2.2.4 Government Expenditure (G) Flashcards
What is tax revenue?
Income that is gained by the government by both direct and indirect taxes
What is government expenditure?
The overall public spending by the government
What is a budget deficit?
When government spending exceeds the amount raised through tax
What is a budget surplus?
When government spending is less than what is gained by tax
What is national debt?
Total amount the government owes. An accumulation of the budget deficit
What is the trade cycle?
The fluctuations of economic growth?
How does the trade cycle affect government spending?
In periods of economic growth, expenditure payments reduce due to more people being in employment (therefore more tax) and less people relying on the welfare system
In periods of recession, expenditure payments increase due to the extra costs of the welfare system
What is fiscal policy?
The use of government expenditure and taxation to achieve macroeconomic objectives
How does an increase in government spending lead to a fall in cyclical unemployment?
Government may choose to invest in infrastructure. Will increase demand for jobs. Teachers / building a school. Higher levels of employment lead to increase in disposable income which increases AD in the economy.
How does an increase in government spending lead to higher levels of economic growth?
High levels of spending creates jobs. Increase in disposable income.
Increase in capital spending increases productivity which also increases long term growth. Injection into circular flow of income
How does an increase in government spending increase the rate of inflation.
Government spending is a component of AD. An increase in spending therefore shifts AD to the right. Positive multiplier, leads a bigger proportion of economic growth than the injection that caused it.
How does a budget deficit lead to an increase in economic growth?
Implied low tax and increases spending. Shift AD to the right. Creates a multiplier. Create jobs. More money, more consumption e.c.t.
How does a budget deficit worsen the balance of payments?
Government spending increases jobs and wealth in the economy. Larger disposable incomes leads to an increase in the marginal propensity to import.
Higher government spending can lead to demand pull inflation which makes UK goods less competitive abroad.
How does a budget deficit lead to the crowding out of the public sector?
When a government borrows, it borrows from private banks. If banks lend too much to the government, they have less to lend to the private sector. Increase government spending can decrease investment in the private sector.
