2.5 - Government and the Economy Flashcards
How does government spending influence the economy?
Government spending injects money into the economy by funding social services, health, and education, which impacts businesses and consumers.
How does government spending on welfare benefits affect businesses?
Increasing welfare benefits puts more money in consumers’ hands, boosting demand for goods and services, while decreasing them reduces consumer spending.
How does government spending on infrastructure impact businesses?
Improves supply routes, reducing costs and increasing efficiency.
Enhances customer access to businesses, potentially increasing demand.
How does taxation affect economic activity?
Higher taxes reduce disposable income and business profits, discouraging spending and investment, while lower taxes increase spending and encourage growth.
What is income tax, and how does it affect businesses?
A tax on individual earnings—higher rates reduce consumer spending, lowering business sales, while lower rates boost spending, increasing profits.
How are businesses taxed?
Sole traders & partnerships pay income tax.
Limited companies pay corporation tax.
Business rate tax is based on property value (higher in the South, impacting competitiveness).
How do tax rates influence business decisions?
Businesses may relocate, lease rather than buy vehicles, or adjust pricing to minimize tax burdens.
What are indirect taxes?
Taxes on spending, such as VAT and duties on pollution, tobacco, and alcohol.
How does taxation impact economic activity?
High tax rates discourage spending and investment.
Low tax rates encourage growth and expansion.
Luxury goods are more affected by tax increases than staple goods due to their high-income elasticity of demand.
What are the four stages of the business cycle?
Boom – High GDP, full production, rising wages, inflationary pressures.
Recession – Falling incomes, reduced demand, lower business confidence.
Slump – Low GDP, high unemployment, business closures.
Recovery – Rising production and employment, increasing consumer spending.
How does the business cycle affect different industries?
Luxury goods (income elastic) see high demand in booms and sharp declines in recessions.
Necessities (income inelastic) are less affected by economic changes.
How should businesses react to different phases of the business cycle?
Boom: Raise prices to maximize profitability.
Prolonged boom: Expand production and develop new products.
Recession: Cut costs, lay off workers, and maximize efficiency.
Local recession: Expand marketing nationally or online.
National recession: Target international markets.
Severe national slump: Consider relocating operations abroad.
How do global economic conditions affect businesses?
Global upswings create growth opportunities, while global recessions harm businesses worldwide.
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on specific markets, individual consumers, and firms.
Macroeconomics looks at the economy as a whole, including all businesses and consumers.
How does microeconomic uncertainty affect businesses?
A new competitor may take market share.
A raw material shortage can raise costs and disrupt supply chains.
How does macroeconomic uncertainty affect businesses?
Government changes may alter spending policies.
Trade agreement changes can impact exchange rates and international trade.
New business laws create uncertainty about costs, demand, and compliance requirements.
How can businesses prepare for economic uncertainty?
By using economic forecasting and scenario planning to predict changes and develop strategic responses.
