4.5

Question 1

Current expenditure

Answer 1

Goods and services for current use to directly satisfy collective needs of the member of the community

E.g. civil servant, police, doctor, teacher
-stimulates economic spending (lots of people employed by the public sector)

Question 2

Capital expenditure

Answer 2

Gov spending on goods and services intended to create future benefits

E.g. infrastructure investment, health, communication
-improved efficiency
-economic growth

Question 3

Transfer pricing

Answer 3

Spending that does not involve transactions of goods and services but instead represents transfer of money

E.g. social security payment, pensions, unemployment benefits
-biggest proportion of gov spending

Question 4

Why is gov spending needed

Answer 4

1. To provide a social efficient level of public and merit goods and overcome market failure
2. to provide a safety net system of welfare benefits to supplement the incomes of the poorest society
3. to provide necessary infrastructure via capital spending on transport, education and health facilities. An important components of a countries long run agate supply.
4. AS means of managing the level and growth of AD to meet macro economic policy objectives

Question 5

The sig of gov spending

Answer 5

Productivity
Growth
Living standards
Crowding out
Levels of taxation
Inequality

Question 6

Key roles of taxation

Answer 6

1 financing key areas of gov spending
2 altering the distribution of income and wealth
3 proving a welfare state safety net for families
4 managing the macroeconomic cycle
5 improving country’s comp
6 tackle market failure through intervention

Question 7

Direct tax

Answer 7

Is added on income, wealth and profit. Direct taxes include income tax, inheritance tax, national insurance contributions, capital gains tax and corporate tax

Question 8

Indirect tax

Answer 8

Taxes on spending
E.g. excise duties on fuel, cigarettes and alcohol and value added tax (VAT) on many different goods and services

Question 9

The impact of tax (3)

Answer 9

Progressive
Proportional
Regressive

Question 10

Progressive

Answer 10

The marginal rate of tax rise as income rise
I.e. as people earn more, the rate of tax on each extra Lund increase. This causes a rise in average rate of tax

Question 11

Proportional

Answer 11

The marginal rate of tax is constant

Question 12

Regressive tax

Answer 12

The rate of tax falls as incomes rise
I.e. the average rate of tax is lower for people of higher incomes

Question 13

Impact of tax cuts

Answer 13

• indirect tax do not discourage savings and investment
• lower direct tax leads to more jobs, investment and increased productivity
• FDI is higher with lower corporation tax
• increased VAT leads to price increases
• lower direct tax increases incentives and leads to more inequality

Question 14

Incentives to work

Answer 14

Higher marginal rates of tax may discourage people from working as they will gain less of what they have earned. Free market economists believe lower taxes will lead to individual working long hours, accepting promotions and joining the workforce
- however it can be argued people would work longer hours with higher taxes in order to maintain their incomes

Question 15

Income distribution

Answer 15

-A progressive tax system will increase equality
-some direct taxes are more progressive than indirect taxes, a more from direct to indirect taxes will increase inequality

Question 16

Output and employment

Answer 16

• direct taxes affect AD: a fall in direct taxes will cause a rise in AD
• indirect taxes effect SRAS: a fall in indirect taxes will increase SRAS
  -some taxes can affect LRAS because of their impact on work incentives or investment

Question 17

Inflation (price level)

Answer 17

• indirect taxes could cause cost push inflation
  -direct taxes will impact AD and could result in demand pull inflation

Question 18

Trade balance

Answer 18

-Taxes could be imposed on imports into a country
These are tariffs and they make it more expensive to import goods which should in theory improve the trade balance
- however other countries might retaliate so exports might decrease as well

Question 19

FDI

Answer 19

-gov can provide a comp tax environment to encourage FDI, so that the market is profitable, fair and gas macroeconomic stability
-taxes should also be consistent and predictable, so they are bus friendly. This would encourage FDI flows

Question 20

The laffer curve

Answer 20

Is the relationship between economic activity and the rate of a taxation, which suggests is an optimum tax rate which maximise total tax revenue

Question 21

What is national debt?

Answer 21

-The amount of money owed by the UK government
-that has built up for many years by many government, the running total

Question 22

What is budget deficit

Answer 22

The government spends more than tax collected (per year)

Question 23

Discretionary fiscal policy

Answer 23

The government makes changes to tax rate and/or levels of governments spending through decisions made by the treasury when setting the budget

Question 24

Automatic fiscal policy

Answer 24

Because when in our session, a government automatically spends more because there are more claiming unemployment benefits

Question 25

Causes of fiscal deficit

Answer 25

-Policies-tax cut and increases to public spending are used by politician to increase their support before elections
-Demand management-Keynesian fiscal policy suggests that deficit can boost demand during a recession
-Cyclical factors-during a recession, taxation can drop rapidly whilst government spending can increase
-Interest payments-high total debt can result in high interest payments, which must be taken from current taxes
-Government inefficiency-tax avoidance can also add to the deficit

Question 26

Causes of fiscal surplus

Answer 26

-Strong attack revenues- e.g. high unemployment, rising incomes or taxes of profit/rents from natural resource exports
-strong, economic growth-when direct and indirect tax revenues grow whilst welfare spending drops (as unemployment declines)
-fiscal austerity- as a result of a long period of high tax rate and deeper cut in state spending

Question 27

The impact of fiscal deficit

Answer 27

-higher taxes-in order to cover interest payments and pay off the debt thereby resulting in less economic competition
-higher interest rates-increasing borrowing by the government will increase market interest rates, thereby reducing business investments
-Crowding out-taking investment and loans away from private institutions, and towards the government instead of reducing business investment
-Wealth affect-interest payments are funded by taxes and then paid to wealthy people who have loaned money to the government increases inequality
-Currency crisis-when a country runs up, too much debt and foreign investors are unwilling to lend more. This leads to a fall in the value of the currency.

Question 28

Economic shock

Answer 28

-shocks are events that are unexpected and bring out change in real economic growth, inflation and unemployment
-less developed economies most at risk because less diversified economy with narrow range of production and export industries

Question 29

demand side shocks

Answer 29

-affect one or more off the components of AD
e.g. financial crisis causing bank lending/credit to fall

Question 30

supply side shocks

Answer 30

-affect short run AS and can also affect a country ling run productive potential
e.g. rise in oil and gas

Question 31

shock absorbers

Answer 31

monetary policy- B of E might cut interest rates to 0% or expand their OE program

Final policy- Gov might allow automatic stabilisers to work and relax fiscal austerity plans

Flexible labour markets-UK has relatively flexible jobs market-real wages less rigid than 20 years ago

Flexible product market-UK bus need to look to export to other fast growing regions of the world

Question 32

main shocks

Answer 32

-world demand shocks
-world supply/price shocks
-world financial shock

-not all shocks are neg
can be pos shocks e.g. production technologies, newly trade, investment deal, political reforms