Eduqas A Level Economics
Eduqas A Level Economics Fiscal Policy Exam Questions
Free Eduqas A Level Economics revision for Fiscal Policy: what you need to know, common mistakes and exam-style questions with answers. Covers government spending and taxation, demand side and supply side fiscal policy, the multiplier, automatic stabilisers and the Laffer curve.
Practise Fiscal Policy with past papers
Once you have learnt this topic, find the Fiscal Policy questions in real Eduqas A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About Eduqas A Level Economics Fiscal Policy
Fiscal policy is the first of the policy instruments in the Eduqas specification. It covers how the government uses spending and taxation to influence aggregate demand and aggregate supply. You need to understand the fiscal framework, the difference between demand side fiscal policy (changing AD through the budget balance) and supply side fiscal policy (using tax and spending to change incentives and productive capacity), and the role of automatic stabilisers. You should be able to analyse expansionary and contractionary fiscal policy on an AD/AS diagram, explain the multiplier process and evaluate effectiveness, including time lags, crowding out and the Laffer curve. This is a core Component 3 macro essay area.
What you need to know
- Fiscal framework Fiscal policy is set by the government through the Budget. It involves decisions on government spending (current and capital) and taxation (direct taxes such as income tax and indirect taxes such as VAT). The budget balance is revenue minus spending.
- Demand side fiscal policy Expansionary fiscal policy (higher spending or lower taxes) shifts AD right and raises output and employment, with a multiplier effect. Contractionary fiscal policy shifts AD left and reduces inflationary pressure and the deficit.
- Supply side fiscal policy Cuts in income or corporation tax, investment allowances and spending on infrastructure, education and training aim to raise incentives to work and invest and shift LRAS right.
- Progressive, proportional and regressive taxes A progressive tax takes a higher proportion of income as income rises, such as UK income tax; a regressive tax takes a higher proportion from low income groups, such as many indirect taxes.
- The Laffer curve The Laffer curve suggests that above a certain tax rate, further rises reduce total tax revenue because they discourage work and encourage avoidance, so cutting very high rates could raise revenue.
- Effectiveness Fiscal policy is affected by time lags, the size of the multiplier, crowding out of private investment, the level of national debt, confidence, and leakages into imports and savings.
Common mistakes in Fiscal Policy
- Confusing fiscal policy with monetary policy. Fiscal policy is government spending and taxation; interest rates and QE are monetary policy.
- Assuming all tax cuts are supply side policy. A tax cut boosts AD in the short run; only cuts that improve incentives to work or invest also shift LRAS.
- Ignoring the starting point. Expansionary fiscal policy is more effective with spare capacity; near full employment it mainly raises the price level.
- Forgetting the financing of fiscal stimulus. Higher spending or lower taxes increase borrowing, which links to the national debt and possible crowding out.
Try three Fiscal Policy exam-style questions
1. Distinguish between direct and indirect taxes, giving an example of each. (2 marks)
Show the mark scheme answer
Direct taxes are levied on income or wealth, e.g. income tax or corporation tax; indirect taxes are levied on spending, e.g. VAT or fuel duty.
2. Explain how a cut in corporation tax could affect both aggregate demand and aggregate supply. (4 marks)
Show the mark scheme answer
Firms keep more post-tax profit, so investment rises; investment is a component of AD, so AD shifts right; higher investment increases the capital stock and productivity; so LRAS shifts right in the long run.
3. Evaluate the effectiveness of expansionary fiscal policy in increasing economic growth. (15 marks)
Show the mark scheme answer
A strong answer would analyse higher spending or lower taxes shifting AD right with a multiplier effect, and capital spending shifting LRAS; evaluate time lags, crowding out, the size of the multiplier given leakages, effects on the deficit and national debt, inflation if near capacity and confidence effects; conclude on when it works best, e.g. in a recession with spare capacity.
Fiscal Policy FAQs
What does Eduqas A Level Economics Fiscal Policy cover?
It covers the fiscal framework, government spending and taxation, demand side and supply side fiscal policy, automatic stabilisers, the multiplier process, the Laffer curve and how effective fiscal policy is.
Which component is Fiscal Policy examined in?
It can be tested in Components 1 and 2, and it is one of the most likely topics for essays in the Macroeconomics section of Component 3.
How do I evaluate fiscal policy well?
Separate short run AD effects from long run supply side effects, then weigh time lags, the multiplier, crowding out, the state of public finances and the amount of spare capacity in the economy.
