A2 2 Government Policy

Question 1

what are the government objectives?

Answer 1

economic growth

sustainable development

low but stable rate of inflation

high level of employment

balance of payments

Question 2

advantages of economic growth

Answer 2

higher economic growth provide the government with increased tax revenues, permitting greater expenditure on health, education and transport

more security and centainty and therefore more confidence in planning for the future

rising incomes lead to rising demnad and sales revenue

market oppourtunites for existing products in existing in new markets- higher level of sales

improved financial performance enables firms to direct more resources towards training- R&D and brand positioning e.g. competitiveness

Question 3

disadvantages of economic growth

Answer 3

growth can lead to increased levels of pollution and congestion- can harm environment

may be impossible to sustain in the long term as the whole worlds resources run out

is often accopanied by increased costs of land, labour and property- bad corporate image- ethics

dosent benefit firms selling inferior goods e.g. pound shops

may result in labour shortages, which can lead to higher wages and price fuelling inflation and creating uncetainity

places individuals and businesses under pressure. Workloads increase and decisions rushed

inflation as demand increases faster than supply

Question 4

objectives of sustainable development

Answer 4

social progress which recognises the needs for everyone, should share benefits of increased prosperity and a clean and safe enviornment

effective protection of the enviornment- limiting global enviornmental threats e.g. climate change to protect human health and safety from hazards

purdent use of natural resources- non-renewable resources are used efficiently and alternatives are developed to replace them in due coarse

maintaince of high and stable levels of economic growth and employment- so everyone can share hight lving standards and greater job oppourtunites

Question 5

causes of inflation

Answer 5

1. cost push inflation- caused by rising costs of overall materials/energy (currently)
2. demand pull- excess demand and business increases price
3. increase in money supply- bank of england prints more money and lends more to commerial banks

Question 6

advantages of sustainable development

Answer 6

increases level of natural capital- an economic metaphor for economic assets e.g. air, soil that supply resources to the economy

improve living standards

can help to boost the economy in terms of attracting higher levels of tourism

businesses which undertake sustainable activites often enjoy higher profits- achieved through sustainable cost reductions e.g. recycling water

increased efficiency- business which undertake sustainable activites work hard to reduce wastage

Question 7

disadvantages of sustainable development

Answer 7

less financially rewarding and requires more work e.g. training, eco-friendly machinery, thus more difficult to achieve survival

often more costly to produce goods in enviornmentally friendly way- fall in efficiency

difficult for countries to achieve economic growth and sustainable development simultaneously

it depends on the stage of the businesss cycle

Question 8

Inflation disadvanatges

Answer 8

increasing costs

shoe leather costs

menu costs

business incertainanty

business competeitiveness

hight intrest rates

borrowing and lending

wage negotiating

reduced purchasing power

reduced investmement

unemployment, growth and trade

value of assets

Question 9

Advantages of inflation

Answer 9

industry-wide prices enable revenues to grow

growing revenues and a constant gross margin = higher gross profits

inflation makes using loans as a source of finanace cheaper as intrest rates are low the rate of inflation is low

a low rate of inflation relative to other countries is likely to mean that firms become more competeive in their domestiuc markets aganist imports

low levels of inflation create more certainity in the economy, which means that business is able to plan ahead because proces can be predicted more easily

marketing and administartive costs will be lower, as there will be fewer adjustments, e.g. price lists and advertising information

the fact that there is more certainity about short term pricing decisions means that there should be more time available for long term strategic decision making

efficient firms survive and inefficient firm disappear. continually rising pricess means that poorly performaing firma can record increaing sales and profits in nominal terms. however, low inflation means that such firms cannot disguise poor sales performane and cannot easily rise prices to cover their own inefficiency

Question 10

what are the two issues that effect inflation?

Answer 10

price elasticity of demand

responding to cost-push inflation

Question 11

disadvantages of higher levels of unemployment

Answer 11

more people will claim government benefits, thus increasing level of government expenditure- less capital available for public services

people who are unemployed will have less disposable income, thus spending less- reduction in market activity and economic conditions

consumer income falls = lower sales = possible redundancies

employees have less bargaining power as alternative jobs are harder to find- lower wage level

reduction in demand may lead to rationalisation- lead to mergers/takeovers

more skilled and experienced people are available for work- reducing training needs

Question 12

advantages of lower levels of unemployment

Answer 12

low levels can lead to higher disposable income- higher levels of consumer spending

firms become more profitable and invest more capital- lead to further growth

creates more income for the government- lead to increased spending on public services

government wont have to pay as many welfare payments for unemployed

more people will claim government benefits- increasing levels of government expenditure

Question 13

why are indirect taxes levied?

