Questions on fiscal policy

Fiscal policy

Question 1

Assuming the economy is in an initial equilibrium at X, identify where the new equilibrium will be if:

1. There is a rise in public sector borrowing
2. There is a rise in government government subsidies to the motor industry
3. The government spends less on defence
4. The basic rate of income tax is raised
5. The VAT rate is cut from 20%  to 15%.

Question 2

1. Analyse the likely impact on the UK economy of an increase in government spending on higher education.
2. What are the main disadvantages of an increase in income tax, assuming the economy has an output gap?
3. What are the main disadvantages of an increase in government spending not matched by an increase in taxation?

Question 3

1. Distinguish between automatic and discretionary fiscal policy.
2. How will the recent financial crisis affect the UK’s national debt?
3. Why is fiscal policy more dominant than monetary policy during the current economic recession?
4. Give three advantages and three disadvantages of using government spending to regulate aggregate demand in the UK economy.
5. Evaluate ‘crowding out’ theory in the light of current government policy towards the financial crisis.