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ExamPass · IGCSE worksheet

Fiscal policy

NameClassDate

Key terms

Define each term.

1
Fiscal policy

Multiple choice

Circle the correct answer.

2

A government cuts income tax rates and raises spending on infrastructure. This is best described as:

  1. Contractionary monetary policy
  2. Expansionary fiscal policy
  3. Supply-side policy only
  4. A balanced budget adjustment
3

Which statement correctly distinguishes a budget deficit from the national debt?

  1. A budget deficit is owed to foreigners, the national debt is owed domestically
  2. A budget deficit is the shortfall in one year, the national debt is the total accumulated over time
  3. A budget deficit applies to central government, the national debt applies to local government
  4. They are two names for the same quantity

Worked problems

Show your working.

4

Classifying a tax system from its bands. A country taxes income at 0% on the first $10,000, 20% on income between $10,001 and $50,000, and 32% on income above $50,000. Calculate the average and marginal rates of tax for a worker earning $60,000 and state whether the system is progressive.

Diagrams

5

Draw a circular flow of income diagram for an economy with a government sector. Label the flows between households and firms, then add taxation as a withdrawal and government spending as an injection. Mark clearly which arrow the government controls in each case.

Answers

1

Fiscal policy: The use of government spending and taxation to influence the level of economic activity and to achieve macroeconomic aims.

2

B. Both measures increase total demand, and both operate through the government budget rather than through interest rates or the money supply. Infrastructure spending also has supply-side effects over the long run, but the immediate classification is expansionary fiscal policy.

3

B. The deficit is a flow, measured over a period, and the debt is a stock, measured at a moment. A government can reduce its deficit every year and still see its national debt rise, because any deficit at all adds to the accumulated total.

4

Step 1. Work out the tax paid on each band. First band: 0% of $10,000 = $0. Second band: 20% of ($50,000 - $10,000) = 20% of $40,000 = $8,000. Third band: 32% of ($60,000 - $50,000) = 32% of $10,000 = $3,200.

Step 2. Total the tax paid. $0 + $8,000 + $3,200 = $11,200.

Step 3. Calculate the average rate of tax. ($11,200 / $60,000) x 100 = 18.67%, or 18.7% to one decimal place.

Step 4. Identify the marginal rate of tax. The next dollar earned is taxed in the top band, so the marginal rate is 32%.

Step 5. Classify the system. The marginal rate of 32% exceeds the average rate of 18.7%, so a further dollar of income is taxed more heavily than income has been on average. The proportion of income paid in tax therefore rises with income, which is the definition of a progressive tax system.

Show the band-by-band working even when the question only asks for the final figure. Method marks are available and a single arithmetic slip then costs one mark rather than all of them.

5

The purpose of drawing it is to see why the two levers pull in opposite directions. Taxation takes money out of the flow, so raising it reduces the income circulating. Government spending puts money in, so raising it increases the income circulating. A budget deficit means injections from the government exceed withdrawals, which is why an unbalanced budget in that direction expands the economy.