Fiscal policy · AS Level Economics

What is most likely to improve the effectiveness of an expansionary fiscal policy in an economy?

• Aa fall in consumer confidence
• Ba fall in the size of the labour force
• Can increase in interest rates
• Dan increase in the money supply

What is a transfer payment?

• Aadvertising expenses incurred by a charity organisation
• Bfood vouchers to help low-income households pay for food
• Cinterest-free study loans given to deserving students by the government
• Dsalary paid to a nurse working in a hospital that provides free treatment

A government reduced direct taxes on consumers and businesses.

What are likely to be the effects of these changes on consumption, investment and national output?

consumption investment national output

• Adecrease decrease decrease
• Bdecrease increase increase
• Cincrease decrease decrease
• Dincrease increase increase

An economy has a GDP of $500 billion.The budget surplus is 2% of GDP.

What is the government spending when the tax revenue is $80 billion?

• A$60 billion
• B$70 billion
• C$80 billion
• D$90 billion

Which action might be part of an expansionary economic policy?

• Areducing the budget deficit
• Breducing the level of government spending
• Creducing the money supply
• Dreducing the rate of interest

What is not included in government spending (G) while calculating aggregate demand (AD)?

• Aeducation
• Bhealthcare
• Croads
• Dtransfer payments

The income tax structure of a country has two elements.

1 The first $20000 of earned income is not taxed.

2 Any income earned above $20000 is taxed at 20%.

What would be a correct description of this tax structure?

• AIt is a progressive tax structure.
• BIt is a proportional tax structure.
• CIt is a regressive tax structure.
• DThe average rate of taxation decreases as incomes increase.

In which situation is expansionary fiscal policy through increased government expenditure likely to be most effective in increasing employment in an economy?

• AWhen the AD curve cuts the horizontal part of the AS curve.
• BWhen the AD curve cuts the vertical part of the AS curve.
• CWhen the government also raises tax to fund its increased expenditure.
• DWhen the government injects a large amount of spending into the economy.

Increases to which measures are most likely to stabilise the price level and reduce income inequalities at the same time?

• Aimport tariffs on non-essential items and transfer payments
• Binterest rates and restrictions on bank lending
• Cminimum wages and tax allowances
• Dtax rates on high income earners and subsidies for essential food items

A newly-built public sector engineering training college received poor inspection reports. The government ceased to pay the college the money that it had usually received as its annual grant.

Which types of government policy does this statement imply?

• Afiscal and monetary policies only
• Bfiscal and supply-side policies only
• Cfiscal, monetary and supply-side policies
• Dmonetary and supply-side policies only

Governments are trying to reduce the burden of transfer payments in economies with an ageing population.

Which policy would help to achieve this aim?

• Aintroducing financial support for university students
• Blinking pension increases to the consumer price index during inflation
• Craising the retirement age
• Dreducing state pensions to finance an equal rise in unemployment benefit

Which policy mainly deals with managing public finances?

• Aenvironmental policy
• Bfiscal policy
• Cmonetary policy
• Dsupply-side policy

There is an increase in the income of individuals.

Which of the following shows a regressive tax system?

• AThe amount of income tax paid remains unchanged.
• BThe marginal income tax rate exceeds the average tax rate.
• CThe income tax rate remains unchanged.
• DThe income tax rate rises.

Which combination correctly classifies an expansionary fiscal policy measure and its impact on a budget deficit?

fiscal policy measure budget deficit

• Aincreased money supply unchanged
• Bincreased welfare spending increased
• Chigher income tax reduced
• Dlower interest rates unchanged

A government spends money to provide an education for students.

Which type of spending is capital expenditure?

• Acomputers for classrooms
• Bgrants for university students
• Crent for school buildings
• Dwages for teachers

What is an example of fiscal policy aimed at increasing aggregate demand in an economy?

• Aincreasing expenditure by firms on skills training programmes for unskilled workers
• Bincreasing the commercial banks’ lending ability
• Creducing the rate of income tax for all income earners
• Dreducing the rate of interest on loans to manufacturing companies

A government reduces its expenditure on workplace training, increases the level of indirect taxes and reduces the rate of interest it pays on government debt.

How would these government macroeconomic policies be categorised?

supply-side fiscal monetary

• Acon con exp key
• Bexp con con con = contractionary
• Ccon exp exp exp = expansionary
• Dexp exp con

The government of a country reduces its budget deficit by cutting government spending. At the same time, the central bank raises the interest rates.

When might this combination of policies be used?

inflation rate unemployment rate

• Ahigh high
• Bhigh low
• Clow high
• Dlow low

A country has a current account deficit on its balance of payments. The government also has a budget deficit.

Which measure to reduce the current account deficit will increase the budget deficit?

• Adepreciating the exchange rate
• Bintroducing quotas on imports
• Craising tariffs on imports
• Dsubsidising exports

A government reduces the benefits that it pays to unemployed workers to increase the incentive to work.

