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Fiscal Policy specification questions
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Questions created using the specification on fiscal policy.
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Fiscal Policy Year 13Q1: Explain how fiscal policy can be used to influence SRAS (costs of firms and expectations).
Higher taxation from firms can shift SRAS to the left.
Q2: Explain how fiscal policy can be used to influence LRAS (maximum productive capacity).
Higher government spending on education, training and infrastructure can increase human capital
and productivity shifting LRAS to the right.
Q3: Explain the difference between Capital Government Expenditure, Transfer Payments, and
Current Government Expenditure.
Capital government spending – spending on assets that last a number of years (like new buildings or
vehicles)
Transfer payments – the government gives people money but there is no good or service received
(benefits)
Current government expenditure – spending on things that are used up annually (like salaries of civil
servants or teachers)
Q4: Explain the difference between Progressive, Regressive, and Proportional Taxation.
Progressive taxation – the marginal rate of tax increases as income increases (income tax)
Regressive taxation – the rate of tax paid falls as incomes rise (duties on tobacco and alcohol)
Proportional taxation – the rate of tax paid is directly proportional to their income
Q5: Explain the difference between Direct and Indirect Taxation.
Direct taxes are taxes taken directly from your earnings. E.g. income tax.
Indirect taxes are imposed on the goods or services you purchase. E.g. VAT.
Q6: What is PSNB/PSNCR and how is different to the national debt?
PSNB – public sector net borrowing excluding public sector banks which measures the gap between
revenue and total spending (the deficit)
PSNCR – public sector net cash requirement which measures the amount by which UK government
expenditure exceeds its income (budget deficit)
Q7: What is the national debt for the UK in 2023?
£2,537 billion.
Q8: Using examples, explain how fiscal policy can be used to solve Market Failure.
Government can set indirect taxes: excise duties like cigarette and tobacco tax can internalise the
external cost of smoking and drinking alcohol. This reduces the quantity of demerit goods consumed
by increasing the price of the good. If the tax is equal to the external cost of each unit the free
market equilibrium becomes the socially optimum equilibrium which internalises the externality.
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