2.2.4 - Government expenditure

Question 1

Is government spending is the largest component of Aggregate Demand?

Answer 1

No

Question 2

An increase in Government spending will increase Aggregate Demand

True or False?

Answer 2

True

Question 3

A budget deficit is where government revenue exceeds government expenditure.

True or False?

Answer 3

False.

A budget deficit occurs when government spending is greater than tax revenues

Question 4

What will the government do in order to increase AD?

Answer 4

The government could inject money into the economy in order to increase AD. This will have a multiplier effect that will help to stimulate the economy.

Government will finance this through revenue from taxation or through government borrowing. The government look to increase spending during a downturn, whilst tax receipts will increase in a boom.

Question 5

What is fiscal policy?

Answer 5

A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.

Question 6

What are merit goods?

Answer 6

These are goods which have positive externalities. These goods will benefit others.

Question 7

What are subsidies?

Answer 7

A subsidy is a form of government intervention, it usually involves a payment by the government to suppliers that reduce their costs of production and encourages them to increase output of a good or service.

Question 8

What are negative externalities?

Answer 8

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs.

For example, cigarettes.

Question 9

What is revenue/current expenditure?

Answer 9

This is money spent on the day-to-day running of the country e.g. wages.

Question 10

What is capital expenditure and what effect does it have on graphs?

Answer 10

The cash spent on investment in a business is normally referred to as “capital expenditure”. This will help shift the LRAS curve to the right and shift the PPF outwards (expansion).

Question 11

What is a budget deficit?

Answer 11

A budget deficit occurs when government spending is greater than tax revenues.

Question 12

What is a budget surplus?

Answer 12

A government runs a budget surplus when total tax revenues exceeds government spending in any given year.

Question 13

When does a balanced budget occur?

Answer 13

This occurs when government expenditure is equal to government revenue e.g. through taxation.

Question 14

What is a recession?

Answer 14

A recession is a significant decline in real economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale and retail sales.

Question 15

What is a boom?

Answer 15

A period characterized by high levels of consumer demand, business confidence, profits and investment at the same time as rising costs, increasing prices and full capacity.

Question 16

When does the government run a budget surplus?

Answer 16

During a boom.

Question 17

When does the government look to run a budget deficit?

Answer 17

During a recession.

Question 18

What would happen if you run a budget deficit over a long period of time?

Answer 18

The original debt have to be paid back at
some point but the debt will have to be serviced i.e. interest has to be paid. This will compound and start to spiral if the government are not careful, potentially impacting on the credit rating of the country

Question 19

What would happen if the government (UK) increases spending and is running a budget deficit during a recession?

Answer 19

There will be an injection into the circular flow of income. There will be a multiplier effect. This will lead to a rightward shift of the AD curve. However, it will lead to an increase in government debt.

Question 20

If the government was in debt why would it be good if they run a budget surplus?

Answer 20

Being in a budget surplus the government will have more tax revenue tha

Question 21

What is a trade deficit?

Answer 21

This occurs when a country imports a gretaer value of goods and services than its exports.

A trade deficit is a net withdrawal from the circular flow of income.

Question 22

What is a trade surplus?

Answer 22

This occurs when a country exports a greater value of goods and services than its imports.

Question 23

What are imports?

Answer 23

Goods bought from another country.

Question 24

What are exports?

Answer 24

Goods sold to another country.

Question 25

Name the 2 main influences on the level of government expenditure.

Answer 25

• The trade cycle

- Fiscal policy

Question 26

What is the definition of a trade cycle?

Answer 26

Variations in the productive capacity of an economy over time.

Question 27

What’s the definition of gross domestic product?

Answer 27

The value of goods and services produced in an economy over a period of time.

Question 28

What is fiscal policy?

Answer 28

A governemnt’s policy regarding taxation and public spending.

Loose
- Increase spending + lower tax revenue

Tight
- Cutting spending + boost tax revenue (slower economy)

Question 29

What’s the golden rule?

Answer 29

This rule states that borrowing on state provided goods goods and services should be over zero of the course of one economic cycle.

Also, states that borrowing is allowed when it finances capital investment.