4.2.5.1 Fiscal policy Quiz: AQA Economics, Unit 2

The 20 questions

1. What does fiscal policy involve?

   • The control of the exchange rate through foreign currency purchases by the Treasury, which is the main tool of fiscal policy in the UK
   • The setting of bank rate and the money supply
   • The regulation of banks through capital requirements
   • The manipulation of government spending, taxation and the budget balance

2. Which of the following best describes a progressive tax?

   • A tax paid only by businesses and never by individuals
   • A tax whose average rate rises as income rises
   • A tax that takes the same proportion of income from everyone
   • A tax whose average rate falls as income rises

3. What is a regressive tax?

   • A tax that is paid only by the government itself
   • A tax that is paid only on income from savings
   • A tax that rises in proportion to income for all households, so that every household pays the same share of its income in tax
   • A tax that takes a larger share of income from lower-income households than from higher-income households

4. What is the difference between direct and indirect taxes?

   • Direct taxes are paid only by firms, while indirect taxes are paid only by households, and the two types of tax raise the same revenue
   • Direct taxes are levied on income or wealth, while indirect taxes are levied on spending
   • Direct taxes are levied on spending, while indirect taxes are levied on income
   • There is no difference between the two types of tax

5. What is a budget deficit?

   • The total value of government debt held by overseas investors
   • The amount of tax revenue collected from businesses only
   • The situation in which government spending exceeds government revenue in a given year
   • The situation in which government revenue exceeds government spending in a given year

6. What is the national debt?

   • The value of exports minus imports in one year
   • The annual budget surplus that the government saves
   • The accumulated total of past government borrowing, minus any repayments, over time
   • The total of the government's tax revenue in a single year, which is reported each month by the Office for National Statistics

7. What is the role of the Office for Budget Responsibility?

   • To set the bank rate and regulate commercial banks, which is the main task of the Office for Budget Responsibility each year
   • To collect taxes from households and businesses
   • To set the minimum wage for all workers
   • To provide independent forecasts and assessments of the public finances

8. Government spending is 800 billion pounds and tax revenue is 750 billion pounds. What is the budget balance?

   • A deficit of 50 billion pounds
   • A deficit of 800 billion pounds
   • A surplus of 750 billion pounds
   • A surplus of 50 billion pounds

9. An income tax charges 20 per cent on the first 10,000 pounds of income and 40 per cent on income above that. What is the tax and average rate for a person earning 30,000 pounds?

   • 12,000 pounds, which is an average rate of 40 per cent
   • 8,000 pounds, which is an average rate of 26.7 per cent, since the 40 per cent rate applies only to the first 10,000 pounds
   • 10,000 pounds, which is an average rate of 33.3 per cent
   • 6,000 pounds, which is an average rate of 20 per cent

10. Why is a flat-rate sales tax such as VAT often considered regressive?

    • It is paid only by businesses, so it does not affect households
    • It charges higher-income households a larger proportion of their income, which means VAT is the most progressive tax collected in the UK
    • Lower-income households spend a larger share of their income on taxed goods, so it takes a higher share of their income
    • It is levied only on savings, which lower-income households do not have

11. During a recession, tax revenue falls and spending on benefits rises. What type of budget deficit does this most closely describe?

    • A structural deficit, which persists even at full employment
    • A cyclical deficit, which changes with the economic cycle
    • A permanent surplus, which arises from strong tax revenue
    • A trade deficit, which arises from imports exceeding exports

12. A deficit that would remain even if the economy were operating at full employment is best described as:

    • A cyclical deficit, which arises only when the economy is at its normal capacity and tax revenue exceeds public spending
    • A trade deficit
    • A monetary surplus
    • A structural deficit

13. A government cuts taxes to boost demand. Which combination of effects is most likely in the short run?

    • Aggregate demand rises, though the size of the effect depends on how much of the tax cut is saved
    • Aggregate demand falls because households receive more income
    • Prices fall automatically because tax cuts increase competition between firms, which lowers the price of every good in the economy
    • Aggregate supply rises by the full amount of the tax cut

14. Evaluate whether a rising national debt is always a problem for the economy.

    • No, it is never a problem because the government can print money without limit
    • Not necessarily, since its significance depends on its size relative to GDP, the cost of interest and who holds it
    • Yes, it is always a problem because any debt is harmful to the economy
    • Yes, but only because it lowers the value of the pound in every case, which raises the cost of all imports for households and firms

15. Evaluate fiscal consolidation during a recession.

    • It can reduce the budget deficit, but it may also reduce aggregate demand and output, worsening the recession
    • It always boosts growth, because lower spending always raises confidence
    • It always raises inflation, because lower spending raises prices
    • It has no effect on demand, because government spending does not affect output, since spending only redistributes money between households

16. National debt is 2000 billion pounds and nominal GDP is 2500 billion pounds. What is the debt-to-GDP ratio?

    • 80 per cent
    • 20 per cent
    • 50 per cent
    • 125 per cent

17. Why might a sustained budget surplus slow economic growth?

    • It increases the money supply so firms invest more
    • It withdraws income from the circular flow, which can reduce aggregate demand if not offset elsewhere
    • It has no effect, because surpluses cannot affect the economy
    • It always raises aggregate demand by the full value of the surplus, because the government spends all of its tax receipts each year

18. Evaluate whether a progressive tax system always reduces incentives to work.

    • Not always, since its effect on incentives depends on tax rates, benefits and the responsiveness of workers
    • Yes, but only because they raise the price level in the economy
    • Yes, progressive taxes always reduce incentives for everyone at all income levels, so no worker is ever willing to take on extra hours
    • No, progressive taxes never affect the incentive to work in any case

19. Why does the principle that taxes should be equitable matter in fiscal policy?

    • It suggests people with a similar ability to pay should pay similar taxes, and those with more should pay more
    • It means taxes should always be levied on businesses rather than on individuals
    • It means every person should pay exactly the same amount of tax regardless of income, so that flat-rate taxes are always the fairest
    • It means taxes should be set by the Bank of England to control inflation

20. Evaluate the economic significance of a government increasing public spending on infrastructure.

    • It always reduces productive capacity, because spending always wastes resources
    • It has no economic significance, because public spending never affects output
    • It may raise demand and productive capacity, but its net effect depends on how it is funded and how efficiently it is used
    • It always lowers the budget deficit, because spending raises tax revenue by more than it costs, so every project pays for itself

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