BAIB1003 Week 6

Fiscal policy refers to:

• The spending and taxing policies used by the government to influence the economy

• The use of interest rates to influence aggregate demand

• The behaviour of the nation's central bank, regarding the nation's money supply

• The government's ability to regulate a firm's behaviour in the financial markets

In 2018, if the government had collected £250bn in taxes and spent £400bn, it would have had a:

• Budget surplus of £650bn

• Budget surplus of £150bn

• Budget deficit of £150bn

• Budget deficit of £650

Which of the following would lead to a fall in the public-sector debt to GDP ratio, thus contributing to the sustainability of the public finances?

• An increase in the public sector primary surplus

• A low rate of economic growth (lower than the rate of interest)

• An increase in the rate of interest

• The need to raise more revenue from taxation

Fiscal stance refers to:

• The existence of inflationary or deflationary gaps in the economy

• The total level of government spending

• The size of the government's budget surplus or deficit

• The effect of the budget deficit or surplus on the level of aggregate demand

Which of the following is an advantage of automatic stabilisers?

• High marginal tax rates may discourage effort and initiative

• Fiscal drag

• High income-related benefits may create a poverty trap

• They come into effect without the need for conscious government intervention

If the Chancellor of the Exchequer raises by £25 million in order to finance an increase in the road building programme of £25 million, the effect on aggregate demand will be that:

• It will fall since the population resents increased taxes more than they appreciate increased government expenditure

• It will remain the same as all that has happened is that tax revenue has been spent on a project that costs the same amount

• It will rise since the multiplier effect from increased government expenditure is greater than the multiplied reduction in income from increased taxes

• It will remain the same, but the distribution of income will change since those who pay the increase in taxes are not necessarily the same people who will use the new roads

One problem with fiscal policy is that it can lead to 'crowding out'. This is defined as:

• When there are insufficient tax revenues to finance increased government expenditure

• Increased public expenditure replacing private-sector expenditure

• That part of public expenditure financed from borrowing

• Increased taxes pushing up interest rates

Which of the following does not make it difficult to forecast the impact of fiscal policy on the economy?

• The amount of crowding out is difficult to predict

• The money multiplier makes it difficult to predict how an increase in the monetary base will affect the money supply

• The impact of tax cuts will depend upon how consumers decide to allocate additional incomes

• The size of the multiplier is difficult to predict

Which of the following measures would be central bank use if it wished to increase money supply?

• Buy securities from financial institutions

• Sell securities to financial institutions

• Raise the rate of interest at which the central bank is prepared to lend to banks

• Raise the minimum reserve ratio

If the demand for loans is inelastic, any attempt to reduce demand will involve large rises in real interest rates. Which of the following would not be a problem associated with high interest rates?

• Cost-push pressures

• Discouragement of long-term investment

• An improving competitive position overseas

• Political unpopularity