Fiscal policy

Which one of the following is most likely to indicate that a government is trying to cause a significant change in the pattern of economic activity?

Extract E (lines 17–18) states: ‘A low rate of corporation tax has also contributed to both short-run and long-run economic growth.’ With the help of a diagram, explain how a low rate of corporation tax may cause short-run and long-run economic growth.

Evaluate the view that increasing taxation is the best way to reduce a budget deficit.

Explain why investment in infrastructure in the less-prosperous regions could help to improve the prosperity of people living in these regions.

After considering Extract D, and the original evidence in Extracts A, B and C, would you recommend that the government intervene in the economy to try to reduce the differences in the economic prosperity of the various regions of the United Kingdom?

Justify your recommendation.

Using the data in Extract A (Figure 1), calculate the difference between Ireland’s corporation tax rate and the mean corporation tax rate of the other five European nations.

Give your answer to one decimal place.

Extract B (lines 1–3) states: ‘Ireland has dropped its low-tax policy of the past 18 years, which had helped to persuade some of the world’s biggest companies, including Google and Facebook, to site their European headquarters in Ireland.’

Using the data in the extracts and your knowledge of economics, assess the view that a rise in Ireland’s corporation tax rate is likely to have a damaging effect on its macroeconomic performance.

Which one of the following is a role of the UK’s Office for Budget Responsibility?

Figure 2 shows two aggregate demand (AD₁ and AD₂) curves and the short-run aggregate supply (SRAS) curve for an economy.

Which one of the following is the government most likely to increase if it wishes to use fiscal policy to reduce national output from Y₁ to Y₂?

Extract B (line 9) states: ‘The government spending cuts also severely damaged private-sector jobs.’

With the help of a diagram, explain how a reduction in government spending could increase unemployment in the private sector.

Assess policies which can be used to reduce cyclical instability in the UK.

Explain how the data in Extract D (Figure 2) show that the UK’s public finances have been improving since 2010.

The table below shows different combinations of changes in the rate of interest and the government’s budget position. The economy has a negative output gap. All other things being equal, which one of the combinations of policies, A, B, C or D, is most likely to

Explain how fiscal policy can be used to try to improve the supply side of an economy.

Extract F (lines 19–20) states ‘What is not clear is what should be done if low inflation turns to bad deflation.’

Using the data in the extracts and your knowledge of economics, evaluate the view that monetary policy is the most effective way of tackling deflation in developed economies such as the UK and Japan.