3.5 Fiscal policy

• What does fiscal policy consist of?

  Government revenue and expenditure
• How is government spending defined?

  Total amount spent by the government over time
• What are direct taxes?

  Taxes on income or wealth paid directly
• What are indirect taxes?

  Taxes on spending paid indirectly by suppliers
• What is VAT?

  Value Added Tax on goods and services
• What is a balanced budget?

  When tax revenue equals government spending
• What is a budget surplus?

  When tax revenue exceeds government spending
• What is a budget deficit?

  When government spending exceeds tax revenue
• How can a government manage a budget deficit?

  By borrowing to spend more than received
• What is the purpose of fiscal policy?

  To influence the level of economic activity
• What are the macroeconomic policy objectives of fiscal policy?

  • Economic growth
  • Low unemployment
  • Price stability
  • Balance in the balance of payments
• What defines a recession?

  Fall in GDP for two consecutive quarters
• How can increased government spending help an economy out of recession?

  By subsidizing areas needing encouragement to increase production
• What is a potential consequence of extra income being spent?

  It may affect GDP or the economy
• Why might extra spending lead to a balance of payments deficit?

  Because imports may be of better quality
• How can increased demand negatively impact the economy?

  It may lead to inflation in the economy
• What is brain drain in the context of the economy?

  It refers to professionals leaving for better pay
• What is a progressive tax?

  A tax taking a higher percentage on higher incomes
• How does inheritance tax function?

  It is a tax on assets and wealth
• How does government spending contribute to income redistribution?

  • Government spending aims to reduce inequality
  • It supports social programs and services
  • It redistributes wealth through various initiatives