2.2.4 Government Spending

Question 1

What are the main areas of government spending, each year

Answer 1

social protection, health, and education

Question 2

What is a budget deficit

Answer 2

Government spending exceeds tax revenue earned, this means that the government must have borrowed in order to finance its spending

Question 3

What is a budget surplus

Answer 3

Government spending is less than tax revenue earned; the Government can pay back some of its debts

Question 4

What is a cyclic budget deficit

Answer 4

a situation where Government spending is greater than tax revenue because the economy is in a recession

Due to: fewer taxes as less people are in work, and increased spending through increased benefits

Question 5

What is a structural budget deficit

Answer 5

a situation where Government spending is greater than tax revenue, but not related to the economic cycle

Question 6

How does the Government budget link to the trade (business) cycle

Answer 6

More revenue from income tax,

corporation tax,

an indirect tax (VAT)

capital gains (rising GDP meaning an increase in bought assets)

Question 7

In a boom, Government spending maybe less because

Answer 7

fewer unemployment benefits

People choosing private services (i.e. private healthcare)

Crime levels tend to be lower, so less money on policing

Question 8

Top 5 areas of Government spending

Answer 8

Total social protection, pension, benefits

Health

Education

Defense

Debt interest

Question 9

Top 5 areas of Taxations for the government

Answer 9

Income tax

National Insurance

VAT

Property taxes

Corporation tax

Question 10

5 key roles of fiscal policy

Answer 10

• To Provide public goods such as policing and defense
• Increase the provision of merit goods such as education and health
• To invest in infrastructures such as roads and rail networks
• Redistribute income from rich to poor
• To manage demand in the economy

Question 11

What are the 3 key things the fiscal policy does

Answer 11

• Used to change the pattern of spending on goods and services
• Impacts on the levels of growth of aggregate demand, output, and jobs
• Manipulating AD with fiscal policy is demand management

Question 12

Demand management:

What is the Expansionary fiscal policy

Answer 12

when the government increases Government Spending and reduce taxation to boost the economy

This will lead to a budget deficit

Question 13

Demand management:

Deflationary fiscal policy

Answer 13

A deflationary fiscal policy happens if taxes are increased

and spending is reduced.

This may lead to a budget surplus

Question 14

What happens if the government increases spending when there is full employment

Answer 14

The government will take away some capital like labour, from other parts of the economy i.e private sector.

GDP wouldn’t increase, because there is already full employment

Question 15

What is crowding out

Answer 15

Government spending would over compete with private spending and investment

Question 16

What is the fiscal multiplier

Answer 16

More government spending leads to more employment and more consumption spending

Question 17

What is current Government spending

Answer 17

– involves recurring spending on providing public services including the pay of teachers and nurses and civil servants.

Question 18

What is capital spending

Answer 18

projects to provide new public infrastructure

Question 19

How does Government spending affect household income

Answer 19

• Direct effects of welfare spending such as the state pension, unemployment benefits and other benefits
• Government spending creates jobs (multiplier effect)
• Government subsidies may help to keep prices lower

Question 20

Describe the AD diagram to show expansionary fiscal policy

Answer 20

Question 21

Describe the AS diagram to show deflationary fiscal policy

Answer 21