Fiscal policy and supply-side policies: Practice Questions

• a.A progressive fiscal policy combined with an interventionist supply-side policy.
• b.A contractionary monetary policy combined with a market-based supply-side policy.
• c.A proportional fiscal policy combined with an expenditure-switching policy.
• d.A regressive fiscal policy combined with a free-market supply-side policy.

• a.

  The PPF shifts inward due to a decrease in the labour force and the national debt becomes a budget surplus within one fiscal year.

• b.

  The PPF shifts outward due to increased efficiency and the national debt immediately falls to zero.

• c.

  The PPF remains unchanged as fiscal policy only affects AD, and the national debt decreases by the exact amount of the spending cut.

• d.

  The PPF shifts inward (or its outward growth slows) and the national debt may continue to rise if GDP growth falls faster than the deficit.

• a.

  Increasing the national minimum wage to boost the disposable income of the lowest-paid workers.

• b.

  Government funding for a new vocational college specialising in renewable energy engineering.

• c.

  Reducing the replacement ratio by lowering the value of unemployment benefits relative to the average wage.

• d.

  Implementing a progressive income tax system to redistribute wealth from high earners to low earners.

• a.

  High tax rates encourage more people to join the workforce, increasing the productive capacity of the economy.

• b.

  The government will automatically increase its spending on infrastructure to match the increased tax revenue.

• c.

  As incomes rise, a higher proportion of income is paid in tax, which slows down the growth of disposable income and dampens inflationary pressure.

• d.

  The government can manually increase tax rates to prevent the economy from overheating.

• a.

  An immediate shift of the Long-Run Aggregate Supply (LRAS) curve to the left due to reduced government revenue.

• b.

  A reduction in the national debt as a result of lower public expenditure requirements.

• c.

  A decrease in the budget deficit due to increased tax revenue from higher economic activity.

• d.

  An increase in work incentives for individuals and a potential rise in investment by firms.

Write your answer out first, then check it against the worked solution.