Chapter 6 Public Finance, Macroeconomic Policies, and Poverty and Inequality

Question 1

What is public expenditure?

Answer 1

Expenditure by the central government, local authorities and public-sector organisation.

Question 2

What are the three main types of public expenditure?

Answer 2

Current expenditure, Capital expenditure and Transfer payments.

Question 3

What current expenditure? (Public expenditure)

Answer 3

Day-to-day spending by the government Includes wages for state employees and any consumable items such as drugs under the NHS.

Question 4

What is capital expenditure? (Public Expenditure)

Answer 4

Long-term investment expenditure on capital projects such as Crossrail, new schools, new motorways etc.

Question 5

What are Transfer Payments? (Public Expenditure)

Answer 5

Payments made by the state to individuals with no exchange of goods or services. A means of redistributing income.

Question 6

What are the objectives of public expenditure?

Answer 6

To provide public goods, defence and internal security, redistribution of income, dealing with external costs from production and consumption, provision of goods yielding external benefits and as a means of managing the economy (part of fiscal policy).

Question 7

What effects the size of public expenditure?

Answer 7

Level of GDP, Demand for public services, Size and age of population, state of the economy, Discretionary fiscal policy, Debt interest, rate of inflation (nominal terms, benefits are index- linked with the CPI so rise with inflation) and political factors

Question 8

Objectives of Taxation?

Answer 8

To control the economy (fiscal policy), To increase revenue to finance public expenditure, Defence and internal security, redistribute income, internalise external costs and influence expenditure patterns.

Question 9

What are the three different types of taxation?

Answer 9

Progressive, regressive and proportional.

Question 10

What is a direct tax?

Answer 10

A tax on income and wealth

Question 11

What is an indirect tax?

Answer 11

A tax on expenditure.

Question 12

Name 4 direct taxes.

Answer 12

Corporation Tax, Income Tax, Capital Gains Tax and Inheritance Tax

Question 13

Name three indirect taxes.

Answer 13

Value added tax, Excise duties and Tariffs.

Question 14

What is an ad valorem tax?

Answer 14

VAT, a tax that is a % amount of the price of a product.

Question 15

What is a specific tax?

Answer 15

Excise duties, a set amount per unit.

Question 16

What effects could potentially occur if income tax were increased?

Answer 16

A discincentive to work, A Reduction in tax revue (Laffer Curve), Slower economic growth as higher rates will lead to a fall in disposable income and disincentives, A more progressive tax system thereby redistributing income.

Question 17

What effects will potentially occur if VAT was increased?

Answer 17

Incentive to work harder in order to maintain standard of living, increase in tax revenue from goods who’s demand is price inelastic, reduced economic growth due to the multiplier effects involved with reduced disposable income, VAT regressive so reduced income distribution.

Question 18

What is PSNB (public sector net borrowing)?

Answer 18

Public expenditure is greater than tax revenue.

Question 19

What is PSNB (public sector net borrowing)?

Answer 19

Public expenditure is greater than tax revenue.

Question 20

What is a fiscal budget deficit?

Answer 20

When expenditure is greater than the revenue received from taxation

Question 21

What is a cyclical budget deficit and is it important?

Answer 21

The governments finances change in line with the trade cycle, Therefore during a ‘bust’ the governments finances would deteriorate.
A cyclical deficit isn’t a problem because it should balance out one the economy goes through its trend growth rate

Question 22

What is the significance of a Structural budget debt?

Answer 22

National debt would increase, Loss of AAA credit rating, crowding out, inflation, decrease in FDI.

Question 23

What is a structural deficit?

Answer 23

A deficit that remains even when the economy is operating at full potential.

Question 24

Why might a structural deficit that occurs due to investment on infrastructure not be that significant?

Answer 24

In the long run the improved infrastructure will increase long run aggregate supply and growth aspects of the economy.

Question 25

What is resource Crowding out?

Answer 25

when the economy is operating at full employment and the expansion of the public sector means that there is a shortage of resources in the private sector

Question 26

What is financial crowding out?

Answer 26

When the expansion of the state sector is financed by increased government borrowing. This causes an increased demand for loanable funds which drives up interest rates and crowds out the private sector investment

Question 27

What is national debt?

Answer 27

Total sum owed by a government to holders of government bonds. AKA the total of a government’s outstanding debt which it has accumulated over time.

Question 28

Significance of national debt?

Answer 28

Loss of a country’s AAA credit rating, crowding out, inflation, decrease in FDI, opportunity cost of future generations.

Question 29

What are the general macroeconomic objectives countries?

Answer 29

Economic Growth, Sustainable growth, full employment, a low and stable rate of inflation, balance of payments equilibrium on the current account, redistribution of income, fiscal balance.

Question 30

What is sustainable growth?

Answer 30

growth that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Question 31

Name the two types of macroeconomic policy?

Answer 31

Demand-side policies (designed to influence AD, split into monetary and fiscal)
Supply-side policy (aimed at increasing AS through increasing competitiveness, incentives and productivity)

Question 32

What does fiscal policy involve?

Answer 32

The use of taxation and government expenditure as a means of influencing economic activity

Question 33

What is a negative result of fiscal policy that many countries using it realised post WWII

Answer 33

It causes inflationary pressure.

Question 34

What are the two key features of fiscal policy?

Answer 34

Automatic stabilisers and discretionary fiscal policy

Question 35

What are automatic stabilisers?

