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Demand Management — Fiscal Policy · Paper 1 — Free Economics SL Practice Questions
1FoundationSAQ-STools of fiscal policy (taxation, government spending)4 marksPaper 1~6 min
The government of Country X is considering using fiscal policy to reduce a recessionary gap. The Minister of Finance proposes either increasing government spending on infrastructure projects or cutting personal income tax rates.
(a)
Define the term 'government spending' as a component of aggregate demand. [1 mark]
(b)
Explain how a cut in personal income tax rates could help close a recessionary gap. [3 marks]
Solutions
2MasterySAQ-STools of fiscal policy (taxation, government spending)4 marksPaper 1~6 min
In Costa Azul, the Gini coefficient has risen from to over the past decade. The government introduces two fiscal measures: a rise in the marginal income tax rate on the highest earners from to , and increased public spending on healthcare and primary education.
(a)
Draw a Lorenz curve for Costa Azul. Label the line of perfect equality, and draw and label curves representing the income distribution before and after the policy. [2 marks]
(b)
Explain how each of the two fiscal measures contributes to the shift shown in your . [2 marks]
Solutions
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