4.5: The role of the state in the macroeconomy

Question 1

APPLICATION
UK National debt

Answer 1

£2.7 trillion

Question 2

APPLICATION
Percentage of national insurance if you earn over £4189 a month vs if you earn £1048 to £4189 a month

Answer 2

EXAMPLE OF A REGRESSIVE TAX

Above £4189 a month = 2%

Between £1048 and £4189 a month = 8%

Question 3

Reasons for tax

Answer 3

-Raise funds for public spending (Transfer payments e.g. Subsidies and benefits)
-Redistribute income (Progressive)
-Correct market failure (Carbon tax and excise duty e.g. demerit goods)
-Manage macroeconomy (Growth, inflation and unemployment)
-Protectionism (tax on M)

Question 4

Reasons for Gov spending

Answer 4

-Influence economic activity (Increased gov spending = Increase in AD)
-Correct market failure (missing market and underconsumption of merit goods)
-Decrease inequality and increase equity (Transfer payments )

Question 5

Examples of expansionary fiscal policy

Answer 5

-Decrease rate of income tax for lower income people meaning an increase tax free allowance (£14000)
-Decrease marginal rate of income tax for high earners = Increase spending so AD1 —> AD2
-Decrease regressive tax in economy = Increase MPC for lower income people
-Decrease corporation tax = Increase retained profits = Increased investment so AD1 —> AD2
-Increase Gov spending on Infrastructure (schools, roads, NHS) = Increase multiplier so AD1 —> AD2

Question 6

Evaluation for expansionary fiscal policy

Answer 6

-May cause inflation
-May deteriorate gov finances
-Time lags —> Gov may take time to have impact
-Public sector is X-inefficient
-Crowds out investment from private sector