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Summary - Unit 2 ECON2 - Economics: Fiscal Policy
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Quick fire questions on fiscal policy.
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Public sector borrowing and public sector debt(Remember to consider international and developing economies when dealing this this topic, not just the UK)
Explain the difference between the budget deficit and the national debt? (4)
The budget deficit is the difference between government revenue and spending measured over the
financial year.
National debt is the total amount owed by the government which has accumulated over the years
which is a much larger sum of money.
Explain four reasons why having a large debt/deficit is a bad thing for an economy. (15)
If a deficit increases because receipts have fallen, either through tax cuts or a decline in business
activity, this activity will not stimulate the economy.
Government budget deficits can crowd out private issuers who are looking to raise funds for
investment projects to grow their business. The more government debt issued, the less demand
there is for private debt and the higher interest rates in order to attract investors. Less demand or
higher interest rates lead to lower investment spending and a weaker economy.
Financing a deficit reduces the pool of available funds that can be invested in other businesses and
reduce the potential capital stock in the economy.
The longer deficits persist without action, the bigger and more painful the needed actions are.
Explain three reasons why having a large debt/deficit is not always a bad thing for an economy.
(15)
Increases aggregate demand and economic growth.
Makes use of surplus saving in recession.
Automatic stabilisers.
Finance public sector investment.
Explain and evaluate the policies than could be used to reduce a budget deficit/national debt. (25)
Cut in government spending.
Depends on type of government spending that is cut. If you cut pension spending there might be an
increase in productive capacity. If you cut public sector investment, it will have a bigger adverse
effect on aggregate demand and the supply side of the economy. The easier option is to cut benefits
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