4.3

Fiscal policy

10 flashcards to master Fiscal policy

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Definition Flip

Define fiscal policy and explain its primary goal.

Answer Flip

Fiscal policy refers to the use of government spending and taxation to influence the economy. Its primary goal is to manage aggregate demand, stabilize the economy, and promote sustainable economic growth.

Definition Flip

Explain the difference between a budget deficit and a budget surplus.

Answer Flip

A budget deficit occurs when government spending exceeds tax revenue in a given period. Conversely, a budget surplus arises when tax revenue is greater than government spending.

Key Concept Flip

What are the two main instruments of fiscal policy?

Answer Flip

The two main instruments of fiscal policy are government spending (

Example: infrastructure, education, healthcare) and taxation (. income tax, sales tax, corporation tax).
Definition Flip

Differentiate between direct and indirect taxes, providing an example of each.

Answer Flip

Direct taxes are levied directly on income or wealth, such as income tax or corporation tax. Indirect taxes are levied on goods and services, such as VAT or sales tax.

Definition Flip

Explain the concept of a progressive tax system.

Answer Flip

A progressive tax system is one where the percentage of income paid in tax increases as income rises.

Example: higher earners pay a larger proportion of their income in tax than lower earners.
Definition Flip

Explain the concept of a regressive tax system, providing an example.

Answer Flip

A regressive tax system is one where the percentage of income paid in tax decreases as income rises. An example is a sales tax on essential goods, which disproportionately affects low-income earners.

Definition Flip

Explain the concept of a proportional tax system.

Answer Flip

A proportional tax system is one where everyone pays the same percentage of their income in tax, regardless of their income level.

Example: a flat income tax rate of 15% for all.
Key Concept Flip

Discuss two potential effects of increased government spending on infrastructure projects.

Answer Flip

Increased government spending can stimulate aggregate demand, leading to economic growth. It can also improve productivity and efficiency in the long run by improving transportation and communication networks.

Key Concept Flip

Assess the possible impact of a decrease in income tax rates on consumer spending and government revenue.

Answer Flip

A decrease in income tax rates can increase disposable income, leading to higher consumer spending. However, it may also reduce government revenue, potentially leading to a budget deficit unless offset by other measures.

Key Concept Flip

Explain how fiscal policy can be used to address a recession.

Answer Flip

During a recession, expansionary fiscal policy, such as increasing government spending or cutting taxes, can be used to stimulate aggregate demand and boost economic activity. This aims to increase output and employment.

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4.2 Macroeconomic aims 4.4 Monetary policy

Key Questions: Fiscal policy

Define fiscal policy and explain its primary goal.

Fiscal policy refers to the use of government spending and taxation to influence the economy. Its primary goal is to manage aggregate demand, stabilize the economy, and promote sustainable economic growth.

Explain the difference between a budget deficit and a budget surplus.

A budget deficit occurs when government spending exceeds tax revenue in a given period. Conversely, a budget surplus arises when tax revenue is greater than government spending.

Differentiate between direct and indirect taxes, providing an example of each.

Direct taxes are levied directly on income or wealth, such as income tax or corporation tax. Indirect taxes are levied on goods and services, such as VAT or sales tax.

Explain the concept of a progressive tax system.

A progressive tax system is one where the percentage of income paid in tax increases as income rises.

Example: higher earners pay a larger proportion of their income in tax than lower earners.
Explain the concept of a regressive tax system, providing an example.

A regressive tax system is one where the percentage of income paid in tax decreases as income rises. An example is a sales tax on essential goods, which disproportionately affects low-income earners.

About Fiscal policy (4.3)

These 10 flashcards cover everything you need to know about Fiscal policy for your Cambridge IGCSE Economics (0455) exam. Each card is designed based on the official syllabus requirements.

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