7.5d Government Economic Policies

Question 1

Any government can use macroeconomics in order to influence what?

Answer 1

The levels of AD/GDP

Question 2

Governments have a choice of 5 key economic objectives:

Answer 2

• Encouraging economic growth
• Controlling/reducing inflation
• Keeping unemployment down
• Ensuring a balance between X and M
• Keeping exchange rates stable

Question 3

What is a problem for governments with economic objectives?

Answer 3

They cannot achieve them all at once

Question 4

What does monetary policy do?

Answer 4

Controls:

• Supply of money
• Rate of interest
• How much money is in the economy

Question 5

What is fiscal policy?

Answer 5

The use of tax and government spending in the economy

Question 6

Methods of controlling how much money is in the economy

Answer 6

• Quantitative easing

- The multiplier effect

Question 7

What happens in quantitative easing?

Answer 7

A country’s central bank creates money in an economy electronically by buying financial products such as pension funds or bonds. Those who sell these assets can then use this money to buy other things and this money is spread around the economy.

Question 8

What does QE encourage?

Answer 8

Consumption and investment - meaning an increase in AD and GDP

Question 9

Tax definition

Answer 9

A charge placed by the government on income, goods and services

Question 10

What does direct taxation include?

Answer 10

• Income tax

- Corporation tax

Question 11

How is direct taxation paid?

Answer 11

Proportionally - the more earned, the bigger the % of tax paid

Question 12

What is indirect taxation?

Answer 12

Charges on purchases

Question 13

What is the indirect taxation in the UK?

Answer 13

Value Added Tax - a 20% charge placed on price of most products

Question 14

What is fiscal policy also known as?

Answer 14

Budgetary policy

Question 15

What does it mean if tax is more than goods and services?

Answer 15

There is a budget surplus so a fall in AD and economic activity

Question 16

What does it mean if goods and services is more than tax?

Answer 16

There is a budget deficit so a rise in AD and economic activity

Question 17

What does it mean if goods and services are equal to tax?

Answer 17

There is a balanced budget

Question 18

The multiplier effect definition

Answer 18

The increase in final income arising from any new injection of spending

Question 19

What is tax used for?

Answer 19

• To generate money for government spending
• As a deterrent i.e. tax on alcohol
• To distribute wealth - those that earn more are taxed more

Question 20

What does fiscal policy do?

Answer 20

Sets tax rates and the amount of government spending

Question 21

What tax do sole traders and partnerships pay?

Answer 21

Incoem tax

Question 22

Implications of high tax rates:

Answer 22

• Reduces spending power
• Reduces demand
• Lowers economic activity

Question 23

What is expansionary fiscal policy?

Answer 23

Cutting taxes and/or raising spending

Question 24

Implications of expansionary fiscal policy:

Answer 24

• Government borrowing increases
• Demand increases
• Lower unemployment

Question 25

When is expansionary fiscal policy used?

Answer 25

In times of economic slowdown or high unemployment

Question 26

What is contractionary fiscal policy?

Answer 26

Raising rates and/or cutting spending

Question 27

When is contractionary fiscal policy used?

Answer 27

When production is at 100% capacity or when there is a risk of high inflation

Question 28

Implications of contractionary fiscal policy:

Answer 28

• Government borrowing decreases

- Demand for goods and services decreases