Answer 13

to raise revenue

to influence to pattern of expenditure

Question 14

advantages of corporation tax

Answer 14

firms existing and future profits would increase for a company as profits are assessed at a lower rate of tax- less money to government

potentially increased dividends may be paid to a company’s shareholders- attract new shareholders

lower rate of corporation tax leads to increased business confidence- create opportunity for increased investment - to produce goods more effectively

R&D with new innovative products which will improve companies offerings to customers, improve quality- increasing demand and profits

Question 15

disadvantages of corporation tax

Answer 15

lower tax rate may increase competition as it could attract global competitors to NI- reducing market share

increased competition lead to reduced potential profits- similar types of firms may enter market

may add an incentive for leading global companies to locate here- greater demand for workers in labour market- prove difficult recruiting

higher demand for skilled staff may mean costs of both- increase recruitment and salaries

less income for government- lead to decreased expenditure of public services

Question 16

advantages of increase of income tax

Answer 16

more revenue for government- leads to more expenditure on public services- standards of living improve

improves level of efficiency

Question 17

disadvantages of increase income tax

Answer 17

groups end up facing the burden of higher rates of taxation include customer and employees. prices are increased to reflect the increased cists facing the business- customer objectives aren’t being fully met

workers are affected in the firms may try reduce staffs wages in attempt to cover costs- leads to job/ salary cuts

firm has less profit available for own use, may decide to postpone investment plans- lack of competitiveness and slow-down in economic growth

makes country less attractive to current and potential foreign investors

Question 18

advantages of using indirect taxation to achieve government objectives

Answer 18

changing the pattern of demand- indirect taxes provide a way of altering the pattern of consumer demand by varing prices - therfore affecting spending decisions

indirect taxes are often uses and justified as instr7ument in correcting for externalities adn associates market failuires

indirect taxes leave people free to make a choice, whereas direct taxes leave people with less of their gross income in their pockets

all tax systems are open to avoidances and evasion but perhaps spending taxes are less easy to avoid- people are unaware hoe much in duty and othwer spending taxes they are paying

Question 19

disadvantages using indirect taxation to achieve government objectives

Answer 19

many indirect taxes make the distrubution of income more unequal because indirect taxes are more regressive than direct taxes - e.g. excise duties on cigarettes and energy together with tax on lottery tickets

higher indirect taxes cause cost-push inflation - l;ead to high prioces and lack of competitivness for NI firm- deoends on whether supplier choose to pass on some or all of any increase in tax- e.g. higher prices

if idirect taxes are too high- creates an incentive to aovid taexes thropugh ‘boot legging’- makes economy less competitive

higher indirect taxes affect households on lower incomes who are least able to save- standards of living may decline

Question 20

which changes in level of indrect tax affect government?

Answer 20

consumer and business confidence- if cofidence is low, then a cut in tax may not increase spending because they prefer extra income

what else is happening in the economy- if we cut tax, durng global recession- consumer spending may contune to fall

Question 21

effects of rise in rate of interest

Answer 21

busines shas borrowed money, its likely thaqt interest costs will rise- will reduce both cash flow and profits available for investors. this causes capital investmen to fall e.g. make to with older, less efficient equipment- knock on effect on suppliers how recieve fewer order

increase in interest effects decreasing consumer spending, decrease amount spent on goods/services, decreasing demand within the economy in general and teadin conitions will be more difficult. the level of income of consumers will be less- increased costs of borrowing related to credit card, loans

exchange rate is likely to rise- when UK interest rates rise pound becomes more attractive currency to invest. this attracts an inflow of foriegn currency which changes into pounds. consequently- increased demand for sterlign causes exchange rate to rise. any business sellign abroad will find that its exports become more expensive to foreign customers- import will become cheaper.

Question 22

effect in fall of rate of interest

Answer 22

investment will increase- an fall in the rate of interest means its now cheaper to borrow money to finance expansion. therefore increase spending of new buliding/technology- investment will raise level of economic activity - can further boost GDP as consumers are spending

consumer spending will increase- interest in a mortgage is less so more oppourtunity to spend on goods/service.

excahnge rate is likely to fall- when interest falls, the pound becomes less attractive currency to invest upon-n therfore fall in demand for sterling- leads to fall in exchange rate. so business abroad will find that exports become attractive- it may sell more

Question 23

disadvantages of falling exchange rates

Answer 23

depreciation of the pound makes our exports cheaper and our imports more expensive

UK businesses should export more as they can now offer more competitive prices

price paid by UK businesses and consumers for imports will rise. a business which import a large quantity of raw materials will face higher costs

as imported goods are now more expensive, this might encourage consumers to switch their purchases from foreign goods to UK products

Question 24

disadvantages of rising exchange rates

Answer 24

an appreciation of the pound makes out imports cheaper and our exports more expensive

UK businesses which import large quantity of raw materials will see a decrease in their costs of production - become more competitive as they can afford to decrease their paces

an appreciation leads to UK exports becoming more expensive and therefore less competitive