Answer 35

changes in government expenditure and tax revenues which occur independently of any specific action by the government. They are determined by changes in the state of an economy. To do with benefits, tax revenues and government sending

Question 36

What is discretionary fiscal policy?

Answer 36

Deliberate changes in government expenditure and taxation in order to influence AD and, therefore, the level of economic activity

Question 37

What are the two types of discretionary fiscal policy?

Answer 37

reflationary/expansionary ( reducing tax)

deflationary/contractionary (increasing tax)

Question 38

What dictates the effectiveness of reflationary fiscal policy?

Answer 38

value of multiplier, time lags, the willingness of people to spend their extra disposable incomes.

Question 39

What is monetary policy?

Answer 39

Relates to changes in interest rates, money supply and exchange rates as a means of influencing the economy.

Question 40

What is inflationary targeting ?

Answer 40

a monetary policy strategy designed to maintain inflation at a certain rate or within a target. UK 2% +-1%, US 2%

Question 41

What are the arguments surrounding the monetary policy of inflation targeting?

Answer 41

Inflation target to narrow and should be based on a wider range of variables such as commodity prices, countries with inflation target experience a relatively low rate of inflation, following slow economic growth post 2008 FC it may be desirable to have a higher rate of inflation.

Question 42

What is Quantitative Easing?

Answer 42

A monetary policy that (in the UK) involves the Bank of England to increase the money supply by buying government bonds and corporate bonds from financial institutions.

Question 43

What were the effects of QE in the UK?

Answer 43

Increased economic output by between 1.5 -2%, increased the price of bonds and consequently a fall in their yield (market rate of interest), Rest in book.

Question 44

What is the potential negative effect of QE?

Answer 44

Some economists argue it is inflationary as it increases the money supply.

Question 45

What are supply-side policies?

Answer 45

any form of policy that has the effect of increasing the supply side of an economy. This is done through increasing competition, productivity and incentives

Question 46

What are the criticisms to supply-side policies?

Answer 46

Increased inequality (reduced tax makes rich richer and cuts in unemployment makes the poor worse off), Exploitation (reduced TU power), Ineffectiveness (firms in recession or if AD is low will not benefit), Market failure (deregulation in financial markets in the banking system resulted in increased risk-taking and the collapse of the banking system

Question 47

What are the criticisms to supply-side policies?

Answer 47

Increased inequality (reduced tax makes rich richer and cuts in unemployment makes the poor worse off), Exploitation (reduced TU power), Ineffectiveness (firms in recession or if AD is low will not benefit), Market failure (deregulation in financial markets in the banking system resulted in increased risk-taking and the collapse of the banking system), Time lags.

Question 48

What is absolute poverty?

Answer 48

When a person has insufficient resources tot meet basic human needs. A normative concept.

Question 49

What is one measurement of absolute inequality?

Answer 49

The World Bank set the poverty line at $1.25 a day at 2005 measured at purchasing power parity.

Question 50

What is purchasing power parity?

Answer 50

Used to determine the relative value of two different currencies, basket of goods.

Question 51

What is relative poverty?

Answer 51

When people are living below a certain income. Usually 40-70% of household income.In the EU people falling below 60% of median income are said to be ‘at risk of poverty’.

Question 52

What are the issues with relative poverty?

Answer 52

highly subjective, changes over time, no east way to make international comparison, it will always exist.

Question 53

What are other measures of poverty?

Answer 53

The united National Human Poverty Index, Standard basket of goods, Ration method.

Question 54

What factors influence inequality within a country?

Answer 54

Education (especially post- secondary school), Training and skills, wage rate, strength of trade unions, social benefit, the tax system, pensions, ownership of assets, inheritance.

Question 55

What is the Kuznets curve?

Answer 55

A theory in from 1955 that attempts to explain how, when an economy is at an early stage of development and primary agriculture inequality will be low. Industrialisation results in increased inequality, but at some point this starts to decrease. This may be due to the government having means of redistributing income. However, 30 years before the financial crisis there was evidence showing that inequality was increasing within developed economies.

Question 56

What effect has globalisation had on inequality?

Answer 56

Industrialisation in China has resulted in 50% less people living in absolute poverty. Reason for increased inequality though include: Unskilled workers in developed countries being replaced by those in undeveloped, global demand for highly skilled workers thereby meaning they can demand very high salaries, increase in the number of TNCs with those at the top paid highly.

Question 57

How do we measure inequality?

Answer 57

Lorenz curve si a graphical representation of income distribution. Cumulative percentage of income against cumulate percentage of population.

Question 58

What is the gini coefficient?

Answer 58

A way of determining the degree of inequity. Using the lorenz curve, G=( A % A+ B) x 100.
0= perfect equality
1= perfect inequality

Question 59

What is the significance and consequences of poverty and inequality?

Answer 59

Those in absolute poverty have no collateral, countries where inequality is high will likely have large amounts of absolute poverty, Harrod-Domar, countries with large inequality the rich may spend large amounts of the money on imports (capital flight), inequality may result in lack of social cohesion(e.g. crime rates and strikes effecting growth.

Question 60

What are some measures to reduce inequality?

Answer 60

Education and training, more progressive tax systems, Higher inheritance tax, increasing number and range of means-tested benefits targeting transfer payments at those in the greatest need, measures to increase geographical mobility of labour, introduction or increase of national minimum wage (reduces exploitation of workers).