Study Guide: Fiscal Policy
Managing the national economy
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Macro-economic objectives and policies
Monetary policy, the money supply and interest rates
Exchange rate policy
Fiscal Policy
Supply-side policy
Specification
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You should be able to discuss the issue of the budget balance and be able to evaluate the possible economic
consequences of a budget deficit or budget surplus and the possible corrective measures.
 You should be able to assess the economic significance of changes in the level and distribution of public
expenditure.
 You should be able to analyse and evaluate the microeconomic significance of taxation and the various roles and
relative merits of the different UK taxes. There should be an awareness of the taxation principles which are likely
to underlie a taxation system, such as the ability to pay and the impact on incentives.
 There should be an awareness of the introduction of fiscal rules: the UK Code for Fiscal Stability and the Stability
and Growth Pact within the euro area.
Note: given the requirements of this Unit and those of Unit 2, it is expected that candidates will have an understanding of
both the potential demand-side and supply-side effects of fiscal policy, including its microeconomic role and the influence
over the pattern of economic activity.
Key economic terms – make a topic glossary after you have completed your summary notes
Multiplier, supply-side, transfer payments, equity, PSNCR, National Debt, Benefit Principle, proportional, progressive and
regressive taxes, direct and indirect taxation, fiscal stance, automatic stabilizers, crowding out
What you should already know from AS:
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What fiscal policy is and the main elements - spending, taxation and the budget balance
Key areas of understanding.
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2.
What is fiscal policy?
Objectives of fiscal policy
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Economic rationale for government spending
The Public Sector Net Cash Requirement
Government borrowing
The impact of a budget deficit
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Taxation – objectives and principles, types of
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Fiscal Policy and aggregate demand
Fiscal policy and the supply-side
Automatic stabilizers
Taxation and incentives, productivity, investment
Fiscal Policy rules – UK and the EU
Knowledge
Complete DETAILED revision notes on the key content - this could be as a mind map or as revision notes and should
include a glossary of key terms. The notes should follow the 12 points above.
Analysis
Read and annotate the A3 summaries of the key issues.
Evaluation
We will have an espresso lesson in which we will focus on the key evaluative questions regarding the UK, EU and global
fiscal situation based on the diagrams. You need to read, annotate and conduct further research on these areas so that
you can make informed contributions to this discussion. What are the key problems? What are the key questions? Use
the planning mat to prepare for the debate.
Assessment
You will complete an essay covering both monetary and fiscal policy. This may be timed or at home.
a)Explain how monetary and fiscal policy might be used to increase aggregate demand
b)In recent years in the UK, much greater emphasis has been given to the supply-side effects of fiscal policy.
Evaluate the view that fiscal policy is only useful for its impact on the supply-side of the economy.
a)Explain the likely reasons for government borrowing
b)Evaluate the possible problems foe the UK economy of increased government borrowing
a)Explain how fiscal policy could be used to influence aggregate demand
b)The UK govt decides to bring about a significant shift in the sources of tax revenue from direct taxes, to
indirect taxes, such as VAT. Evaluate the potential economic consequences of such a shift in the sources of tax
revenues.
a)Explain how fiscal policy could be used to achieve govt objectives, such as low unemployment, higher
productivity and environmental protection
b)In recent years, the ‘Golden Rule’ in UK fiscal policy has required a balanced budget to be achieved over the
economic cycle. Evaluate the possible macroeconomic consequences for the UK economy of such a
requirement.
a)Explain the economic reasons for govt spending
b)In 2006, UK govt spending accounted for 41% of GDP and was predicted to grow further. Evaluate the
possible consequences for the UK economy if this further growth were to occur.
a)Explain why a govt budget might move from a surplus to a deficit.
b)Assess the extent to which rising budget deficits might benefit UK macroeconomic performance.
a)Explain the ways in which changes in both govt spending and taxation might bring about changes in AD
b)Assume that there is a significant shift, in the burden of taxation from direct taxes, such as income tax, to
indirect taxes such a VAT. Evaluate the possible economic consequences for the UK economy.
In recent years, there has been a rise in the share of national income taken in taxation by the UK govt. Evaluate
the possible consequences of a rising tax burden.