3.2.3-How the Government Manages the Economy

Question 1

What is a Balanced Budget?

Answer 1

Government income = Government expenditure

Question 2

What is a Budget?

Answer 2

Government income & government expenditure for a 1 year period

Question 3

What is a Buget Deficit?

Answer 3

Where government spending exceeds tax revenue

Question 4

What is a Budget Surplus?

Answer 4

Where tax revenue is greater than government spending

Question 5

What is Contractionary?

Answer 5

Attempts to slow down the economy, not to make it smaller

Question 6

What are Direct Taxes?

Answer 6

Taxation on income and wealth

Question 7

What is Expansionary?

Answer 7

Attempts to stimulate/grow the economy

Question 8

What is Fiscal Policy?

Answer 8

Use of taxation and government spending to influence the economy

Question 9

What is the Government Budget?

Answer 9

Government’s plan for spending and tax

Question 10

What is National Debt?

Answer 10

The cumulative amount of money owed by a country

Question 11

What does Stimulate mean?

Answer 11

Encourage economic activity

Question 12

What is the Base Rate?

Answer 12

The interest rate set by the Bank of England that influences market interest rates

Question 13

What is Monetary Policy?

Answer 13

Central bank’s use of interest rates, money supply or exchange rates to influence the level of aggregate demand in the economy

Question 14

What is Money Supply?

Answer 14

The sum of the notes, coins and deposit in banks & financial institutions

Question 15

What is Deregulation?

Answer 15

The removal of regulations or restrictions on a particular business

Question 16

What is Privatisation?

Answer 16

The process of transferring public sector organisations to the private sector

Question 17

What is are Supply Side Policies?

Answer 17

Government policy to enable an increase in the quantity or quality of goods and services produced in an economy

Question 18

What are Trade Unions?

Answer 18

An organised association of workers formed to protect and further their rights and welfare

Question 19

What are the largest areas of Government spending?

Answer 19

• Social protection
• Healthcare
• Education
• Defence
• Transport

Question 20

What are the main sources of taxation?

Answer 20

• Income tax
• National Insurance contributions
• VAT

Question 21

Why would government impose taxation?

Answer 21

• To pay for public sector services
• To discourage certain activities
• Redistribution of income

Question 22

What are some examples of direct taxes?

Answer 22

• Income tax
• National insurance
• Corporation tax
• Capital gains tax

Question 23

What are some examples of indirect taxes?

Answer 23

• VAT
• Council tax
• Stamp duties
• Business rates
• Inheritance tax

Question 24

What are the arguments for using indirect taxation?

Answer 24

• Changes in indirect taxes can change the pattern of demand by varying relative prices
• Indirect taxes can be used as a means of making the pollutor pay and ‘internalising external costs’
• Indirect taxes are less likely to distort the choices between work and leisure
• Indirect taxes can be changed more easily than direct taxes
• Indirect taxes are less easy to avoid
• Indirect taxes provide an incentive to save savings and provide finance for investment

Question 25

What are the arguments against using indirect taxation?

Answer 25

• Many indirect taxes are regressive-make distribution of income more unequal
• Higher indirect taxes can cause cost-push inflation
• If indirect taxes are too high-creates an incentive to avoid indirect taxes through boot-legging
• Revenue from indirect taxes can be uncertain

Question 26

Who sets interest rates?

Answer 26

The central banks

Question 27

What is the main interest also called?

Answer 27

Tbe bank/base rate

Question 28

What are the different central banks?

Answer 28

• Bank of England (UK)
• European Central Bank (EU)
• Federal Reserve (US)

Question 29

What part of the BOE sets interest rates?

Answer 29

The MPC (monetary policy commitee)

Question 30

What does the Base rate affect?

Answer 30

The interest rates in which money is lended to commercial banks

Question 31

What can changes in interest rate affect?

Answer 31

Aggregate demand

Question 32

What does lowering the base rate accomplish?

Answer 32

Expansionary monetary policy

Question 33

What does the government use interest rates to affect?

Answer 33

• Inflation
• Money supply
• Exchange rates

Question 34

What is quantatitive easing?

Answer 34

The government buying back government bonds from banks releasing money into the economy and stimulating growth

Question 35

What is the main issue with quantitive easing?

Answer 35

Banks may not lend out money they are given

Question 36

What are different impacts of Supply Side policies?

Answer 36

• Anti trade union legislation to help labour markets work more freely increasing labour productivity
• Increase in quantity of education increasing quality of workforce and making markets more competitive
• Increasing total output in areas of the economy

Question 37

What are different examples of supply side policies?

Answer 37

• Privatisation
• Deregulation
• Education and training
• Policies to boost Regions with high Unemployment
• Infrastructure
• Lower business taxes
• Lower income taxes
• Reducing benefits
• Investment in infrastructure
• Restricting power of trade unions

Question 38

What are the limitations of supply-side policies

Answer 38

• Infrastructure takes time to construct and costs a lot of tax-payers money
• Training and education takes a long time to filter through
• Deregulation-firms will take time to be established