5- Government expenditure

Question 1

Main influences on government expenditure

Answer 1

• The trade cycle

- Fiscal policy

Question 2

What is government spending?

Answer 2

Tax revenue and borrowing spent by the government for the benefit of the country’s citizens.

Question 3

What determines levels of government spending and the areas of the economy that have money spent on them?

Answer 3

• Government’s reading of economic conditions

- The varying priorities of the government of the day

Question 4

Influence of a recession of government spending?

Answer 4

• In a recession economic growth is negative and government spending will increase.
• Automatic stabilisers mean that the government will pay more in unemployment benefits to counter the fall in demand
• However, the government will receive less in tax receipts as unemployment has increased.

Question 5

What are Automatic stabilisers?

Answer 5

They are a type of fiscal policy designed to offset fluctuations in a nation’s economic activity through their normal operation without additional , timely authorization by the government or policymakers.

Question 6

Government spending in boom conditions?

Answer 6

• Government spending will decrease
• Unemployment will fall leading to less spending on benefits
• At the same time tax receipts will increase so there is less pressure for government spending.

Question 7

What is fiscal policy?

Answer 7

Means by which a government adjusts its spending levels and rates to monitor and influence a nation’s economy.

Question 8

Main forms of government intervention?

Answer 8

• Provide public and merit goods that are deemed to have positive externalities
• At the same time they will want to decrease negative externalities like pollution
• Provide subsidies to support industry

Question 9

How does the government try to increase AD?

Answer 9

• The government will inject money into the economy in order to order to increase AD.
• This will have a multiplier effect that will help stimulate growth
• Government will finance this through revenue from taxation or government borrowing
• The government look to increase spending during a downturn, whilst tax receipts will increase in a boom

Question 10

What are supply side policies?

Answer 10

Government economic policies aimed at making industries operate better and more efficiently

Question 11

Government supply side policies?

Answer 11

• Investment in education, training, to increase productive capacity of economy
• Capital expenditure on physical assets will help to develop infrastructure, allowing businesses to operate more effectively and efficiently
• This will help shift LRAS right and the PPF right

Question 12

What is current expenditure?

Answer 12

Day to day running of the country e.g. wages

Question 13

What is a balanced budget?

Answer 13

When government expenditure is equal to government revenue e.g. through taxation

Question 14

What is a budget deficit?

Answer 14

Occurs when government spending is greater than tax revenues.

Question 15

What will a budget deficit cause?

Answer 15

• Government borrowing

- Potential tax rises

Question 16

Government budget in a downturn?

Answer 16

In a downturn, government will tend to run a budget deficit and pay it back when the economy has improved.

Question 17

Government budget in boom conditions?

Answer 17

Governments will aim to run a budget surplus in a boom

Question 18

Effect of a long term budget deficit?

Answer 18

It can be very damaging to an economy as not only does the original debt have to be paid back but also the debt will have to be serviced i.e. interest has to be paid.
The government will have to be careful as if it compounds, it will spiral and could potentially impact credit rating of a country.

Question 19

Impact of imbalance of government spending on circular flow of income?

Answer 19

• If the government increases spending and is running a budget deficit e.g. during a recession, there will be an injection into the circular flow of income.
• There will be a multiplier effect
• As well as rightward shift of the PPF
• However it will lead to an increase in government debt.

Question 20

What is a budget surplus?

Answer 20

Occurs when tax revenue is greater than government spending.

Question 21

What does government do with budget surplus?

Answer 21

Pay off debts