Summary
Fiscal policy involves using taxation and government spending to manage aggregate demand, aligning with the government's macroeconomic goals. The government's annual budget serves as a statement of its fiscal policy, indicating policy intentions and economic performance.
- Fiscal Policy — Government strategy using taxation and spending to influence the economy. Example: Increasing government spending to boost economic activity.
- Budget Surplus — When tax revenue exceeds government spending. Example: A government collects 450 billion.
- Budget Deficit — When government spending surpasses tax revenue. Example: A government spends 550 billion in taxes.
- National Debt — Total debt accrued by the government, often expressed as a percentage of GDP. Example: A country with a GDP of 500 billion has a debt-to-GDP ratio of 50%.
- Indirect Taxes — Taxes on goods and services, paid by consumers but collected by firms. Example: Value Added Tax (VAT) on products.
- Direct Taxes — Taxes levied on income and wealth. Example: Income tax on individual earnings.
- Progressive Tax — A tax system where the tax rate increases as income increases. Example: Higher earners pay a larger percentage of their income in taxes.
- Regressive Tax — A tax system where the tax rate decreases as income increases. Example: Sales tax affects lower-income individuals more.
- Proportional Tax — A tax system with a constant tax rate regardless of income. Example: A flat tax rate of 15% on all income levels.
Exam Tips
Key Definitions to Remember
- Fiscal Policy
- Budget Surplus
- Budget Deficit
- National Debt
- Indirect Taxes
- Direct Taxes
- Progressive Tax
- Regressive Tax
- Proportional Tax
Common Confusions
- Confusing budget deficit with national debt
- Misunderstanding the difference between direct and indirect taxes
- Mixing up progressive and regressive tax systems
Typical Exam Questions
- What is fiscal policy? Fiscal policy is the use of government spending and taxation to influence the economy.
- How does a budget deficit affect national debt? A budget deficit increases national debt as the government borrows to cover the shortfall.
- What is the difference between direct and indirect taxes? Direct taxes are levied on income and wealth, while indirect taxes are imposed on goods and services.
What Examiners Usually Test
- Understanding of fiscal policy and its components
- Ability to differentiate between types of taxes
- Knowledge of the impact of fiscal policy on the economy