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A-Level Economics Edexcel > 4.5 Role of the state in the Macroeconomy > Flashcards

4.5 Role of the state in the Macroeconomy Flashcards

1
Q

what is public expenditure?

A
  • represents a significant portion of AD
  • the expenditure can be broken down into three categories
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2
Q

What are the 3 types of public expenditure?

A
  • current expenditure
  • capital expenditure
  • transfer paymentsWhat area
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3
Q

What is Current expenditure?

A
  • the daily payments required to run the government & public sector
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4
Q

What is a common example of current expenditure?

A

the wages and salaries of public employees
- such as teachers, police, military personnel etc

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5
Q

what is Capital expenditure

A

investments in infrastructure and capital equipment

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6
Q

What is a common example of capital expenditures?

A
  • high speed rail projects
  • new hospitals + schools
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7
Q

What are transfer payments?

A

payments made by the government for which no goods/services are exchanged for
- this type of government spending does not contribute to GDP as income is only transferred from one group of people to another

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8
Q

What are examples of transfer payments?

A
  • unemployment benefits
  • disability payments
  • subsidies to producers and consumers
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9
Q

What are the major areas of expenditure

A
  • pensions
  • healthcare
  • welfare
  • education
  • interest repayments
  • defence
  • protection
  • transport
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10
Q

What are the main factors affecting the size and composition of public expenditure

A
  • changing incomes
  • changing age distributions
  • changing expectations
  • the global financial crisis of 2008
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11
Q

why does an increase incomes effect the size and composition of public expenditure?

A

LIC’s have low tax revenue leading to low government expenditure
-as incomes increase in an economy increase, government tax revenue increases allowing them to increase their expenditure

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12
Q

why does a decrease in incomes effect the size and composition of public expenditure?

A
  • As incomes increase, citizens demand a higher quantity and quality of government services
    -thus they are very income elastic
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13
Q

why do changing age distributions effect the size and composition of public expenditure?

A

ageing population and increased life expectancy cause government spending on pensions and healthcare to increase to support this elder population

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14
Q

why do changing expectations effect the size and composition of public expenditure?

A

pressure is put on government to change substance and delivery mechanisms of services to keep up with increased expectations
- results in increased spending through adjusting to technology advances

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15
Q

why did the global financial crisis of 2008 effect the size and composition of public expenditure?

A
  • UK borrowing increased to facilitate the government spending required to avoid a long lasting depression
  • the borrowing had to be repaid with interest, the government cut expenditure and raised taxes to facilitate this.
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16
Q

What is impacted by public expenditure?

A
  • productivity and growth
  • living standards
  • crowding out
  • level of taxation
  • equality
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17
Q

How does public expenditure impact productivity and growth?

A
  • some argue govt spending is wasteful and causes ineffiency
  • alternatively they provide infrastructure such as roads
  • education creates human capital necessary for growth
  • through the spending the multiplier effect is created
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18
Q

how does public expenditure impact living standards?

A
  • increase in g leads to increase in ad thus increase in real GDP; thus macro objective
  • if increase in education healthcare etc, then increase in LRAS
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19
Q

How does public expenditure impact crowding out?

A
  • government require funding for the increased expenditure
  • this may come from government bonds
  • the government increase interest rates to increase incentive for the bonds to be bough
  • high interest rates cause a decrease in. borrowing for firms
  • thus a decrease in capital investments.
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20
Q

how is the level of taxation impacted by public expenditure?

A
  • if goc spending is high, levels pf tex must be high for spending to be sustainable.
  • oil rich countries tend to be an exception as revenue from oil can pay for most government spending
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21
Q

How is Equality impacted by public expenditure?

A

spending should increase equality as it
- leads to redistribution
- provides a minimum standard of living
- ensures everyone has access to basic goods

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22
Q

What are the 3 tax system classifications?

A
  • progressive,
  • proportional
  • regressive
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23
Q

What is a progressive tax system?

A

as incomes rises, a larger percentage of income paid is in tax

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24
Q

What is regressive tax system?

A

as incomes rise, a smaller percentage of income is paid in tax
- usually have a big impact on low- income households

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25
Q

What is proportional tax system?

A

the percentage of income paid in tax is constant, no matter what the level of income

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26
Q

What could economic tax changes impact?

A
  • incentive to work
  • tax revenues
  • income distribution
  • real output employment
  • average price level
  • the trade balance
  • flows foreign direct investment (FDI)
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27
Q

What is the impact on the incentive to work by taxes?

A
  • the higher the tax rate the lower the incentive for the unemployed to seek work
28
Q

What is the laffer curve?

A

illustrates the relationship between increasing tax rates and the level of government revenues recieved

29
Q

What is the impact on the tax revenues by taxes?

A
  • as tax rates increases a point is reached where disincentivised workers work less resulting in less income and less government tax
30
Q

What is the impact on the income distributionby taxes?

A
  • a progressive tax system redisstrubtes from those with higher incomes to those with lower incomes + reduces income inequality
  • however this does not give the poor anything so the system must be supported by benefits
31
Q

What is the impact on real output and employment by taxes?

A
  • cuts in taxation stimulate AD
  • however imports may increase, link to MPZ or MPM
  • this can increase real GDP if there is a spare capacity in the economy, ie a LRAS supply Is horizontal
32
Q

What is the impact on the price level by taxes?

A
  • an increase in indirect taxes reduces disposable income + workers may petition employers for a salary increase
  • if they receive the increase the economy may face a wage-price spiral
  • indirect taxes also increase costs of production for firms leading to cost push inflation
33
Q

What is the impact on the trade balance by taxes?

