2.1 Government and the Economy : Unit 31- 34

Question 1

1. What are policy instruments?

Answer 1

• Tools governments use to implement their policies, such as interest rates, rates of taxation, and levels of government spending.

Question 2

2, What is fiscal policy?

Answer 2

• Fiscal policy are decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy.

Question 3

3. What is budget?

Answer 3

• Government’s spending and revenue plans for the next year.

Question 4

4. What are the 4 reasons governments impose taxation?

Answer 4

• To pay for public sector services
• To discourage certain activities, and consumption.
• Taxes can be used to help control aggregate demand.
• The distribution of wealth in the economy can be made fairer.

Question 5

5. What are the 3 types of taxes? Define.

Answer 5

• Indirect taxes: Taxes levied on spending is an indirect tax.
• Direct taxes: Taxes levied on the income earned by firms and individuals.
• Environmental taxes: Taxes that are designed to protect the environment.

Question 6

6. What are the 5 key direct taxes used around the world?

Answer 6

• Income tax: This is a direct tax on the amount earned by an individual.
• Social insurance taxes: They are imposed on people’s income but the money collected is used specifically for pension benefits and health care.
• Corporation taxes: are levied on the profits made by limited companies.
• Capital gains tax: levied on any financial gains made when selling assets at a profit.
• Inheritance tax: is paid on money that is
  inherited from people who die.

Question 7

7. What are the 6 key indirect taxes used?

Answer 7

• Sales tax: are taxes on spending
• Duties: are often heavy taxes on a select range of goods.
• Custom duties:are taxes levied on imports
• Council tax: is collected by local authorities to help pay for local services such as refuse collection.
• Business rates: are also collected by local authorities and contribute to the provision of local community services.

Question 8

8. What are the 3 key environmental taxes?

Answer 8

• Landfill tax : is imposed on the disposal of waste in landfill sites
• Climate change levies: meet their commitment to reducing greenhouse gases
• Aggregates levies: is a tax on sand, gravel, and rock that is dug from the ground.

Question 9

9. What is fiscal deficit?

Answer 9

• amount by which government spending exceeds government revenue.

Question 10

10. What is fiscal surplus?

Answer 10

• the amount by which government revenue exceeds government spending.

Question 11

11. What is the national debt?

Answer 11

total amount of money owed by a country.

Question 12

12. What are the 2 negative impact of fiscal deficits?

Answer 12

• Opportunity cost.
• future generations may be burdened with the debt. Thus, may not be able to forcus on the the growth and development of the economy.

Question 13

13. What are the 3 positive impacts of fiscal surplus?

Answer 13

• Can be used to spend on the future provision of public services
• Lower taxes in the economy.
• Reduce future interest payments and strengthen the nation’s finances.

Question 14

14. What are the 5 impacts of fiscal policy on macroeconomic objectives?

Answer 14

• Affect inflation (contractionary fiscal policy)
• Economic growth (expansionary)
• Unemployment (Expansionary)
• Current account deficit (contractionary to reduce demand for imports)
• Fiscal policy and the environment.

Question 15

15. What is expansionary fiscal policy?

Answer 15

• Fiscal measures designed to stimulate demand in the economy.

Question 16

16. What is contractionary fiscal policy?

Answer 16

• Fiscal measures designed to reduce demand in the economy.

Question 17

17. What is monetary policy?

Answer 17

• use of interest rates and the money supply to control aggregate demand in the economy.

Question 18

18. What is money supply?

Answer 18

• amount of money circulating in the economy.

Question 19

19. What is base rate?

Answer 19

• Rate of interest set by government or regional central banks for lending to other banks, which in turn influence all other rates in the economy.

Question 20

20. What are the 4 reasons many different rates of interest?

Answer 20

• Different banks charge different rates as they compete with each other.
• Rates are higher if money is borrowed without security.
• The amount paid to borrowers is higher than the amount given to savers.
• Highest rates are charged to credit card users.

Question 21

21. What is mortgage?

Answer 21

• Legal arrangement where you borrow money from a financial institution in order to buy land or a house, and you pay back the money over a period of years

Question 22

22. What is a rate of interest?

Answer 22

Price of borrowing money.

Question 23

24. What are the 4 roles of a central bank?

Answer 23

• Implementing the government’s monetary policy and regulation of the banking system.
• Acting as a lender of last resort to commercial banks
• Controlling inflation and stabilizing a nation’s currency
• Setting interest rates

Question 24

25. What are the 4 impacts of interest rates on macroeconomic objectives?

Answer 24

• Inflation (by slowing down the speed at which the money supply is growing, this is likely to involve raising the rate of interest)
• Unemployment: ( use lower interest rates to reduce unemployment, thus people may be able to borrow and afford goods causing aggregate demand to increase and firms to recruit new employees)
• Economic growth
• The current balance:
  ( reduce spending on imports: lower aggregate demand: increase rates)

Question 25

26. What are the 3 factors that have an overall effect on the current balance when monetary policy is changed or implemented?

