ECON4 Affect of government policy

Question 1

3 reasons for public expenditure

Answer 1

Efficiency, Equity, Macro management

Question 2

What is capital expenditure

Answer 2

Spendign on investment goods (longer than a year) which can be used more than once

Question 3

What is current expenditure

Answer 3

Reoccuring payments for goods and services (paying for drugs for NHS)

Question 4

What are Transfer payments

Answer 4

One way payments where no goods or services are exchanged, usually benefits/aid

Question 5

What is the purpose of transfer payments?

Answer 5

They redistribute income from rich to poor and provide a basic standard of living

Question 6

What % of government spending is on health

Answer 6

15%

Question 7

What is the largest proportion of government spending on?

Answer 7

Current expenditure on running costs

Question 8

How is government expenditure measured in relation to the wider economy?

Answer 8

Gov’t spending as a % of GDP

Question 9

What % of GDP will gov’t spend in 2022-23?

Answer 9

43.20%

Question 10

How does level of government spending affect productivity and growth (2 big brief ideas)

Answer 10

Government can boost AS by spending on supply side policies, Fiscal policy can stabilise trade cycle and stimulate growth

Question 11

How does government spending affect productivity and growth?

Answer 11

• Create infrastructure which can give businesses external economies of scale
• Education shifts LRAS to the right as it creates human capital
• Healthcare reduces the days lost to illness and allows workers to work longer
• Government spending can create a multiplier on growth

Question 12

How do free market economists view government spending on productivity?

Answer 12

Free market economists argue that government spending is wasteful and causes inefficiency

Question 13

How does Government spending increase living standards?

Answer 13

• Government corrects market failure and provides public goods which improves social welfare
• Reduce absolute poverty through welfare

Question 14

How can it be argued government spending reduces living standards (2)?

Answer 14

• It can be argued that the government is inneficient so taxation is used ineffectively and with lower taxation the economy would be more efficient
• Principle agent problem applies as government spends money on behalf of the people and the agents in government may have different aims

Question 15

What is resource crowding out

Answer 15

extra government spending leads to reduced private sector spending

Question 16

How does government crowd out borrowing? (4 COR)

Answer 16

By increasing spending government may have to increase borrowing - which increases the interest rate - firms can’t access credit - firms don’t invest

Question 17

What is crowding in

Answer 17

Increase in G leads to higher public sector spending

Question 18

PPF and crowding in/out

Answer 18

in- shift out (new PPF or better use)out - shift along

Question 19

How might high government borrowing increase taxation? (2)

Answer 19

Increasingly need to pay more interest, If confidence is lost in gov’ts ability to pay back debt they may have to raise interest to attract creditors

Question 20

What is a direct tax

Answer 20

Tax levied on economic agents

Question 21

What is an indirect tax

Answer 21

tax levied on a G/S

Question 22

What are the three tax systems for income tax?

Answer 22

Progressive, Regressice and Proportional

Question 23

What is progressive tax

Answer 23

Higher income = Hugher marginal rate of tax

Question 24

What is regressive tax?

Answer 24

Higher income = lower marginal rate of tax

Question 25

What is proportional tax?

Answer 25

When the same rate of tax is paid on income regardless of the size of income

Question 26

Why tax (4)

Answer 26

Fund Government, Correct market failure, Manage the economy, Redistribute economy

Question 27

What are the canons of taxation

Answer 27

Cost to collect is low % of yield, Timing and amount is clear, Payment/timing is conveniant, equitable

Question 28

What is a hypothecated tax

Answer 28

tax linked to a specific area of G

Question 29

What does the laffer curve show

Answer 29

Tax revenue and tax rate

Question 30

What is tax competition

Answer 30

low corporation tax to attract investment

Question 31

Name some main UK taxes

Answer 31

income, National insurance contributions, Inheritance, excise, VAT, Council, Business

Question 32

How does higher marginal tax level affect Incentives to work

Answer 32

Higher marginal rates of tax can incentivise some people to work to less as the opporunity cost of leisure time becomes lower

Question 33

What is the free market view on the affect of low taxation on productivity? What is the counterpoint to this?

Answer 33

That lower taxes incentivises:

1. Longer Working hours
2. Accepting promotions
3. Joining the Workforce

There is no evidence to suggest this and it can be argued that higher taxation incentivises people to work longer to maintain their income

Question 34

What concept does the Laffer curve demonstrate

Answer 34

That up until the peak government revenue increases as the increased taxation takes more from each economic agent, however beyond the peak economic agents start to work less as the high tax slowly removes the incentive to work

Question 35

What is the impact of direct taxation on AD and what affect does this have on the wider economy? (Think Keynes graph)

Answer 35

Direct taxes affect AD (Wealth Affects, disposable income) so a change could lead to an increase and decrease in AD

Question 36

What affect does increased indirect taxes have on AS? (Keynesian or Classical if you’re weird)

Answer 36

Indirect taxes are part of the business’s variable costs, therefore as indirect taxes increase unit costs increase which leads to an upwards (or leftwards in you’re classical) shift in AS

Question 37

What impact can tax have on LRAS?

Answer 37

Can be argued taxes reduce incentive to work reducing size of labour force and reducing LRAS

Question 38

2 types of G

Answer 38

Automatic stabilisers, discretionary fiscal policy

Question 39

What is the structural deficit

Answer 39

A budget deficit that exists at all points of the business cycle

Question 40

Link equation between deficit types

Answer 40

Structural deficit = actual deficit - cyclical deficit

Question 41

How do taxes positively affect the trade balance? (and what’s a counterbalance)

Answer 41

Increase taxation = lower disposable income therefore lower spending therefore less spending on income.