2.2.4 Governemnt Expenidture

Question 1

Progressive tax

Answer 1

A tax that takes a higher proportion of income as income rises e.g. income tax

Question 2

Regressive tax

Answer 2

A tax that takes a higher proportion of income as income falls e.g. VAT, alcohol duty, fuel duty
Often indirect tax

Question 3

Proportional tax

Answer 3

A tax that takes the same proportion of income regardless of the level of income

Question 4

Purpose of taxation

Answer 4

Raise tax revenue to finance government spending
Manage demand in the economy to help meet macroeconomic objectives
Redistribute income and wealth
Address market failure and environmental targets

Question 5

Fiscal policy

Answer 5

Taxation and spending measures that help guide the economy and support the government in achieving their objectives e.g. expansionary and contractionary influenced by the state of the economy

Involved the use of government spending, direct and indirect taxation and government borrowing or affect the level and growth of AD, output and jobs

Question 6

Purpose of fiscal policy

Answer 6

Allows manipulation of the level of AD
Used to change spending on goods and services
Redistribution of income and wealth
Microeconomic interventions to correct market failures such as pollution
Respond to economic shocks (could be a result of systemic risk)

Question 7

Discretionary fiscal policy

Answer 7

One-off policy changes for example to impact aggregate demand
E.g. the furlough scheme

Question 8

Automatic stabilisers

Answer 8

Policies which offset fluctuations in the economy without the need for government intervention

Question 9

Effectiveness of automatic stabilisers

Answer 9

Depends on if government allows stabilisers to operate fully- need to avoid fiscal austerity
Depends on how generous the welfare system is
Depends on marginal propensity to consume

Question 10

Expansionary fiscal policy

Answer 10

Used during times of economic decline, involves spending more on transfer payments or reducing taxes and increases the size of the budget deficit

Question 11

Contractionary fiscal policy

Answer 11

Used during periods of economic growth, involved decreasing expenditure on purchases and transfer payments or increasing tax rates hence reducing the size of the budget deficit

Question 12

Fiscal policy

Answer 12

Any policy relating to government spending, tax or borrowing
Demand
Also affects LRAS (Long Run Aggregate Supply) as can increase long term supply capacity so can be called fiscal supply-side policy
E.g. Increased government spending on broadband infrastructure, raising national insurance contributions, reducing the rate of VAT

Question 13

Monetary policy

Answer 13

Any policy relating to interest rates, the money supply and or managing the exchange rate
Central bank led
Demand
E.g. devaluing the exchange rate, raising the base of interest, increasing the money supply in the economy

Question 14

Supply side policy

Answer 14

Any policy intending to increase the productive potential of the economy e.h. Shifts LRAS to the right
Free market vs intervention

E.g. Deregulation of transport industries, reducing amount of paperwork to set up a business, lowering the rate of corporation tax( also FP)

Question 15

Public sector

Answer 15

the part of an economy that is controlled by the government, not profit driven

Question 16

Types of government spending

Answer 16

-Transfer payments (social welfare- there is no consequential increase in total output or increase in productivity)
-Current spending (recurring spending on public services, day-to-day)
-Capital investment spending (state investment)

Question 17

Examples of transfer payments

Answer 17

Job seekers allowance or tax credits (financial incentive for married couples, pay less tax as get money back from tax paid)

Question 18

Examples of current spending

Answer 18

Current government spending on public services
- Salaries of NHS employees
-Drugs used in healthcare
-Road maintenance
-Army logistics supplies

Question 19

Examples of capital spending

Answer 19

-New motorways and bridges (and train lines)
- New equipment for the NHS
- Flood defence schemes
-Defence equipment

Question 20

Budget (fiscal) deficit

Answer 20

Government spending is greater than tax revenue

Question 21

Cyclical fiscal deficit

Answer 21

The size of the deficit is influence by the state of the economy
- movements/ correlation with economic cycle
-in a boom there will be high tax receipts and low spending on unemployment (higher VAT and corporation tax), reducing the size of the cyclical deficit

Question 22

Direct taxation

Answer 22

Taxes on income, profit and wealth paid directly by the bearer (e.g. income tax is paid directly by you to the government so you never receive that money)

Question 23

Indirect taxation

Answer 23

Tax on expenditure levied onto goods and services and paid by the supplier e.g. VAT

Question 24

National debt

Answer 24

The total amount owed by the government which has accumulated over the years

Question 25

Structural fiscal deficit

Answer 25

The part of the deficit that is not related to the state of the economy- does not disappear (or get smaller) when the economy recovers