4.5 - Role of the state in the macro economy

Question 1

Capital expenditure

4.5.1 - Public expenditure

Answer 1

Government expenditure on capital items and infrastructure. This spending should generate a future income stream

Question 2

Current expenditure

4.5.1 - Public expenditure

Answer 2

Government expenditure on public sector workers wages, raw materials that are used up immediately, such as school dinners and pharmaceuticals for the NHS. No income stream is generated

Question 3

Crowding in

4.5.1 - Public expenditure

Answer 3

When an increase in government spending/investment leads to an expansion of economic activity (real GDP) which in turn incentivises private sector firms to raise their own levels of capital investment and employment

Question 4

Crowding out

4.5.1 - Public expenditure

Answer 4

The crowding out view is that a rapid growth of government spedning leads to a transfer of scarce productive resources from the private sector to the public sector where productivity might be lower. Can also lead to higher taxes and interest rates which squeezes profits, investment employment in the private sector

Question 5

Debt burden

4.5.1 - Public expenditure

Answer 5

Debt that a business or country has normally expressed as a share of GDP

Question 6

Financial Policy Committee (FPC)

4.5.1 - Public expenditure

Answer 6

The FPC’s main role in the UK is to indentify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system as a whole. The FPC publishes a Financial Stability Report identifying key threats to the sustainability of the UK financial system. The FPC has the power to instruct commercial banks to change their capital reserves (buffers)

Question 7

Financial stability

4.5.1 - Public expenditure

Answer 7

The condition in which the financial system - comprising financial intermediaries, markets and market infrastructures - is capable of withstanding shocks and the unravelling of financial imbalances

Question 8

Fixed interest bonds

4.5.1 - Public expenditure

Answer 8

Government bonds are fixed interest securities. This means that a bond pays a fixed annual interest - this is known as the coupon. The coupon (paid in £s, $s, €s etc.) is fixed but the yield on the bond will vary depending on the market price of a bond

Question 9

Government debt

4.5.1 - Public expenditure

Answer 9

Government debt is also known as public debt, national debt or soverign debt and is money (or credit) owed by a central government to creditors within the country (domestic, or internal debt) as well as to international creditors

Question 10

Prudential Regulation Authority (PRA)

4.5.1 - Public expenditure

Answer 10

The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms. The PRA focuses on the solvency of specific financial markets such as: Insurance providers, Buy-to-let mortgage lenders, Credit unions and other specialist lenders

Question 11

Public sector debt

4.5.1 - Public expenditure

Answer 11

Public sector debt is owed by central and local government and by public (state-owned) corporations

Question 12

Quantitative easing

4.5.1 - Public expenditure

Answer 12

A central bank uses quantitative easing (QE) to increase the base supply of money in the banking system and encourage banks to lend at cheaper interest rates i.e. to small & medium sized businesses

Question 13

Real interest rates

4.5.1 - Public expenditure

Answer 13

The real rate of interest is important to businesses and consumers when making spending and saving decisions. The real rate of return on savings is the money rate of interest minus the rate of inflation. So, if a saver is receiving a money rate of interest 6% but price inflation is running at 3% per year, the real rate of return of these savings is only +3%. Real interest rates become negative when the nominal rate of interst is less than inflation

Question 14

Structural budget deficit

4.5.1 - Public expenditure

Answer 14

The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscial deficit will not disappear when the economy recovers

Question 15

Transfer payments

4.5.1 - Public expenditure

Answer 15

This is simply a redistribution of income and wealth by the government when they make payments to individuals without goods or services being received in return

Question 16

Direct tax

4.5.2 - Taxation

Answer 16

A tax on income and wealth e.g. income tax or corporation tax where the burden of the tax cannot be passed on to someone else

Question 17

Incentives

4.5.2 - Taxation

Answer 17

Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive market to work efficiently economic agents (i.e consumers and producers) must respond to price signals in the market

Question 18

Incidence of a tax

4.5.2 - Taxation

Answer 18

How the final burden of a tax is shared out. If demand for a good is price elastic and a tax is imposed, then the tadx may fall mainly on the producer as they will be unabloe to put prices up without losing a lot of demand

Question 19

Income

4.5.2 - Taxation

Answer 19

Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital

Question 20

Indirect tax

4.5.2 - Taxation

Answer 20

An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value-added tax

Question 21

Laffer Curve

4.5.2 - Taxation

Answer 21

A (supposed) relationship between economic activity and the rate of taxation which suggests there is an optimum tax rate which maximises total tax revenue

Question 22

Progressive tax

4.5.2 - Taxation

Answer 22

With a progressive tax, the marginal rate of tax rises as income rises. I.e as people earn more income, the rate of tax on each extra pound goes up. The causes a rise in the average rate of tax

Question 23

Proportional tax

4.5.2 - Taxation

Answer 23

When the marginal rate of tax is constant leading to a constant average rate of tax

Question 24

Regressive tax

4.5.2 - Taxation

Answer 24

With a regressive tax, the rate of tax paid falls as incomes rise - I.e. the average rate of tax is lower for people on high incomes. Examples: Duties on tabacco and alcohol

