AQA GCSE Economics Spot Check - Fiscal Policy

Evaluate the possible consequences of a budget surplus and a budget deficit for a country.

• Both always lead to economic growth

• A surplus may allow for increased investment or tax cuts, while a deficit may require borrowing or spending cuts

• Both always result in higher unemployment

• A deficit always leads to inflation, while a surplus always leads to deflation

Answer explanation

A budget surplus can lead to increased investment or tax cuts, stimulating growth. Conversely, a budget deficit may necessitate borrowing or spending cuts, which can hinder economic performance.

If a government has a large amount of fiscal headroom, what can it do?

• Borrow more money to finance deficits.

• Increase spending or cut taxes within its borrowing rules.

• Reduce its deficit by cutting spending.

• Raise taxes to slow economic growth.

Answer explanation

With fiscal headroom, a government can increase spending or cut taxes, stimulating the economy while staying within borrowing limits. This option supports growth without immediately increasing debt.

Which government action is most likely to increase economic growth?

• Government spends more on NHS, education, and benefits.

• Government cuts spending and increases taxes.

• Government reduces investment in public services.

• Government increases import tariffs.

Answer explanation

Increased government spending on NHS, education, and benefits stimulates demand, creates jobs, and enhances productivity, leading to economic growth. Other options either reduce spending or impose tariffs, which can hinder growth.

Why might cutting government spending and increasing taxes help control inflation?

• It reduces overall demand in the economy, helping to lower price increases.

• It increases consumer spending, raising prices.

• It encourages more borrowing by businesses.

• It leads to higher wages for public sector workers.

Answer explanation

Cutting government spending and increasing taxes reduce overall demand in the economy. Lower demand can help control inflation by decreasing the pressure on prices to rise.

Which group of households benefits the most from a reduction in income tax, and why?

• Lower-income households, because they pay less tax to begin with

• Higher and middle-income earners, because they pay more tax to begin with

• Retired households, because they receive pensions

• Households with no income, because they do not pay tax

Answer explanation

Higher and middle-income earners benefit the most from a reduction in income tax because they pay a larger share of taxes. A tax cut for them results in more significant savings compared to lower-income households.

What is a recommended fiscal policy action to reduce inflation?

• Spend on education

• Cut spending or raise taxes

• Invest in export industries

• Create job schemes

Answer explanation

To reduce inflation, cutting government spending or raising taxes decreases overall demand in the economy, which can help lower price levels. This is a direct approach to combat inflation compared to other options.

What is a budget deficit?

• When the government collects more in taxes than it spends.

• When the government spends more than it collects.

• When the government balances its spending and tax collection.

• When the government eliminates all debt.

Answer explanation

A budget deficit occurs when the government spends more than it collects in taxes, leading to a shortfall. This is the opposite of a budget surplus, where tax revenues exceed expenditures.

Which of the following best defines fiscal policy?

• The use of government spending and taxation to influence the economy.

• The regulation of interest rates by the central bank.

• The process of setting trade tariffs between countries.

• The management of a company’s internal finances.

Answer explanation

Fiscal policy refers to the use of government spending and taxation to influence the economy, making it the correct choice. The other options relate to monetary policy, trade, or corporate finance, not fiscal policy.

What is a possible reason why the UK might have a budget deficit or surplus?

• Changes in government spending and taxation policies

• The color of the national flag

• The number of sports teams in the country

• The length of the coastline

Answer explanation

The UK budget deficit or surplus can be influenced by changes in government spending and taxation policies, as these directly affect revenue and expenditures.

Which of the following is a potential risk of running a persistent budget deficit?

• Reduced economic activity

• Lower government debt

• Higher interest payments on government borrowing

• Decreased public investment