Chapter 10 - government economic policy

Question 1

policies to deal with structural deficit

Answer 1

1. EMERGENCY LOANS
2. AUSTERITY MEASURES = to cut spending and increase taxation including efficiency savings in government spending and pension benefits reduction
3. SALE OF STATE ASSETS = to raise funds for international borrowings

Question 2

advantages in monetary policy vs fiscal

Answer 2

• monetary policy creates extra demand without creating high levels of government debt
• crowding out
• fiscal policy has a greater time lag

Question 3

types of government spending

Answer 3

1. government fiscal consumption expenditure = provision of goods/services used by the population
2. government investment (gross fixed capital formation) = building of roads, infrastructure
3. transfer payments = welfare payments including pensions, welfare benefits and social care

Question 4

indirect tax definition and characteristics

Answer 4

collected by an intermediary from the person who bears the economic burden of the tax , ie tax on spending

eg; VAT, tax on cigarettes/alcohol
retailer responsible for paying this tax to gov but customer responsible through higher prices

indirect tax = REGRESSIVE

Question 5

types of deficits

Answer 5

BUDGET deficit = gov spends more than it receives from taxes
CYCLICAL deficit = during recession, gov will receive less tax but will spend more
STRUCTURAL deficit = long term deficits not associated with trade cycle. caused by; increased role of gov (spending more on gov services), past gov spending (interest on past)

Question 6

automatic stabilisers

Answer 6

total welfare spending increases naturally when unemployment rises

withdrawals fall because taxation of incomes will fall as income falls in recession

both support AD

Question 7

policies to deal with structural deficit

Answer 7

1. emergency loans = from other gov
2. austerity = cut spending, increase tax
3. sale of state assets = sell nationalised industries to repay past borrowings

Question 8

effect of increases in money supply

Answer 8

• reduces IR
• higher consumption
• higher lending to businesses to finance investment
• higher share prices = easier for companies to issue shares to finance investment

Question 9

what is the quantity theory of money

Answer 9

argues that changes in PL are caused by changes in money supply

increase in money supply = increase demand = demand pull inflation

Question 10

supply side characteristics/examples

Answer 10

• inflexibility in labour market = forces wages to high levels = unemployment and restricts AS
• direct taxation influences incentive to work
• state owned industries likely to be inefficient so restrict AS

Question 11

what is supply side policy

Answer 11

• increasing competition through deregulation/privatisation
• reduction in direct taxes
• improve labour effectiveness by reducing monopoly power
• provision of training
• reduction in disincentives to work through reformed benefit system (lower benefits)