What is the role of government spending within fiscal policy?

Government spending is one of the three instruments of fiscal policy that can be manipulated to influence the economy, directly affecting aggregate demand and resource allocation.

How does taxation function as a tool of fiscal policy?

Taxation is manipulated by the government to influence economic activity by affecting disposable incomes, consumption, and incentives to work and invest.

What is the macroeconomic function of fiscal policy?

Fiscal policy influences the overall level of economic activity and aggregate demand in the economy.

What is the microeconomic function of fiscal policy?

Fiscal policy influences the allocation of resources and the pattern of economic activity across different sectors and regions.

How does increased government spending affect aggregate demand under expansionary fiscal policy?

Increased government spending raises aggregate demand directly, as government expenditure is a component of AD.

Explain how reduced taxation leads to higher aggregate demand.

Reduced taxation increases households' disposable income, which raises consumption and therefore increases aggregate demand.

AQA A-Level Economics 7136

Economic Methodology and the Economic Problem

Topic overview Economics as a social science, and positive and normative statements The economic problem, factors of production and opportunity cost Production possibility diagrams

Individual Economic Decision Making

Topic overview Consumer behaviour and utility Imperfect information Aspects of behavioural economic theory Behavioural economics and economic policy

Price Determination in a Competitive Market

Topic overview Demand, the demand curve, income and wealth Substitutes, complements and consumer preferences Price elasticity of demand and total revenue The determinants of price elasticity of demand Income and cross elasticity of demand The determinants of supply Price elasticity of supply Equilibrium, disequilibrium and how a market clears Shifts in demand and supply, and the price mechanism The interrelationship between markets

Production, Costs and Revenue

Topic overview Production, productivity and specialisation Costs of production in the short and long run Economies and diseconomies of scale Revenue and profit The law of diminishing returns and returns to scale Technological change

Perfect Competition, Imperfectly Competitive Markets and Monopoly

Topic overview The characteristics of the four market structures Price takers, price makers and non-price competition Competitive markets The objectives of firms Profit maximisation and the divorce of ownership from control Profit maximisation and the shutdown condition Price taking, entry and exit, and long-run equilibrium Efficiency in perfect competition and its assumptions Monopolistic competition in the short run Monopolistic competition in the long run The characteristics of oligopoly and barriers to entry The kinked demand curve and price rigidity Collusion, cartels and price leadership Non-price competition in oligopoly The advantages and disadvantages of oligopoly Monopoly power and barriers to entry The monopoly diagram and supernormal profit The costs and benefits of monopoly Price discrimination The dynamics of competition Creative destruction and the competitive market process Contestable and non-contestable markets Static and dynamic efficiency Market structure and resource allocation Consumer and producer surplus

The Labour Market

Topic overview The demand for labour and marginal productivity theory The supply of labour Wage determination in competitive labour markets Wage determination in imperfectly competitive labour markets Trade unions and wage determination The National Minimum Wage Discrimination in the labour market

The Distribution of Income and Wealth: Poverty and Inequality

Topic overview Income, wealth and the causes of their distribution Equality, equity, the Lorenz curve and the Gini coefficient The arguments about inequality The problem of poverty Progressive taxation and transfer payments Means-tested benefits, universal benefits and the poverty trap Wealth taxes and state provision Evaluating redistribution

The Market Mechanism, Market Failure and Government Intervention

Topic overview How markets and prices allocate resources The meaning of market failure Public goods, private goods and quasi-public goods Positive and negative externalities Merit and demerit goods Market imperfections An inequitable distribution of income and wealth Indirect taxes and subsidies Price controls, state provision and regulation Pollution permits and the extension of property rights Evaluating intervention and the mixed economy Government failure Competition policy Public ownership, privatisation, regulation and deregulation

The Measurement of Macroeconomic Performance

Topic overview The objectives of government economic policy Macroeconomic indicators and index numbers Uses of national income data

How the Macroeconomy Works

Topic overview The circular flow of income The aggregate demand and aggregate supply curves What shifts short-run and long-run aggregate supply Macroeconomic equilibrium and economic shocks Consumption and investment Government spending and net exports The accelerator, saving and investment Aggregate demand and the level of economic activity The determinants of aggregate supply

Economic Performance

Topic overview Short-run and long-run economic growth The economic cycle and output gaps Demand-side and supply-side shocks Measuring unemployment and the types of unemployment The determinants of employment and policies to reduce unemployment Inflation and deflation The quantity theory of money Consequences of inflation and deflation The balance of payments on current account Output gaps and the growth-inflation conflict Reconciling policy objectives in the AD/AS model

Financial Markets and Monetary Policy

Topic overview The characteristics and functions of money Financial markets and their role Debt, equity and bond yields Commercial banks, investment banks and the balance sheet Liquidity, profitability, security and credit creation The instruments and institutions of monetary policy How bank rate changes affect the economy What the MPC considers, and the exchange rate channel The functions of a central bank The bank rate and the MPC's decisions Exchange rate movements and the macroeconomy The monetary policy transmission mechanism Quantitative easing and unconventional policy The regulators and the risks banks face Liquidity ratios, capital ratios and systemic risk

Fiscal Policy and Supply-Side Policies

Topic overview Fiscal policy and aggregate demand Types of tax The budget balance and the national debt The purposes of public expenditure and taxation The principles of taxation Budget deficits, surpluses and their effects The national debt and fiscal rules Supply-side policies and how they work Market-based and interventionist supply-side policies

