Chapter 5

Question 1

Explain two reasons why governments in for economic growth

Answer 1

• increase standard of living
• people will enjoy better healthcare and better education
• increase demand of labor
• unemployment will decease achieving aim of full employment

Question 2

Analyze why governments want to keep inflation low

Answer 2

Increase business continuity leading to higher investment and economic growth

Lower inflation may increase exports and decrease imports improving a current account(Part of balance of payment)

Low inflation will encourage my saving as value of money will not decrease more funds will be available for investment

Question 3

Full employment vs Low inflation

Answer 3

• inc income levels
• inc sp on g&s
• inc demand pull inflation
• harder to attract skilled labor
• inc wages
• inc CoP
• inc cost push inflation

Question 4

Analyze why government imposes taxes

Answer 4

• To redistribute income more equally by imposing progressive tax, imposes higher tax rates on rich
• discourage consumption of the demerit goods eg cigarettes as taxes will increase prices of cigarettes and reduce demand
• To discourage imports by imposing tariffs on imports so price of imports increase leading to lower demand and higher demand on domestic goods increasing BoP stability
• main sorce of rev

Question 5

Define indirect taxes and give an example

Answer 5

Tax imposed on spending example sales tax(VAT) or tariffs or excise duty

Question 6

Define regressive tax

Answer 6

Tax rate decreases as income level increases

Question 7

Analyze how A Cut in tax rates could increase tax revenue

Answer 7

• A cut income tax can increase incentive to work and increase productivity so unemployment decreases in the tax revenue increases
• A cut in the Corporation tax increase incentive to invest increasing profits leading to higher tax revenue
• increased consumer spending on goods and services plus firm investment leading to higher revenue from indirect tax example VAT

Question 8

Identify 2 fiscal policy measures

Answer 8

Government spending and tax

Question 9

Analyze the impact of A cut in interest rates on saving and investment

Answer 9

• Decreasing interest-rate will decrease the cost of borrowing some firms will be able to invest more due to higher borrowing
• decrease in interest rate will decrease in income on saving Decreases
• consumers will spend more so firms will respond by increasing investment as they expect higher profits

Question 10

Define supply side policy

Answer 10

Long-term measures to increase productive capacity by inc quality and quantity of FoP leading to an outwards shift in PPC
Eg education and training, increase subsidies, privatization

Question 11

State & Explain supply side policies

Answer 11

-Education and training:
increase skill and productive capacity
-Deregulations:
Removing Rules and regulations, reducing costs of production for firms and increasing efficiency
-Subsidy: encourage firms to inc sp on R&D
-Privatization: selling state owned assets to private
-Lower power of trade union
-reduce unemp benefits
-lower direct taxes: inc incentive to work & invest

Question 12

Gov budget

Answer 12

financial plan for expected gov rev and expenditure

Question 13

What causes national debt

Answer 13

a budget deficit, gov needs to borrow

Question 14

Reasons for gov sp

Answer 14

• to inc AD
• sp on public goods, to help reduce market faliure
• to redistribute income by sp on subsidies, unemp benefits & pension

Question 15

Tax burden

Answer 15

Amount of tax that households & firms must pay

Question 16

Capital gain tax

Answer 16

tax on profit made by selling assets for a higher price

Question 17

Excise duty

Answer 17

taxes charges on specific goods, charged in addition to VAT

Question 18

Principles of taxation

Answer 18

• equitable (takes into consideration ability of tax payer)
• economical (easy & cheap to collect)
• convenience (convenient to tax payer)
• certainty(knowledge to limit tax evasion)
• efficiency(few negative side effects)
• flexibility(easy to changes when economic activity changes)

Question 19

Tax avoidance

Answer 19

legal, not buying good or service

Question 20

Tax evasion

Answer 20

illegal, not paying correct amount of tax

Question 21

Disadv of exp fiscal policy

Answer 21

• may cause budget deficit
• if AD inc more than output, would cause D pull inflation
• if there are low confidence levels cons sp decreases
• sp on imports could inc, worsen current acc position

Question 22

Disadv of contractionary fiscal

Answer 22

-would decrease AD, could lead to a recession

Question 23

Money supply

Answer 23

amount of money in the economy at a certain time

Question 24

EG vs Low inflation

Answer 24

cut in interest rate to inc EG

• would reduce saving, income on saving decreases
• cheaper costs of borrowing
• inc firm investment & consumer sp
• inc AD
• leading to D pull inflation

Question 25

EG vs BoP stability

Answer 25

Income levels inc
-may inc consumer sp on imports
-firms may inc investment
-inc imports of raw material and capital goods
EG may lead to inflation
- making exports less price competitive
If imports inc more than exports it would lead to a deficit

Question 26

Full employment vs BoP stability

Answer 26

Inc income levels 
-inc sp on imports 
More competition on labor 
-cost push inflation
-exports less price competitive

Question 27

what would make sustainable EG

Answer 27

EG will inc employment

• as output inc
• firms bring on more labor
• decrease unemployment
• inc sp on g&s
• firms respond by inc output further