Section A: Key terms and recall
Define the term 'government budget'. [2 marks]
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A plan for the government's spending and taxation for a specific period, usually a year. [2 marks]
Identify two reasons for government spending. [2 marks]
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Any two of the following: - Provide public goods and services - Redistribute income - Stabilise the economy - Promote economic growth [2 marks]
What is the purpose of taxation? [1 mark]
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To raise revenue for government spending. [1 mark]
Define fiscal policy. [2 marks]
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The use of government spending and taxation to influence the economy. [2 marks]
Identify two fiscal policy measures. [2 marks]
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Any two of the following: - Increasing or decreasing government spending - Increasing or decreasing taxes - Changing the level of government borrowing [2 marks]
Section B: Applying your knowledge
A government wants to reduce unemployment. Suggest one fiscal policy measure it could use and explain your answer. [2 marks]
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Increase government spending on infrastructure projects to create jobs. [1 mark] This will increase aggregate demand and reduce unemployment. [1 mark]
A country is experiencing high inflation. Suggest one fiscal policy measure it could use and explain your answer. [2 marks]
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Increase taxes to reduce disposable income. [1 mark] This will decrease aggregate demand and reduce inflation. [1 mark]
A government wants to reduce inequality. Suggest one fiscal policy measure it could use and explain your answer. [2 marks]
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Increase spending on welfare benefits. [1 mark] This will redistribute income from the rich to the poor and reduce inequality. [1 mark]
A country has a budget deficit. Suggest one fiscal policy measure it could use and explain your answer. [2 marks]
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Increase taxes to raise more revenue. [1 mark] This will reduce the budget deficit. [1 mark]
Section C: Explain and analyse
Explain how fiscal policy can be used to achieve the government's macroeconomic aims. [4 marks]
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Fiscal policy can be used to achieve the government's macroeconomic aims in the following ways: - To reduce unemployment, the government can increase spending on infrastructure projects to create jobs. [1 mark] This will increase aggregate demand and reduce unemployment. [1 mark] - To reduce inflation, the government can increase taxes to reduce disposable income. [1 mark] This will decrease aggregate demand and reduce inflation. [1 mark] - To reduce inequality, the government can increase spending on welfare benefits. [1 mark] This will redistribute income from the rich to the poor and reduce inequality. [1 mark]
Analyse the effects of a decrease in government spending on the economy. [6 marks]
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A decrease in government spending will have the following effects on the economy: - It will reduce aggregate demand. [1 mark] This will lead to a decrease in real GDP. [1 mark] - It will reduce employment. [1 mark] This will lead to an increase in unemployment. [1 mark] - It will reduce inflation. [1 mark] This will lead to a decrease in the price level. [1 mark] - It will reduce the budget deficit. [1 mark] This will lead to a decrease in government borrowing. [1 mark]
Section D: Challenge
A government is considering increasing taxes to reduce the budget deficit. Discuss the potential advantages and disadvantages of this policy. [6 marks]
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Advantages: - It will reduce the budget deficit. [1 mark] This will lead to a decrease in government borrowing. [1 mark] - It will reduce inflation. [1 mark] This will lead to a decrease in the price level. [1 mark] Disadvantages: - It will reduce aggregate demand. [1 mark] This will lead to a decrease in real GDP. [1 mark] - It will reduce employment. [1 mark] This will lead to an increase in unemployment. [1 mark]