Ch 27 - economic issues (policies)

Question 1

3 policies that a govt uses to achieve economic objectivies

What does each deal with

Answer 1

» fiscal policy – taxes and government spending
» monetary policy – interest rates
» supply side policies.

Question 2

Define fiscal policy

Answer 2

Fiscal policy is a government policy which adjusts government spending and taxation to influence the economy.

Question 3

What are the 2 main types of taxes
define both

Answer 3

Direct taxes - paid directly from incomes

Indirect taxes - added to the prices of goods and taxpayers pay the tax as they purchase the goods

Question 4

What is income tax

Answer 4

Tax on people’s income

Question 5

Why does changing income tax affect spending

Answer 5

Influences disposable income

Question 6

What is disposable income

Answer 6

level of income a taxpayer has after paying income tax.

Question 7

Explain what happens if income tax is increased

what happens if taxes reduce

Answer 7

Less disposable income
Less money to spend
Less demand
Less sales for businesses
Businesses produce fewer goods
Unemployment

vice versa if taxes reduce
except after creating employment there could also be inflation since demand > supply.

Question 8

Why are higher profit taxes bad for business

another name

Answer 8

Cooperation tax - Lower profits after tax. Profit is a interest free debt free source of finance. Less money to reinvest in the business. Business may find it harder to expand

Also bad for the owners since their reward is reducing. Reduces the motivation to start own business.

Question 9

Negative impact of raising indirect taxes

Answer 9

make goods and services more expensive for consumers.

Since price is rising, consumers may buy fewer as a result. Reduces demand of product(s)

May lead to wage spiral since costs of goods and services are going up, real income is decreasing.

Question 10

What is an import tarrif
what is an import quota

Answer 10

tax on an imported product

physical limit on the quantity of a product that can be imported.

Question 11

Effects on businesses on increasing import tarrifs

Answer 11

» Businesses will benefit if they are competing with imported goods. These will now become more expensive, leading to an increase in sales of home-produced
goods.

» Businesses will have higher production costs if they have to import raw materials. These will now be more expensive.

» Retaliation from other countries

Question 12

What is retaliation (import tarrifs)
How does it affect businesses

Answer 12

Countries may now take the same action and introduce import tariffs too.

A business trying to export to these countries will probably sell fewer goods than before since their goods are more expensive there.

Question 13

When are quotas used

Answer 13

Quotas can be used selectively to protect certain industries from foreign competition that may be seen as unfair or damaging to jobs.

Question 14

What is the definition of monetary policy

Answer 14

Decisions on the money supply, the rate of interest and the exchange rate taken to influence aggregate demand

Question 15

What does ‘interest rate’ mean

Answer 15

The cost of borrowing money

Question 16

What do higher interest rates do

Answer 16

More expensive to borrow money - businesses will have to delay taking loans for expansion. If they t take loans profit will reduce since they have to pay higher interest

More expensive to borrow for consumers - eg will not buy cars and homes and all.

Saving becomes more attractive (banks are giving more interest on savings) and consumer expenditure starts to fall.
Business have less demand
reduce output
Less sales and profits
Unemployment occurs

Question 17

How does increasing interest rates affect exchange rate

Answer 17

Appreciates the exchange rate (more in deck for ch 29)

Question 18

What are supply side policies

Answer 18

Policies aimed at increasing the productivity in the economy along with making its industries more competitive to other industries.

Question 19

3 supply side policies

Answer 19

Privatisation
Improving training and education
Increasing competition in all industries

Question 20

What is privatisation

Answer 20

Transfer of ownership of a firm from the public sector to the private sector

Question 21

Why do governments use privatization?

Answer 21

The main object of private sector firms is profit, compared to the main objective of public sector firms which is social welfare

This leads to private sector firms being more efficient, delivering goods at a lower cost and better quality. This is better for society.

Question 22

How do govts increase competition in industries

Answer 22

deregulation (removal of govt rules) + trade liberalisation (remove tarrifs and quoatas)

Question 23

Why would govts want to increase comp in industries

Answer 23

Increase efficiency of businesses
Increase quality of products
Reduce prices of products

Question 24

Why is spending on education and training a supply side policy

Answer 24

Increasing government spending on education & retraining raises the quality of the workforce.

this means that

People are more occupationally mobile - easier to get jobs. Reduces unemployment and increases productivity

Question 25

If govts increase income tax

what is a possible business decision
what are the problems with this deicison

Answer 25

Decision:
Reduce prices of products to increase demand
problem:
reduced profit. Reduces GPM

decision:
Produce cheaper products to lower prices
problem:
Brand image may take a hit

Question 26

If govts increase tariffs on imports

what is a possible business decision
what are the problems with this deicison

Answer 26

decision:
Shift focus on selling products more to the domestic market as locally produced goods now seem cheaper
problem:
Still might be profitable to export (opportunity cost)

decision:
Switch from buying imported materials and components to locally produced ones
problem:
Foreign parts may be of a higher quality compared to local.

Question 27

If govts increase interest rates

what is a possible business decision
what are the problems with this deicison

Answer 27

decision:
reduce/delay investments. Growth reduces
problem:
Other companies may continue to grow so market share could reduce

decision:
Develop cheaper products that consumers will be better able to afford
problem:
customer may think that qual is bad. Neg impact on brand image

decision:
Sell existing assets for cash to reduce loans/pay higher interest rates
problem:
Assets may be imp for future expansion but they would have sold it

Question 28

If govts increase spending

what is a possible business decision
what are the problems with this deicison

Answer 28

decision:
Switch marketing strategy to gain more public-sector contracts

problem:
May be great competition if other businesses take same action