1. Fiscal Policy and Demand Managament

Define balanced budget.

When total government spending equals government tax receipts

Define budget deficit.

When the government spends more than they receive in tax revenues.

Define budget surplus.

When the government receives more in tax revenues than they spend.

Define crowding out.

When higher government spending causes an equivalent fall in private sector spending and investment.

What is fiscal policy?

Changes to government spending and taxation in order to influence AD

Define expansionary fiscal policy.

When the government increases aggregate demand through higher levels of government spending a lower tax.

Define contractionary fiscal policy.

When the government decreases aggregate demand through lower levels of government spending and higher tax.

What are the two types of fiscal stabilizer?

1. Discretionary stabilizers

2. Automatic stabilizers

What are automatic stabilizers? Give an example.

Fiscal policy tools to influence GDP and to counter fluctuations in the economic cycle. e.g. progressive tax.

What are discretionary stabilizers? Give an example.

deliberate economic policies enacted by the government to stabilize the economy in response to changing economic conditions e.g. increasing spending.

What is the problem with increased government spending during full employment?

the government crowds out the private sector and GDP wouldn't increase as there is already full employment.

What is the fiscal multiplier?

The idea that an initial increase in spending can increase GDP.

State 6 factors which may impact the effectiveness of fiscal policy.

- How many jobs will be created

- Whether tax cuts will lead to increased spending or not

- If inflation will be caused

- Which groups in the economy will benefit from tax cuts

- The state of the economy and confidence

- The efficiency of government spending.

What two effects do tax rate changes have on aggregate demand?

Direct and indirect

What is direct taxation?

Tax on income, wealth and profits.

What is indirect taxation?

Tax on spending and expenditure.

Give examples of direct taxation.

- Income tax

- Inheritance tax

- National insurance

- Capital gains

- Corporation tax

Give examples of indirect tax.

- VAT

- Excise duties on fuel, cigarettes, alcohol etc

State ways in which the government can spend their budget as part of fiscal policy.

- Subsidies

- Investment on infrastructure

- Improving education and training

- Paying for free child care

- Improving healthcare

- Investing in technology