2.2.3 Government Spending

Question 1

Define government spending

Answer 1

Tax revenue and borrowing spent by the government for the benefit of the country’s citizens

Question 2

What are the three types of government spending

Answer 2

• transfer payments/ welfare spending - current spending/public services
• capital spending/state investment

Question 3

Define transfer payments

Answer 3

A redistribution of income and wealth made without goods or services being received in return

Question 4

Which is the biggest area in government spending

Answer 4

Social protection

Question 5

Give examples of current spending

Answer 5

• salaries of NHS employees
• drugs used in healthcare

Question 6

Give examples of capital spending

Answer 6

• construction of new motorways and bridges
• new equipment in the NHS

Question 7

What do the precise levels of government spending and the areas of government spending vary according to

Answer 7

-the governments reading of economic conditions
- the varying priorities of the government of the day

Question 8

What is government spending influenced by

Answer 8

The trade cycle

Question 9

What happens to government spending and tax revenue during a recession

Answer 9

Government spending rises and tax revenue decreases

Question 10

Why does government spending rise during a recession

Answer 10

Automatic stabiliser mean that the government will pay more in unemployment benefits helping to counter the fall in demand

Question 11

Why does tax revenue decrease during a recession

Answer 11

The government will receive less on tax receipts as unemployment has increased so there may be fewer households earning an income/less spending, as well as firms generating lower profits

Question 12

Define automatic stabilisers

Answer 12

Changes in government spending and tax revenue that take place automatically in response to the economic cycle

Question 13

What happens to government spending and tax revenue during a boom

Answer 13

Government spending will fall and tax revenue will rise

Question 14

Why does government spending fall during a boom

Answer 14

Government spending will fall as they are paying less in unemployment benefits as there is higher demand for labour so perhaps higher incomes and employment

Question 15

Why does tax revenue rise during a boom

Answer 15

Greater tax revenue as unemployment has fallen so there may be more households earning an income/more spending, as well as firms generating higher profits

Question 16

What is a balanced budget

Answer 16

Government spending = tax revenue

Question 17

What is a budget deficit

Answer 17

Government spending > tax revenue and borrowing

Question 18

What is a budget surplus

Answer 18

Government spending < tax revenue

Question 19

What are the four ways government spending impact the economy

Answer 19

• increase AD
• multiplier effect
• offsetting economic declines
• infrastructure

Question 20

Explain how government spending increase AD

Answer 20

Higher government spending on goods, services, infrastructure projects, or social welfare programmes, injects money directly into the economy

Question 21

Explain how government spending causes the multiplier effect

Answer 21

Higher government spending can lead to a larger final change in real GDP

Question 22

How does government spending offset economic declines

Answer 22

During a recession, by increasing its own spending, the government can help stimulate economic activity, preventing a more severe downturn
This is known as a fiscal stimulus

Question 23

How does government spending impact infrastructure

Answer 23

Government spending on infrastructure projects not only creates immediate demand for construction related activities but can lead to increased business investment and productivity- boosting productive potential

Question 24

What are the affects of the government reducing income tax

Answer 24

Greater disposable income, increased consumption, higher AD