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Economics EDEXCEL IGSCE > 2.1 Government and the Economy : Unit 31- 34 > Flashcards

2.1 Government and the Economy : Unit 31- 34 Flashcards

1
Q
  1. What are policy instruments?
A
  • Tools governments use to implement their policies, such as interest rates, rates of taxation, and levels of government spending.
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2
Q

2, What is fiscal policy?

A
  • Fiscal policy are decisions about government spending, taxation and levels of borrowing that affect aggregate demand in the economy.
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3
Q
  1. What is budget?
A
  • Government’s spending and revenue plans for the next year.
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4
Q
  1. What are the 4 reasons governments impose taxation?
A
  • 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.
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5
Q
  1. What are the 3 types of taxes? Define.
A
  • 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.
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6
Q
  1. What are the 5 key direct taxes used around the world?
A
  • 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.
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7
Q
  1. What are the 6 key indirect taxes used?
A
  • 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.
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8
Q
  1. What are the 3 key environmental taxes?
A
  • 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.
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9
Q
  1. What is fiscal deficit?
A
  • amount by which government spending exceeds government revenue.
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10
Q
  1. What is fiscal surplus?
A
  • the amount by which government revenue exceeds government spending.
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11
Q
  1. What is the national debt?
A

total amount of money owed by a country.

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12
Q
  1. What are the 2 negative impact of fiscal deficits?
A
  • 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.
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13
Q
  1. What are the 3 positive impacts of fiscal surplus?
A
  • 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.
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14
Q
  1. What are the 5 impacts of fiscal policy on macroeconomic objectives?
A
  • Affect inflation (contractionary fiscal policy)
  • Economic growth (expansionary)
  • Unemployment (Expansionary)
  • Current account deficit (contractionary to reduce demand for imports)
  • Fiscal policy and the environment.
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15
Q
  1. What is expansionary fiscal policy?
A
  • Fiscal measures designed to stimulate demand in the economy.
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16
Q
  1. What is contractionary fiscal policy?
A
  • Fiscal measures designed to reduce demand in the economy.
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17
Q
  1. What is monetary policy?
A
  • use of interest rates and the money supply to control aggregate demand in the economy.
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18
Q
  1. What is money supply?
A
  • amount of money circulating in the economy.
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19
Q
  1. What is base rate?
A
  • 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.
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20
Q
  1. What are the 4 reasons many different rates of interest?
A
  • 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.
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21
Q
  1. What is mortgage?
A
  • 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
22
Q
  1. What is a rate of interest?
A

Price of borrowing money.

23
Q
  1. What are the 4 roles of a central bank?
A
  • 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
24
Q
  1. What are the 4 impacts of interest rates on macroeconomic objectives?
A
  • 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)
25
Q
  1. What are the 3 factors that have an overall effect on the current balance when monetary policy is changed or implemented?
A
  • Income elasticity of imports
  • Strength of the link between interest rates and exchange rates.
  • The price elasticity of demand for imports and exports.
26
Q
  1. What are the effects on consumers due the mechanism by which interest rate changes?
A

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.

27
Q
  1. What are the effects on firms due to the mechanism by which interest rate changes?
A
  • 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
28
Q
  1. What is quantitative easing?
A
  • 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.
29
Q
  1. What is aggregate supply?
A

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

30
Q
  1. What is supply-side policies?
A

government measures designed to increase supply in the economy.

31
Q
  1. What are the 4 aims of supply-side policies?
A
  • 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.
32
Q
  1. What are the impacts of supply-side policies on productivity?(2)
A
  • improve flexibility on labor
  • Training and education of labor
33
Q
  1. What are the benefits of supply-side policies on total output?
A
  • 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.
34
Q

Name 7 examples of policies used by the governments?

A
  • 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
35
Q

What is offset?

A
  • If something, such as a cost or sum of money, offsets another cost, it reduces or balances it, so the situation remains the same.
36
Q

What is austerity?

A

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

37
Q

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

A
  • Economic growth
  • Reduced Inflation
  • Unemployment down
  • Environment protection
38
Q

What are the 4 possible trade offs?

A
  • Unemployment and inflation
  • Economic growth and Inflation
  • Economic growth and environmental protection
  • Current account on BOP and inflation
39
Q

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

A
  • contractionary fiscal policy.
  • Contractionary monetary policy
40
Q

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

A
  • 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.
41
Q

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

A
  • 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.
42
Q

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

A

supply-side policy.

43
Q

What policy will government use to promote economic growth?

A
  • expansionary fiscal policy
  • Expansionary monetary policy
44
Q

What do you mean by the economy will be overheated?

A
  • 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.
45
Q

What is the possible disadvantage of economic growth?

A
  • overheated economy
    -demand-pull inflation
46
Q

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

A
  • Supply-side policy
47
Q

How does Economic growth affect environmental protection negatively?

A
  • 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.
48
Q

What is the disadvantage of inflation on BOP balance?

A
  • 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.
49
Q

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

A
  • Monetary policy- contractionary
50
Q

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

A
  • Fiscal policy

Economics EDEXCEL IGSCE (13 decks)

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