Question 25

Tax burden

4.5.2 - Taxation

Answer 25

The tax burden measures total tax revenues as a % of GDP

Question 26

Automatic stabiliser

4.5.3 - Public sector finances

Answer 26

A feature of the tax and transfer system that reduce economic activity during booms and stimulates activity during slumps, but without direct intervention by the government

Question 27

Cyclical budget (fiscal) deficit

4.5.3 - Public sector finances

Answer 27

The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low

Question 28

Debt servicing

4.5.3 - Public sector finances

Answer 28

The repayment of interest and principle to external creditors

Question 29

Debt sustainability

4.5.3 - Public sector finances

Answer 29

The ability to manage debts so they do not grow and impede economic stability/growth

Question 30

Discretionary fiscal policy

4.5.3 - Public sector finances

Answer 30

Deliberate attempts to affect the level and growth of aggregate demand using changes in government spending, direct and indirect taxation and borrowing

Question 31

Fiscal deficit

4.5.3 - Public sector finances

Answer 31

When government expenditure is higher than the revenue from taxes in a given year

Question 32

Inflation expectations

4.5.3 - Public sector finances

Answer 32

Expectations of the future path of consumer price inflation in a country - inflation expectations often influence wage bargaining in the labour market

Question 33

National debt

4.5.3 - Public sector finances

Answer 33

A government’s total outstanding debt - effectively what the goverment still owes from the budget deficits accumulated over time

Question 34

National savings

4.5.3 - Public sector finances

Answer 34

National savings is the total public and private sector saving measured as a share of GDP. Savings is the difference between income and consumption

Question 35

Public sector

4.5.3 - Public sector finances

Answer 35

The public sector is made up of central government, local government and public corporations (state-owned or nationalized industries)

Question 36

Structural budget deficit

4.5.3 - Public sector finances

Answer 36

The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers

Question 37

AAA credit rating

4.5.4 - Macroeconomic policies in a global context

Answer 37

The best credit rating that can be given by credit rating agencies to corporate or government bonds, effectively indicating that the risk of the debt default is negligible

Question 38

Balanced growth

4.5.4 - Macroeconomic policies in a global context

Answer 38

In macroeconomic, balanced growth occurs when output and the capital stock grow at the same rate. Also refers to balanced expansion of components of aggregate demand

Question 39

External shock

4.5.4 - Macroeconomic policies in a global context

Answer 39

An unexpected event beyond the control of the country’s officials that has a large negative impact on its economy

Question 40

Financial shocks

4.5.4 - Macroeconomic policies in a global context

Answer 40

These occur in the global financial system, such as increased stress in the international bank system or financial markets

Question 41

Long run Phillips Curve

4.5.4 - Macroeconomic policies in a global context

Answer 41

The long-run Phillips Curve is assumed to be a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on the rate of unemployment

Question 42

Monetary stability

4.5.4 - Macroeconomic policies in a global context

Answer 42

Monetary stability means stable prices and confidence in the currency. Stable prices are defined by the Government’s inflation targets, which the Bank of England seeks to meet through decisions taken by the Monetary Policy Committee

Question 43

Nominal interest rate

4.5.4 - Macroeconomic policies in a global context

Answer 43

The nominal interest rate is the price of borrowing a unit of domestic currency for some period of time unadjusted for inflation

Question 44

Real interest rate

4.5.4 - Macroeconomic policies in a global context

Answer 44

Real rate of interest = nominal interest rate - rate of inflation. E.g. if infaltion is 2% and the nominal interest rate is 6%, then the real interest rate is +4%

Question 45

Re-balancing

4.5.4 - Macroeconomic policies in a global context

Answer 45

A process of changing the nature of economic growth and development. For example, a country might try to increase reliance on domestic demand (especially from consumers), achieve a more equal income distribution and introduced policies and incentives for environmental sustainabilty

Question 46

Sovereign debt crisis

4.5.4 - Macroeconomic policies in a global context

Answer 46

Broad term for the widespread problem of high government fiscal deficits and rising national debts in many developed countries especially in the vulnerable countries inside the European currency zone

Question 47

Sovereign wealth fund (SWF)

4.5.4 - Macroeconomic policies in a global context

Answer 47

A government or state-run fund usually created by profits from natural resources. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil and gas-rich Middle East and Norway

Question 48

Transfer pricing

4.5.4 - Macroeconomic policies in a global context

Answer 48

The price at which divisions of a company transact with each other, such as the trade of supplies or labour between departments

Question 49

Transnational companies

4.5.4 - Macroeconomic policies in a global context

Answer 49

TNCs base their manufacturing, assembly, research and retail operations in a number of countries

Question 50

Unbalanced economy

4.5.4 - Macroeconomic policies in a global context

Answer 50

Imbalances are a common feature of many modern economies. For example, imbalances between:
1. Savings and investment
2. Domestic and external demand
3. Public and private sector
4. Formal and informal economic activity
5. Balance of payments deficits and surpluses

Question 51

Under-employment

4.5.4 - Macroeconomic policies in a global context

Answer 51

When people want to work full-time but find that they can only get part-time work - the result is a loss of hours that the economy can use