Which types of macroeconomic policies are being used?

fiscal monetary supply-side policy policy policy

• A✓ ✗ ✗
• B✓ ✓ ✗
• C✓ ✗ ✓
• D✗ ✗ ✓

What is the most likely reason for a government to introduce a progressive tax?

• Ato discourage the consumption of a particular good
• Bto distribute disposable income more evenly
• Cto increase the disposable income of households
• Dto reduce demand for healthcare services

What is the effect of a cut in a country‘s income tax rates on its exports and imports?

exports imports

• Afall fall
• Bfall unchanged
• Cunchanged fall
• Dunchanged rise

Which area of government spending is a transfer payment?

• Aspending on new road building
• Bspending on pensions to the elderly
• Cspending on buying new police cars
• Dspending on wages of teachers

A government increases the basic rate of income tax to finance additional spending on apprenticeships and training.

Which types of macroeconomic policy are being used?

monetary supply side fiscal policy policy policy

• A✓ ✓ ✓ key
• B✓ ✓ ✗ ✓= used
• C✓ ✗ ✓ ✗= not used
• D✗ ✓ ✓

A government reduced the tax on company profits from 28% to 20%.

Which statement best describes this policy?

• AIt is both a contractionary fiscal policy and a supply-side policy.
• BIt is both an expansionary fiscal policy and a supply-side policy.
• CIt is both an expansionary fiscal policy and an expansionary monetary policy.
• DIt is both an expansionary monetary policy and a supply-side policy.

Which policy is most likely to have a contractionary effect on national income?

• Aa reduction in income tax rates
• Ba reduction in interest rates
• Can appreciation in the exchange rate
• Dan increase in government spending on transport infrastructure

What is an example of expansionary fiscal policy?

• Aan increase in income tax
• Ban increase in private sector investment
• Can increase in spending on public goods
• Dan increase in the money supply

A worker earns $10000 and pays $1000 in income tax.

Another worker earns $30000 and pays $4500 in income tax.

A third worker earns $150000 and pays $50000 in income tax.

Which type of tax is this?

• Aindirect
• Bprogressive
• Cproportional
• Dregressive

A government decides to raise most of its revenues from indirect taxes.

What would increase the effectiveness of this policy?

• Aan increasing trend towards bartering of goods
• Bincreasing interest rates on household savings
• Cincreasing occurrence of informal markets in the economy
• Dplacing taxes on goods and services which have a price-inelastic demand

An income tax has a tax-free allowance of $10 000 and a single rate of 25%.

What type of tax is this?

• Aindirect
• Bprogressive
• Cproportional
• Dregressive

Which action is classified as a fiscal policy measure?

• Afixing a currency to another country’s currency
• Btightening credit regulations on banks
• Cproviding guidance to industry and the public
• Dmanaging changes in the level of government debt

A government decides to increase indirect taxes, abolish the agricultural subsidy and lower the income level at which tax becomes payable.

What would be the most likely consequence of these changes?

• Aa decrease in cost-push inflation
• Ban increase in income inequality
• Can increase in the balance of payments deficit
• Dan increase in the budget deficit

What would be a positive effect on the growth of an economy in the short run, if the government reduced a direct tax on individual earnings?

• AFood prices would increase because of shortages.
• BImports of luxury cars would increase to satisfy a change in demand.
• CSavings would increase because of additional disposable income.
• DThe consumption of domestically produced goods would increase.

What defines a progressive tax?

• AAll taxpayers pay the same proportion of income in taxes.
• BLow-income earners pay a lower proportion of income in taxes than high-income earners.
• CLow-income earners pay less in taxes than high-income earners.
• DLow-income earners pay more in taxes than high-income earners.

Assess whether fiscal policy or supply‑side policy is likely to be more effective in reducing unemployment in an economy. [12]

‘The Australian government plans a large increase in its spending.’

Assess the possible effects of a large increase in government spending by the government on the Australian economy. [6]

Assess the extent to which a government can use fiscal policy to influence leakages from and injections into the circular flow of income to achieve any two of its macroeconomic objectives. [12]

Assess the extent to which the shape of the long-run aggregate supply (LRAS) curve affects the ability of a government to use fiscal policy to achieve price stability. [12]

Assess whether supply-side policy or demand-side policy is the better way of reducing this inflation. [12]

Explain the difference between a budget surplus and a budget deficit and consider the extent to which a budget surplus is better than a budget deficit. [8]

Assess whether expansionary fiscal policy always benefits an economy. [12]

Assess the extent to which using fiscal policy would be the best way to reduce a high rate of inflation. [12]

With the help of an AD/AS diagram, explain what is meant by an expansionary fiscal policy and consider the extent to which an expansionary fiscal policy will always increase the level of aggregate demand. [8]