A
  • increase in taxes reduces disposable income which can reduce the level of imports
    -this is dependent on the marginal propensity to import
  • improving the net trade balance
34
Q

What does FDI stand and mean?

A

Foreign Direct Investments
- investment by foreign firms

35
Q

What is the impact on FDI by taxes?

A
  • Lowe taxes on profit and investment tend to encourage businesses too invest in a country since it will help them see a higher level of return
36
Q

What is the public sector?

A
  • central government
  • local councils
  • public corporations
  • nationalised industries
37
Q

what are public sector finances?

A

money in v money out
- borrowing
- debt

38
Q

What is discretionary fiscal policy?

A

deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and contractionary
- when the government chooses to change government spending and taxation
- a deliberate act/choice

39
Q

What is expansionary discretionary fiscal policy?

A
  • when fiscal policy is used deliberate;y to increase AD by increasing G or lowering taxation
  • called a fiscal stimulus in the case of policies to help the economy recover from the financial crisis and Covid pandemic
40
Q

What is contractionary discretionary fiscal policy?

A

when the fiscal policy is used to reduce AD buy reducing government spending /+ increasing taxation
- called austerity as the case of policies after stimulation to the economy for the recovery of covid pandemic (e.g.)

41
Q

What are automatic stabilisers?

A
  • occur naturally as G and taxation respond to changes in GDP levels
  • act to stabilise movements from cyclical swings
42
Q

how is a boom an eg of automatic stabilisers

A

in a boom progressive income tac structure takes a greater proportion of income tax, thus stabilising the boom

43
Q

relationship between automatic stabilisers and the multiplier effect?

A

they reduce the size of the multiplier
- as an increase in withdrawals and leakages is likely to occur following an increase in income

44
Q

What is another example of automatic stabilisers?

A

fiscal drag

45
Q

What is fiscal drag?

A
  • the government does not increase the personal allowanc/ taxes so more people are ‘dragged’ into paying income tax as wages increase taking incomes above the personal allowance
46
Q

What is national debt

A

all accumulated budget deficits of a country
- can be expressed in absolute or as a percentage of GDP

47
Q

What is fiscal deficit?

A

occurs when the level of government spending is greater than the government tax revenue in any given year

48
Q

What is a structural budget deficit?

A

budget deficit that exists when removing the effects of the economic cycle on the budget deficity
- a deficit that occurs ignoring the effects of the economy
- occurs if the economy was operating at a sustainable level of growth and employment

49
Q

What is a cyclical deficit?

A
  • occurs due to downturns in the trade cycle, usually as a result of a recession
  • gov receives less tax revenue as profits and income fall and G increases
  • these deficits tend to self-correct as the economy starts to grow again.
50
Q

What is the impact of a fiscal deficit?

A
  • government spending increases, taxation decreases - expansionary f.p
  • increase in g causes increase in AD thus
    – inflation, employment, growth incresases
51
Q

What influences the size of fiscal deficits?

A
  • state of economy
  • housing marekt
  • policy priorities
  • unforeseen events
52
Q

How does state of economy influence the size of fiscal deficits

A
  • gov rev increases in a boom or and decreases in recession
  • gov spending decreases in a boom and increases in recession
  • fiscal deficit increases as the state of the economy worsens
53
Q

How does the housing market influence the size of fiscal deficits

A

gov receives an indirect tax from property sales (stamp duty)
- this rev increases when an economy is doing well and helps to reduce fiscal deficits

54
Q

How does political priorities influence the size of fiscal deficits

A
  • after gov spends more on rescuing an economy austerity is priorities with the focus of eliminating the deficit
55
Q

what is austerity

A

contractionary gov policy that increases taxation and reduces gov spending to decrease deficit

56
Q

How does unforeseen events influence the size of fiscal deficits

A

they require government support increasing government spending increasing the deficit

57
Q

What are the factors influencing the size of national debts

A
  • size of fiscal deficits
  • gov policies
58
Q

how does the size of fiscal deficit influence the size of national debts

A
  • as an accumulation of annual fiscal deficits the size of fiscal deficit will grow by the size of the deficit
  • if the uk ran a budget surplus the additional rev could pay some of the debt or used to fund gov spending or investments in the following year
59
Q

How does government policies influence the size of national debts

A

these directly impact tax rev and gov spending, changing the level of fiscal deficit leading to change in national debt

60
Q

what can size of deficits and national debts influence in an economy

A
  • interest rates
  • debt servicing
  • inter-generational equity
  • rate of inflation
  • FDI
61
Q

How are interest rates impacted by deficit and debts

A

the higher the level of gov debt as a proportion of GDP the more concerned global lenders will be to fund future deficits
- this may require uk to raise interest Raes to entice lenders to make their money available to the gov

62
Q

How is debt services impacted by deficit and debts

A
  • OC to paying back debt and debt interest
  • higher the debt the greater the OC
63
Q

How are Inter-generational equityimpacted by deficit and debts

A

todays borrowing has too be paid back from tax revenue received from future generations
- the greater the debt, the greater the burden on the next generation of tax payers

64
Q

How are rates of inflation impacted by deficit and debts

A

reduced purchasing power allows gov to pay back lenders with money worth less than when it was originally borrowed

65
Q

How are FDI impacted by fiscal deficit and national debts

A

higher the external debt the ore foreign currency is required by the gov to pay it
- countries may run short of foreign currency
- to obtain more is to make fid more attractive
- thus more assets are sold but more foreign currency used to facilitate repayments

A-Level Economics Edexcel (20 decks)

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