4.5.3 - Public Sector Finances

Question 1

Describe Discretionary Fiscal Policy
(2 Points)

Answer 1

~ When the government uses their ability to make decisions, to choose the best policy and then enacts that policy.

~ Through the use of government expenditure and taxes.

Question 2

Describe Automatic Stabilisers
(2 Points)

Answer 2

~ Occurs when tax and public expenditure, change without government intervention, to keep the economy stable.

~ E.g. Increased welfare payments, when unemployment is rising.

Question 3

Describe Fiscal Deficits
(2 Points)

Answer 3

~ When government spending, is higher than tax revenue.

~ Leads to a large national debt.

Question 4

Describe National Debts

Answer 4

Sum of past fiscal deficits, accumulated by the government borrowing over time.

Question 5

What Are The 2 Types Of Budget Deficits?

Answer 5

~ Cyclical deficit.

~ Structural deficit.

Question 6

Describe Cyclical Deficits
(3 Points)

Answer 6

~ Occur during recessions.

~ Unemployment is high, public expenditure is high and tax revenue is low.

~ During a boom there is no cyclical deficit.

Question 7

Describe Structural Deficits
(2 Points)

Answer 7

~ Exist at every point of the business cycle.

~ Occurs when a government’s budget deficit persists, even when the economy is operating at full employment.

Question 8

What Do Budget Deficits & National Debt Impact?
(3 Points)

Answer 8

~ Interest rates.

~ Financial crowding out.

~ Future generations.

Question 9

Describe How Budget Deficits & National Debt Impacts ‘Interest Rates’
(4 Points)

Answer 9

~ If there is a budget deficit present.

~ Government borrows more money, to fund public expenditure.

~ Demand for borrowed money increases, meaning prices for borrowed money increases.

~ Increasing the interest rate.

Question 10

Describe How Budget Deficits & National Debt Impacts ‘Financial Crowding Out’
(4 Points)

Answer 10

~ If there is a budget deficit present.

~ Government borrows more money, to fund public expenditure.

~ Demand for borrowed money increases, meaning prices for borrowed money increases, increasing the interest rate.

~ Increasing costs for private firms to borrow money, decreasing investment.

Question 11

Describe How Budget Deficits & National Debt Impacts ‘Future Generations’
(3 Points)

Answer 11

~ More borrowed money to fund a budget deficit, increasing national debt overtime.

~ If a country has high national debts, they would have to raise taxes and cut public expenditure.

~ If this persists, this affects future generations.

Question 12

What Are Some Factors Influencing The Size Of The Budget Deficit?
(3 Points)

Answer 12

~ State of the business cycle.

~ Unforeseen events.

~ Interest rates.

Question 13

What Are Some Factors Influencing The Size Of The National Debt?
(2 Points)

Answer 13

~ Size of the fiscal deficit.

~ Ageing populations.