2.6

Question 1

What is the definition for Macroeconomic objectives?

Answer 1

The goals set by the government which they aim to achieve in order to improve the overall performance of the economy.

Question 2

What are the 7/8 Macroeconomic Objectives?

Answer 2

T-Trade balanced
I- Inflation to be low/stable prices
G-Growth in the economy
E-Employment high
R-Redistribution of Wealth
S-Sustainability, Stability

Question 3

What do each of the Macroeconomic Objectives mean?

Answer 3

T-Trade balanced-Net Exports to be balanced
I- Inflation to be low/stable prices-Aim is 2% for gov
G-Growth in the economy-3/4% growth aim
E-Employment high- low unemployment 4%
R-Redistribution of Wealth- Less income inequality
S-Sustainability, Stability-economic considerations/living standards

Question 4

What is Fiscal Policy?

Answer 4

Involves changes in Government Spending, taxation and borrowing to help achieve some of the micro and macroeconomic objectives of the government.

Question 5

What are the Main Instruments of Fiscal Policy? Explain them?

Answer 5

Government Spending: Welfare benefits and other transactions, current spending on public services such as education, capital spending (such as infrastructure)

Taxation: Indirect Taxes when people spend on goods and services, Direct Taxes on income and wealth

Fiscal Balance (Deficit/Surplus): Budget deficit when G>T, Budget Surplus when T>G, Budget Balance when G=T

Question 6

What are the Key Roles of Fiscal Policy?

Answer 6

-Correcting market failures
-Subsidies to help people afford social housing
-Stabilizing and Stimulating AD
-Improving the economies supply-side potential
-Responding to crises caused by external shocks

Question 7

What are the main three types of government spending?

Answer 7

Transfer Payments-Welfare spending
Recurring Spending-Public Services
Investment Projects-State Investment

Question 8

What is Taxation?

Answer 8

A process by which governments collect revenue from individuals, businesses, and other entities to finance public services, infrastructure and various government functions

Question 9

What are the main reasons for Taxation?

Answer 9

-Revenue Generation: Fund Gov programmes and Services e.g. education, infrastructure and social welfare
-Redistribution of Income and wealth: Progressive Tax (higher for those with a higher income)-balance out more
-Economic Stabilization: Reducing tax during economic downturns can increase spending
-Regulation and Incentives: Higher taxes on e.g. tobacco discourage consumption
-Public Goods-Finance Public goods which are needed like streetlights

Question 10

What is the definition of Equity?

Answer 10

Taxation should be fair and equitable. Pay same amount of tax as people with similar financial capacities.

Question 11

What is the ability-to-pay principle for tax?

Answer 11

Suggests that individuals or entities with a greater ability to pay taxes should contribute a larger share of their income to the government in the form of taxes. This is closely linked with progressive tax

Question 12

What is direct tax on?

Answer 12

On Income, Wealth and Profit. Include Income Tax, Inheritance Tax, national insurance, Capital gains Tax and Corporation Tax. The burden of a direct Tax can’t be passed on.

Question 13

What is an Indirect Tax on?

Answer 13

Taxes on spending. e.g. excess duties on fuel, cigarettes and alcohol. Products may be able to pass on an indirect tax.

Question 14

What is the tax base?

Answer 14

The base of what is taxed and who pays tax.

Question 15

Who pays tax and what is taxed?

Answer 15

Businesses and Households pay tax. The things that are taxed are Income, Wealth, Spending, Pollution and Financial Transactions

Question 16

What is the Tax Burden?

Answer 16

Total amount of taxes collected by the government as a percentage of the GDP or national income. It provides insights into the overall level of taxation in an economy.

Question 17

Is National Insurance and Indirect or Direct Tax?

Answer 17

Direct Tax

Question 18

What is National Insurance?

Answer 18

A Direct Tax introduced in 1911 and its paid by employees, employers and are used to help fund state pension and welfare benefits such as JSA and Sick pay.

Question 19

What is Monetary Policy?

Answer 19

Monetary Policy involves changes in interest rates, the supply of money and credit and exchange rates by the central bank to influence the macro-economy and achieve target outcomes

Question 20

What can the central bank do to interest rates?

Answer 20

Can set official monetary policy interest rates, which then affect the interest rates offered by banks to borrowers and savers. Lowering interest rates can stimulate borrowing and spending, while raising them can reduce borrowing and spending to control inflation.

Question 21

What’s Symmetrical range for interest rates?

Answer 21

Could be target of 2% with 1% allowance each side.

Question 22

What’s Asymmetrical range for interest rates?

Answer 22

Could be target of 2% and one side could be 4% whereas the other is 1% so different range on either side

Question 23

What is the central bank called in England and when did it become independent?

Answer 23

Bank of England became independent in 1997.

Question 24

What is Monetary Stability?

Answer 24

Means a lengthy period of stable prices and market confidence in the external value of a currency. Stable prices are defined by the inflation target.

Question 25

What are the 3 types of policies?

Answer 25

Fiscal Policy (AD), Monetary Policy (AD), Supply-side Policies (LRAS)

Question 26

What is Fiscal Policy?

Answer 26

Manipulating Tax Revenue and Government Spending to influence AD

Question 27

What is Current Expenditure?

Answer 27

Spending on day-to-day running of public services. e.g. Teachers pay

Question 28

What is Capital Expenditure?

Answer 28

Spending on Infrastructure. e.g. new schools/roads

Question 29

What are Transfer Payments?

Answer 29

One-way spending on aid and welfare

Question 30

What’s the equation for Fiscal Balance?

Answer 30

Total Tax Revenue- Total Expenditure

Question 31

What is National Debt?

Answer 31

The Government’s stock of outstanding debt. The national Debt can be expressed in billions of pounds, or as a percentage of national income.

Question 32

What is National Debt a result of?

Answer 32

The result of a country consistently running budget deficits, where the government’s expenditure exceeds its revenue. When this happens the government borrows money to cover the deficit leading to and increased debt

Question 33

How is a budget deficit financed?

Answer 33

-Issuing Government Bonds
-International Borrowing
-Central Bank Financing

Question 34

What is Quantitative Easing?

Answer 34

A Central Bank uses QE to increase the supply of money in the banking system designed to encourage commercial banks to lend cheaper interest rates to small and medium sized businesses. Used to stimulate AD

Question 35

Is Quantitative Easing a form of Expansionary or Contractionary Monetary Policy?

Answer 35

Expansionary Monetary Policy

Question 36

What are Bank Reserve Requirements?

Answer 36

Minimum amount of funds that banks must keep on hand as cash or in deposits at the central bank. This ensures the bank has enough money to meet demands of their countries and helps to prevent bank runs