage of total supply, leading to inflation.
How can deregulation conflict with environmental protection?
Deregulation lowers business costs but can reduce the effectiveness of environmental protection policies; for example, deregulating emission limits increases global warming.
True or False?
A rise in export demand can improve the current account at first but worsen it over time.
True.
Higher export demand initially improves the current account, but the resulting inflation and loss of competitiveness can worsen it over time.
True or False?
Laws that prevent logging and protect biodiversity can reduce economic growth.
True.
Environmental laws such as those preventing logging raise firms' costs, causing cost-push inflation and reducing economic growth.
Rising demand for exports can lead to inflation as firms produce more to meet foreign demand.
Rising demand for exports can lead to demand-pull inflation as firms produce more to meet foreign demand.
An increase in government spending is an example of fiscal policy.
An increase in government spending is an example of expansionary fiscal policy.
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