AQA A Level Economics
AQA A Level Economics 3.2.5 Fiscal Policy and Supply-Side Policies Exam Questions
Free AQA A Level Economics exam questions for 3.2.5 Fiscal Policy and Supply-Side Policies, with a mark scheme for every pack. Covers fiscal policy, government spending, progressive and regressive taxes, budget deficits, national debt, automatic stabilisers and market-based and interventionist supply-side policies.
3.2.5 Fiscal Policy and Supply-Side Policies exam questions
2 question packs of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
About AQA A Level Economics 3.2.5 Fiscal Policy and Supply-Side Policies
Fiscal policy and supply-side policies is section 3.2.5 of AQA A Level Economics and is examined on Paper 2. Fiscal policy covers government spending and taxation, the use of fiscal policy to manage aggregate demand and influence aggregate supply, direct and indirect taxes, progressive, proportional and regressive taxes, the principles of a good tax, budget deficits and surpluses, cyclical and structural deficits, the national debt and automatic stabilisers versus discretionary policy. Supply-side policies cover market-based measures such as tax cuts and deregulation and interventionist measures such as spending on education and infrastructure, aiming to increase LRAS. Examiners ask you to compare these with monetary policy and evaluate their effectiveness.
What you need to know
- Fiscal policy Fiscal policy uses government spending and taxation to influence AD and the economy's supply side. Expansionary fiscal policy (higher spending or lower taxes) increases AD, with multiplier effects; contractionary policy reduces it.
- Taxation Direct taxes are on income and wealth (income tax); indirect taxes are on spending (VAT). A progressive tax takes a rising proportion of income as income rises, a proportional tax the same proportion and a regressive tax a falling proportion. Know Adam Smith's principles of a good tax.
- Budget balance and debt A budget deficit is when spending exceeds revenue in a year; the national debt is the accumulated total of past borrowing. A cyclical deficit results from the economic cycle; a structural deficit exists even when the economy is at potential output.
- Automatic stabilisers and discretionary policy Automatic stabilisers, such as benefit spending and progressive taxes, change without new decisions and dampen the cycle. Discretionary policy involves deliberate changes in spending or tax rates.
- Supply-side policies Market-based policies include cutting income and corporation tax, reducing benefits, deregulation, privatisation and reducing trade union power. Interventionist policies include spending on education, training, infrastructure and research. Both aim to raise productivity and shift LRAS right.
- Evaluation Fiscal policy faces time lags, crowding out and debt concerns. Supply-side policies take a long time to work, can be costly and may increase inequality, but can raise growth without inflation.
Common mistakes in 3.2.5 Fiscal Policy and Supply-Side Policies
- Confusing the budget deficit with the national debt. The deficit is an annual flow; the debt is the accumulated stock.
- Calling VAT progressive because rich people pay more in total. VAT is usually regressive because it takes a larger share of the income of poorer households.
- Treating supply-side policies as the same as supply-side shocks. Supply-side policies are deliberate measures to raise long-run productive capacity.
- Saying fiscal policy only affects AD. Spending on education or infrastructure and tax incentives can also shift LRAS.
- Ignoring crowding out. Higher government borrowing may raise interest rates and reduce private investment, limiting the effect of expansionary fiscal policy.
Try three 3.2.5 Fiscal Policy and Supply-Side Policies exam-style questions
1. Distinguish between a progressive tax and a regressive tax. (4 marks)
Show the mark scheme answer
A progressive tax takes a larger proportion of income as income rises; for example UK income tax with higher rates for higher bands; a regressive tax takes a larger proportion of income from those on lower incomes; for example VAT or excise duties on tobacco.
2. Explain how automatic stabilisers reduce fluctuations in economic activity. (4 marks)
Show the mark scheme answer
In a recession incomes fall so tax revenue falls automatically and benefit spending rises; this supports disposable income and AD; in a boom tax revenue rises and benefit spending falls, dampening AD; no new policy decisions are needed.
3. Evaluate whether interventionist supply-side policies are more effective than market-based supply-side policies in increasing long-run growth. (25 marks)
Show the mark scheme answer
Interventionist: education, training and infrastructure correct market failures, raise labour productivity and shift LRAS right; market-based: tax cuts and deregulation raise incentives to work and invest; evaluate: interventionist policies are costly and slow, risk of government failure; market-based policies may increase inequality and incentives effects may be small; effectiveness depends on the cause of low productivity; both increase AD in the short run; supported judgement.
3.2.5 Fiscal Policy and Supply-Side Policies FAQs
What does AQA A Level Economics 3.2.5 cover?
It covers fiscal policy and its effects on AD and AS, types and principles of taxation, budget deficits and the national debt, automatic stabilisers, and market-based and interventionist supply-side policies.
Which paper is 3.2.5 examined in?
It is assessed on Paper 2, National and international economy, and can also appear on Paper 3, Economic principles and issues, which draws on the whole specification.
How do I evaluate fiscal and supply-side policies?
Consider time lags, the size of the multiplier, crowding out, the state of the public finances, effects on incentives and on the distribution of income. Supply-side policies are slow to work, so time scale is always a useful judgement point.
