2.2.4 - Government expenditure

Question 1

What are the 4 stages of the business cycle?

Answer 1

1 - boom/peak
2 - downturn
3 - recession
4 - recovery/expansion

Question 2

What is on the axis of the business cycle?

Answer 2

x-axis = time
y-axis = real output

Question 3

What happens in stage 1 of the business cycle - boom/peak?

Answer 3

National income is high, economy at full employment, consumption and investment are high, tax revenues are high. Wages and profits will be increasing. There may be inflationary pressure.

Question 4

What happens in stage 2 of the business cycle - downturn?

Answer 4

Output and income fall, consumption and investment fall, tax revenues decrease, governments expenditure rises, unemployment rises. Imports decline, less inflationary pressure.

Question 5

What happens in stage 3 of the business cycle - recession?

Answer 5

Low economic activity. High unemployment; consumption, investment and imports are low. Few inflationary pressures, prices may be falling.

Question 6

What happen in stage 4 of the business cycle - recovery?

Answer 6

National income and output begin to increase. Unemployment falls. Consumption, investment and imports begin to rise. Inflationary pressures begin to mount.

Question 7

How is government spending (G) affected the the business cycle?

Answer 7

Boom - low g due to high income and employment
Downturn - increased g due to a rise in unemployment
Recession - g may be high due to high unemployment
Recovery - g would begin to fall, unemployment levels are decreasing.

Question 8

How does the business cycle affects taxes (T)?

Answer 8

Boom - high tax revenue due to high income
Downturn - tax revenues decrease
Recession - low tax revenue
Recovery - tax revenues increase

Question 9

How does fiscal policy affect government spending?

Answer 9

Some government spending may be fixed from year to year eg. school funding, pensions. However, governments can decide how much they spend each year in their budget. Their fiscal policy describes decisions about taxation and spending, depends on priorities of the government.

Question 10

How does age distribution influence government expenditure?

Answer 10

An ageing population leads to increased government expenditure on pensions, social care etc. A younger population may lead to increased spending on education.