Answer 25

• Income elasticity of imports
• Strength of the link between interest rates and exchange rates.
• The price elasticity of demand for imports and exports.

Question 26

27. What are the effects on consumers due the mechanism by which interest rate changes?

Answer 26

if it falls: aggregate demand rises, and more able to spend than save.
if it increase : aggregate demand falls, and more encouraged to svae than spend.

Question 27

27. What are the effects on firms due to the mechanism by which interest rate changes?

Answer 27

• They use borrowed money to fund their business:
  thus, if it falls: will be able to produce more goods - boost their profits
• business confidence
• lower costs
  if it rises
• lower profits
• reduce business confidence
• raise costs

Question 28

28. What is quantitative easing?

Answer 28

• Buying of financial assets, such as government bonds from commercial banks, which results in a flow of money from the central bank to commercial banks.

Question 29

29. What is aggregate supply?

Answer 29

the total amount of goods and services produced in a country at a given price level in a given time period

Question 30

30. What is supply-side policies?

Answer 30

government measures designed to increase supply in the economy.

Question 31

31. What are the 4 aims of supply-side policies?

Answer 31

• improve flexibility in labor markets by removing restrictions.
• restore the incentive to work by lowering taxes on work and enterprise,
• promote competition through privatization, deregulation, and helping small business
• Increase investment by improving the flow of capital.

Question 32

31. What are the impacts of supply-side policies on productivity?(2)

Answer 32

• improve flexibility on labor
• Training and education of labor

Question 33

32. What are the benefits of supply-side policies on total output?

Answer 33

• increase the productive potential of the economy.
• national income rises
  -living standards will be improved.
• less chance of demand-pull inflation.
• Unemployment will be lower as more jobs are created.

Question 34

Name 7 examples of policies used by the governments?

Answer 34

• Privatization
• Deregulation
• Education and training
• Policies to boost regions with high unemployment.
• Infrastructure spending
• Lower business taxes to stimulate investment.
• Lower-income taxes to encourage working

Question 35

What is offset?

Answer 35

• If something, such as a cost or sum of money, offsets another cost, it reduces or balances it, so the situation remains the same.

Question 36

What is austerity?

Answer 36

official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend.

Question 37

What are the 5 macroeconomic objectives the government ideally wants to have?

Answer 37

• Economic growth
• Reduced Inflation
• Unemployment down
• Environment protection

Question 38

What are the 4 possible trade offs?

Answer 38

• Unemployment and inflation
• Economic growth and Inflation
• Economic growth and environmental protection
• Current account on BOP and inflation

Question 39

What are two types of policies used to reduce inflation? contractionary? expansionary?

Answer 39

• contractionary fiscal policy.
• Contractionary monetary policy

Question 40

What are the 5 negative effects of using contractionary monetary policy to help reduce inflation?

Answer 40

• higher interest rates will discourage consumers and businesses from borrowing. thus, a fall in consumption and investment.
• Higher mortgage payments
• Firms’ profit will be low as they incur more costs, resulting in them investing less.
• Will discourage firms from borrowing to invest in new technology and expansion.(long-term development/ lose of competitive edge to foreign markets)
• If higher interest rates results in higher exchange rates it may be harder for firms to sell abroad.

Question 41

What are the two negative effects of using fiscal policy to reduce inflation?

Answer 41

• Higher taxes and lower government spending could result in unemployment.
• People may suffer as a result of poorer government services after the cuts in expenditure.

Question 42

What policy might avoid the trade-off between inflation and unemployment?

Answer 42

supply-side policy.

Question 43

What policy will government use to promote economic growth?

Answer 43

• expansionary fiscal policy
• Expansionary monetary policy

Question 44

What do you mean by the economy will be overheated?

Answer 44

• this when demand rises too fast causing prices and imports to rise, a situation that governments may try to correct by raising taxes and interest rates.

Question 45

What is the possible disadvantage of economic growth?

Answer 45

• overheated economy
  -demand-pull inflation

Question 46

What is the policy that could be used to avoid negative trade between Economic growth and Inflation?

Answer 46

• Supply-side policy

Question 47

How does Economic growth affect environmental protection negatively?

Answer 47

• Emissions from power generators, chemical processors, and other manufacturers.
• When people have more disposable income they may buy more cars, which results in more emission and congestion.
• which may affect people’s health.

Question 48

What is the disadvantage of inflation on BOP balance?

Answer 48

• Inflation could result in a rise in prices which would increase the price of exports.
• Inflation could result in consumers switching from domestic products to cheaper imported products, thus, creating pressure on the BOP balance.

Question 49

What policy may worsen the current account for a period of time?

Answer 49

• Monetary policy- contractionary

Question 50

What policy should the government use instead to avoid the trade-off between Inflation and the current account on the balance of payment?

Answer 50

• Fiscal policy