Fiscal Policy

MCQ

1)

The table shows the government's receipts from taxation.

$m

tax on company profits 100

income tax 600

import duties 30

sales tax 250

What is the total amount of revenue raised by direct taxes?

a $280m
b $700m
c $730m
d $950m

2)
What is an example of an expansionary fiscal policy?

a Decreased budget deficit

b Higher interest rates
c Increased money supply
d reduced tax rates

3)

Which measure would indicate that an expansionary fiscal policy is being used by
the government?

a. cuts in government spending

b. higher interest rates
c. lower interest rates
d. lower taxes
4)
A government decides to increase tax revenues from consumer expenditure.
Which tax will it increase?

a.capital gains tax

b.death duties
c.profits tax
d.value added tax
5)
Which form of taxation always takes an increasing percentage of the taxpayer’s
income as it rises?

a.indirect
b.progressive
c.proportionate
d.regressive
6)
Due to a rise in the number of retired people, there has been increased demand for
some government expenditure.

Which type of government expenditure is most likely to be directly affected?

a.defence
b.health services
c.retraining grants
d.street lighting

7)

An economy is experiencing rising prices.

Which government policy will help reduce consumer expenditure?

introducing compulsory saving for income earners

investing more in building infrastructure
issuing more banknotes and coins
reducing indirect taxes

8)

One aim of government policy is to redistribute income through taxation in order to

reduce inequality.

Which policy will achieve this aim?

a.Impose a tax of $0.20 on every dollar earned.

b.Increase the tax-free allowances after which tax must be paid progressively.
c.Introduce a tax on all food.
d.Provide an incentive to earn by reducing taxes for the highest paid.
9)
The standard rate for Value Added Tax (sales tax) is 20% in a country. Different
consumers buying the same product have to pay the same amount of tax.

What kind of tax is this?

a.direct
b.progressive
c.proportional
d.regressive
10)

When is a government said to balance its budget?

a.when all goods and services are taxed equally

b.when economic growth is the same in all regions of the economy
c.when its total income equals its total expenditure
d.when total exports equal total imports
Choose your answer

11)

The table shows the tax that an individual would pay at different levels of disposable
income.

disposable 10 000 20 000 30 000 40 000

income ($)

tax ($) 0 2000 4000 6000

Which type of tax is shown in the table?

a.corporation tax
b.indirect tax
c.progressive tax
d.regressive tax
12)

Which actions would be likely to increase government expenditure and reduce

revenues from taxation?

government expenditure tax revenues

A improve health facilities for the elderly encourage people to reduce their
spending
 B increase the amount of the state increase VAT (sales tax)
pension

C provide free bus transport for retired encourage people to work beyond
people retirement

D raise the age of retirement decrease bus fares

13)

The table shows tax paid at different income levels in an economy.

income level tax paid

($) ($)

5 000 500

12 000 2400

20 000 5000

30 000 6000

Which description of the tax system used is correct?

a.continually progressive
b.progressive then regressive
c.proportional
d.regressive then progressive

14)
The table shows the amount of tax paid as income rises in four countries, A–D.

Which country has a progressive tax?

amount of tax (US$) paid on income of:

10 000 20 000 30 000 40 000 50 000

 A 2 000 4 000 6 000 8 000 10 000

B 2 000 6 000 12 000 18 000 25 000

C 4 000 4 500 5 000 5 500 6 000

D 4 000 7 000 9 000 10 000 12 000

15)
The table shows the amount of tax to be paid at different weekly incomes.

weekly income ($) 100 150 200 250

weekly tax ($) 20 30 36 40

Which statement describes the system of income tax as income rises over this
range?

a.It is progressive throughout.

b.It is proportional then becomes progressive.
c.It is proportional then becomes regressive.
d.It is regressive throughout.

Four Part Questions

1) [2 Marks]
More governments are imposing taxes on unhealthy food and drinks. Such
taxes are usually regressive. Some of these governments are also increasing
their spending on healthcare. In other countries healthcare is provided by the
private sector. The number of state-owned enterprises is declining in a number
of countries due to privatisation.
Define regressive tax.
2) [4 Marks]
The Chinese government reformed the Chinese tax system in 2016. It extended
VAT (sales tax) from the sale of goods to the sale of services enabling it to cut
the corporation tax rate. Taxes on goods and services are usually regressive
The Chinese government wanted to raise living standards and hoped that a cut
in the tax rate firms pay would attract multinational companies (MNCs) to the
country
Explain the difference between a progressive tax and a regressive tax

3) [4 Marks]
It was predicted that global unemployment would rise by over two million in
2017. Unemployment rates, however, vary between countries. Some
governments use fiscal policy measures and others use supply-side policy
measures to reduce unemployment. The unemployment rate can also be
influenced by trade protection.
Explain two reasons for government spending

4) [6 Marks]
A United Arab Emirates (UAE) airport announced a record profit of $1.9 billion in
2016. This was despite a fall in its total revenue. In 2016, the UAE considered
introducing Value Added Tax (VAT). The introduction of an indirect tax may have
an impact on unemployment. The UAE has a very low unemployment rate which
is one reason why multinational companies (MNCs) set up in the UAE.
Analyse how the introduction of an indirect tax may cause unemployment

5) [8 Marks]
The state of California has the most progressive tax system in the USA. The tax
system helps reduce high poverty rates. Policy makers are considering
reforming sales tax in the state to include services, while reducing the use of
direct taxes
Discuss whether a government should increase indirect taxes and whether it
should reduce direct taxes.

Answers

1) B correct answer as corporation and income tax are the two direct taxes in the list
2) D is the correct answer as reducing tax rates and increasing government
spending constitute expansionary fiscal policy

3) D is the correct answer as increasing government spending constitutes

expansionary fiscal policy, not decreasing it

4) D is the correct answer as VAT is a tax on spending

5) B is the correct answer as this describes a progressive tax

6) B is the correct answer as elderly people require more health care

7) A is the correct answer as increased savings leaves less disposable income

for consumers to spend

8) B is the correct answer as a tax free allowance is the first portion of income
that households can earn without incurring any taxes. By increasing it, poor
households are able to retain more income and inequality is reduced

9) D is the correct answer as all indirect taxes are regressive (they represent a
larger proportion of poorer households income than wealthier households)

10)A is the correct answer as higher rates of income tax reduce the incentive to
work as more of a person's income goes to the government

11) C is the correct answer as there is a higher rate of marginal tax for each
successive income band - 10%, 13% and 15%

12) A is the correct answer as spending on improving health facilities will raise
government spending and encouraging people to save more, will lead to lower
levels of indirect tax (GST/VAT) being paid

13) B is the correct answer as the tax rate goes from 10% to 20% to 25% to 20%
- first progressive but the final tax band is regressive

14) B is the correct answer as the marginal tax rate keeps increasing from 10%
to 30% to 40% to 45% to 50%
15) B is the correct answer as 100/20 = 5 and 150/30 = 5, as the income
increases, tax becomes progressive, the data shows: 200/36 = 5.6 and so on