Question 1

Fiscal policy

Accepted Answer

Involves the use of taxation, public spending and the governmentâs budgetary position to achieve the governmentâs policy objectives

Question 2

Balanced budget

Accepted Answer

Achieved when government spending equals government revenues (G=T)

Question 3

Budget surplus

Accepted Answer

Occurs when the government is less than government revenue (G<T) This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary.

Question 4

Public sector borrowing

Accepted Answer

Borrowing by the government and other parts of the public sector to finance a budget deficit

Question 5

Demand-side fiscal policy

Accepted Answer

Used to increase or decrease the level of aggregate demand (and to shift the AD curve left or right) through changes in government spending taxation and the budget balance.

Question 6

Deficit financing

Accepted Answer

Deliberately running a budget deficit and borrowing to finance the deficit

Question 7

Expansionary fiscal policy

Accepted Answer

Uses fiscal policy to increase aggregate demand and to shift the AD curve to the right

Question 8

Contractionary fiscal policy

Accepted Answer

Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left

Question 9

Sovereign debt

Accepted Answer

Sovereign debt is part of the national debt owned by people or institutions outside the country that has sold the debt to them

Question 10

The sovereign debt problem

Accepted Answer

Stems from difficulties the government face when trying to finance budget deficits by borrowing on international finance markets

Question 11

Supply side fiscal policy

Accepted Answer

Used to increase the economyâs ability to produce and supply goods through creating incentives to work, save, invest and be entrepreneurial

Question 12

Interventionist fiscal policy

Accepted Answer

The financing of retraining schemes for unemployed workers. 
Are also designed to improve supply side performance

Question 13

National debt

Accepted Answer

The stock of all past central governments borrowing that has not been paid back

Question 14

Cyclical budget deficit

Accepted Answer

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the economic cycle.

Question 15

Cyclical budget surplus

Accepted Answer

If the structural budget were zero, a cyclical surplus would emerge in the upswing of the economic cycle

Question 16

Structural budget deficit

Accepted Answer

The part of the budget deficit that is affected by structural change in the economy affecting the governmentâs finances and also from long term government policy decisions.

Question 17

Reasons for taxation and government spending

Accepted Answer

Allocation 
distribution

Question 18

Social wages

Accepted Answer

Part of a workerâs standard of living received as goods and services provided at zero price or as income in kind by the state, being financed collectively by taxation.

Question 19

Principle of taxation

Accepted Answer

A criterion used for judging whether a tax is good or bad also known as the canon of taxation

Question 20

What are the principles of taxation?

Accepted Answer

Economy 
Convenience
Certainty 
Equity 
Efficiency
Flexibility

Question 21

Economy

Accepted Answer

Requires a tax to be convenient for the taxpayers to pay

Question 22

Convenience

Accepted Answer

Requires a tax to be convenient for the taxpayer to pay

Question 23

Certainty

Accepted Answer

Requires tax payers to be reasonably certain of the amount of tax they are expected to pay

Question 24

Equity

Accepted Answer

Requires the tax to be fair, particularly the tax should be based on the taxpayers ability to pay

Question 25

Efficiency

Accepted Answer

A tax should achieve its objectives with minimum unintended consequences

Question 26

Flexibility

Accepted Answer

Requires a tax to be easy to change to meet new circumstances

Question 27

(In a fiscal context) transfers

Accepted Answer

The redistribution of spending power from the taxpayers in general to those receiving welfare benefits and also to holders of national debt

Question 28

Debt interest

Accepted Answer

Made up of payments by the government to people who have lent to the state (I.e holders of the national debt)

Question 29

Progressive taxation

Accepted Answer

A tax is progressive if, as income rises, a greater proportion of income is paid to the government in tax

Question 30

Regressive taxation

Accepted Answer

When the proportion of income paid falls as income increases

Question 31

Proportional taxation or a flat tax

Accepted Answer

When the proportion of income paid stays the same as income increases

Question 32

Direct tax

Accepted Answer

A tax which cannot be shifted by a person legally liable to pay the tax onto someone else. Direct taxes are levied on income and wealth

Question 33

Indirect tax

Accepted Answer

A tax which can be shifted by the person legally liable to pay the tax onto someone else for example through raising the price of a good being sold by the tax payer. Indirect taxes are levied on spending e.g. VAT and excise duties

Question	Answer
Fiscal policy	Involves the use of taxation, public spending and the governmentâs budgetary position to achieve the governmentâs policy objectives
Budget deficit
	Occurs when government spending exceeds government revenue (G>T). This represents a net injection of demand into the circular flow of income and therefore a budget deficit is expansionary
Balanced budget	Achieved when government spending equals government revenues (G=T)
Budget surplus	Occurs when the government is less than government revenue (G<T) This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary.
Public sector borrowing	Borrowing by the government and other parts of the public sector to finance a budget deficit
Demand-side fiscal policy	Used to increase or decrease the level of aggregate demand (and to shift the AD curve left or right) through changes in government spending taxation and the budget balance.
Deficit financing	Deliberately running a budget deficit and borrowing to finance the deficit
Expansionary fiscal policy	Uses fiscal policy to increase aggregate demand and to shift the AD curve to the right
Contractionary fiscal policy	Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left
Sovereign debt	Sovereign debt is part of the national debt owned by people or institutions outside the country that has sold the debt to them
The sovereign debt problem	Stems from difficulties the government face when trying to finance budget deficits by borrowing on international finance markets
Supply side fiscal policy	Used to increase the economyâs ability to produce and supply goods through creating incentives to work, save, invest and be entrepreneurial
Interventionist fiscal policy	The financing of retraining schemes for unemployed workers. Are also designed to improve supply side performance
National debt	The stock of all past central governments borrowing that has not been paid back
Cyclical budget deficit	The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the economic cycle.
Cyclical budget surplus	If the structural budget were zero, a cyclical surplus would emerge in the upswing of the economic cycle
Structural budget deficit	The part of the budget deficit that is affected by structural change in the economy affecting the governmentâs finances and also from long term government policy decisions.
Reasons for taxation and government spending	Allocation distribution
Social wages	Part of a workerâs standard of living received as goods and services provided at zero price or as income in kind by the state, being financed collectively by taxation.
Principle of taxation	A criterion used for judging whether a tax is good or bad also known as the canon of taxation
What are the principles of taxation?	Economy Convenience Certainty Equity Efficiency Flexibility
Economy	Requires a tax to be convenient for the taxpayers to pay
Convenience	Requires a tax to be convenient for the taxpayer to pay
Certainty	Requires tax payers to be reasonably certain of the amount of tax they are expected to pay
Equity	Requires the tax to be fair, particularly the tax should be based on the taxpayers ability to pay
Efficiency	A tax should achieve its objectives with minimum unintended consequences
Flexibility	Requires a tax to be easy to change to meet new circumstances
(In a fiscal context) transfers	The redistribution of spending power from the taxpayers in general to those receiving welfare benefits and also to holders of national debt
Debt interest	Made up of payments by the government to people who have lent to the state (I.e holders of the national debt)
Progressive taxation	A tax is progressive if, as income rises, a greater proportion of income is paid to the government in tax
Regressive taxation	When the proportion of income paid falls as income increases
Proportional taxation or a flat tax	When the proportion of income paid stays the same as income increases
Direct tax	A tax which cannot be shifted by a person legally liable to pay the tax onto someone else. Direct taxes are levied on income and wealth
Indirect tax	A tax which can be shifted by the person legally liable to pay the tax onto someone else for example through raising the price of a good being sold by the tax payer. Indirect taxes are levied on spending e.g. VAT and excise duties

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