The International Economy

Topic overview The causes and characteristics of globalisation The impact of globalisation on developed and developing economies Multinational corporations Comparative and absolute advantage The effects of trade and changing trade patterns Tariffs, quotas and the tariff diagram Arguments for and against protectionism Trading blocs and the World Trade Organisation The components of the balance of payments Causes of current account imbalances and investment flows Correcting imbalances and their consequences How exchange rates are determined in a floating system Government intervention and fixed exchange rates Floating rates and currency unions Growth, development and less-developed economies Measuring development: the HDI and other indicators Investment and education as drivers of development Corruption, governance and institutional barriers Infrastructure, human capital and property rights Market-based and interventionist development strategies Aid and trade as development strategies Growth, globalisation and inequality

Fiscal Policy and Supply-Side Policies

9 subtopics
24 things to know
Papers 2 and 3

What Fiscal Policy and Supply-Side Policies covers

Fiscal policy and supply-side policies is examined on Papers 2 and 3. It covers what governments spend and tax, the deficit and debt that follow, and the policies aimed at the productive capacity of the economy rather than at demand.

Where it is assessed

Papers 2 and 3

The national and international economy, then the synoptic paper.

Check the AQA specification ↗

The 9 subtopics

Each one has its own page.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Numbers

How is the budget balance calculated, and when is it in deficit or surplus?

Numbers

What are corporation tax, National Insurance and VAT?

Key term

How do direct and indirect taxes differ, and how do they steer economic activity?

Key term

What are progressive, proportional and regressive taxes?

Key term

What is the national debt, how does a budget deficit differ, and how do deficits and surpluses change the debt?

Key term

Name one main category of UK government spending.

Key term

What is income tax in the UK?

Numbers

How do cuts in corporation tax and income tax work as supply-side policies?

Process

How can the private sector improve the supply side without government action?

Numbers

What can supply-side policies do for the trend rate of growth and for unemployment?

Evaluation

What is the aim of welfare reform as a supply-side policy?

Evaluation

How do direct and indirect taxes differ, and what are externality taxes for?

Numbers

Why do the interest rate on debt and who holds it matter for sustainability?

Key term

What are the purposes of public expenditure?

Key term

What do horizontal equity, vertical equity and efficiency mean in taxation?

Process

What is the budget balance, and how does it change the national debt?

Key term

What is the link between persistent budget deficits and the national debt?

Key term

What happens to the national debt when a government runs a budget surplus?

Numbers

Why is the currency in which national debt is denominated significant?

Evaluation

How do market-based and interventionist supply-side policies differ?

Evaluation

How do lower taxes improve supply-side performance, and why may infrastructure need the state?

Numbers

How do deregulation, privatisation and union reform improve efficiency?

Evaluation

What fundamental disagreement underlies the distinction between interventionist and market-based supply-side policies?

Process

How does fiscal policy influence aggregate demand?

Take Fiscal Policy and Supply-Side Policies further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

Monetary policy vs Fiscal policy
Monetary policy: management of interest rates and the money supply. Fiscal policy: management of taxation and government expenditure.
Supply-side policy vs Demand-side policy
Supply-side policy: measures intended to increase productive potential. Demand-side policy: measures intended to influence total spending.
Expansionary policy vs Contractionary policy
Expansionary policy: action intended to raise aggregate demand. Contractionary policy: action intended to reduce aggregate demand.

Questions from this topic

Each one with the model answer underneath.

1
What is the role of government spending within fiscal policy?
Model answer
Government spending is one of the three instruments of fiscal policy that can be manipulated to influence the economy, directly affecting aggregate demand and resource allocation.
2
How does taxation function as a tool of fiscal policy?
Model answer
Taxation is manipulated by the government to influence economic activity by affecting disposable incomes, consumption, and incentives to work and invest.
3
What is the macroeconomic function of fiscal policy?
Model answer
Fiscal policy influences the overall level of economic activity and aggregate demand in the economy.
4
What is the microeconomic function of fiscal policy?
Model answer
Fiscal policy influences the allocation of resources and the pattern of economic activity across different sectors and regions.
5
How does increased government spending affect aggregate demand under expansionary fiscal policy?
Model answer
Increased government spending raises aggregate demand directly, as government expenditure is a component of AD.
6
Explain how reduced taxation leads to higher aggregate demand.
Model answer
Reduced taxation increases households' disposable income, which raises consumption and therefore increases aggregate demand.

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Economic Methodology and the Economic Problem

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Price Determination in a Competitive Market

Production, Costs and Revenue

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Fiscal Policy and Supply-Side Policies revision questions

What does Fiscal Policy and Supply-Side Policies cover in AQA A-Level Economics?: 9 subtopics: fiscal policy and aggregate demand, types of tax, the budget balance and the national debt, the purposes of public expenditure and taxation, the principles of taxation, budget deficits, surpluses and their effects, the national debt and fiscal rules, supply-side policies and how they work and market-based and interventionist supply-side policies. Each one has its own page with questions and model answers.
How is Fiscal Policy and Supply-Side Policies organised?: By the AQA 7136 specification, subtopic by subtopic, so it matches the order you are taught it in.

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