(Government objectives and policies)

Question 1

What is fiscal policy?

Answer 1

Changes of taxation and government’s expenditure to manage the economy.

Question 2

What are direct taxes?

Answer 2

Direct taxes are charged on income such as income taxes and corporation taxes.

Question 3

What are indirect taxes?

Answer 3

Indirect taxes are levied on spending such as VAT.

Question 4

What might government do to influence total demand in the economy?

Answer 4

Government might change the levels of taxation and government spending.

Question 5

What will happen if income tax were lower and how business can respond?

Answer 5

If income taxes were lower, there will be more spending in the economy and business may respond by increasing production and expanding.

Question 6

How business might respond to the higher corporation tax?

Answer 6

If there is higher corporation taxes, business may respond by lowering investments in business and reducing dividends.

Question 7

How government tried to constrain levels of public spending and how it affect the businesses?

Answer 7

• They might lower their financial support on public services which result employees in those business to have lower income, decreasing their purchasing power, and the demand in economy will fall.
• They might also lower their financial support on certain government expenditure, this will particularly affect private enterprises which relied on these contracts. For instance, if the government lower their spending on defend, business which sell military products will negatively affected
• They might cut of freeze the payment to certain people such as pension and social security payment which will affect the purchasing power of people who rely on these government’s payments, reducing demands in the economy.

Question 8

What is social security payments?

Answer 8

Money taken by UK’s government from people wages to pay for the system of payments to people who are ill or unemployed.

Question 9

In most countries, who is responsible for developing and maintaining the nation’s key infrastructure?

Answer 9

Government

Question 10

Who will get benefit by the heave expenditure on large scale projects by business and why?

Answer 10

Private sector business since they are likely to get most of the work

Question 11

What can business do without government intervention?

Answer 11

Without government intervention, some business may not meet the needs of certain skate holder and exploits vulnerable groups.

Question 12

How government take action to ensure that vulnerable groups are protected?

Answer 12

They provide legal framework which the business can operate in to ensure that vulnerable groups are protected.

Question 13

What do consumers want?

Answer 13

Consumers want good quality services with fair prices and good customer services and information about products that are accurate and clear.

Question 14

In which ways, some firms may exploit consumers?

Answer 14

• They might increase prices to higher level than in the competitive market
• They might use fixed pricing where number of firms agree to sell their products on fixed prices to avoid price competition
• They might restrict consumer choice by market sharing
• They might raise barriers to entry by spending large amount of money on marketing.

Question 15

What does consumer legislation aim to do?

Answer 15

Consumer legislation cover variety of consumer issue and aimed to protect consumer from some unwanted practices from business to consumers

Question 16

What will happen if businesses break consumer laws?

Answer 16

they may be fined and compensate consumers for any loss.

Question 17

Why should government try to promote competition?

Answer 17

Because competition prevent anti-competitive practices and consumer’s exploitation.

Question 18

What are the ways government can promote competition?

Answer 18

• By encouraging small firms to grow
• By lowering trade barriers to entry
• By introducing anti-competitive legislation

Question 19

What will happen, if barriers to entry are lowered?

Answer 19

More firms will be able to join the market more easily which will boost the country’s economy growth.

Question 20

What do anti-competitive legislation designed to do?

Answer 20

They tried to protect consumer from exploitation by monopolies.

Question 21

Why might countries restrict trade?

Answer 21

Countries might restrict trade to

• Protect jobs when international competitor threatens survival of domestic business
• Prevent dumping
• Raise revenue from tariffs
• Protect infant industries

Question 22

What is protectionism?

Answer 22

Use of trade barriers to protect domestic producers.

Question 23

What is anti-competitive practices?

Answer 23

Attempts by firms to restrict or prevent competition

Question 24

What is dumping?

Answer 24

Dumping is where the business sell goods in another country often below cost.

Question 25

Dumping is where a business sell products to another countries often below cost.
Which kind of trade barriers to government use to restrict trade?

Answer 25

• Tariffs
• Quota
• Subsidy
• Administrative barriers - Safety or health and environmental regulation to make importing more difficult

Question 26

What are the main benefits to businesses of trade blocs?

Answer 26

• Opportunity to specialize in the production of goods that the country can produce expertly and low cost
• Access to wider market for business
• To lower cost, since they can exploit economics of scales by selling more outputs to wider market
• Protect businesses from large predator multinational from outside the bloc.

Question 27

What are the disadvantages of trading blocs?

Answer 27

They might protect inefficient businesses and lead to conflicts and tension if the benefits is not shared fairly between countries.

Question 28

Why interest rate can change?

Answer 28

because it is directly controlled by the authorities.

Question 29

What is monetary policy?

Answer 29

Using changes in interest rate and money supply to manage the economy.

Question 30

What is quota and subsidy?

Answer 30

Quota - physical limit on the quantity of imports allowed into the country

Subsidy - Financial support given to domestic producers to help compete with overseas firms.

Question 31

What is protectionism?

Answer 31

Use of trade barriers to protect domestic producers.

Question 32

What will happen if the interest rate rise or fall?

Answer 32

When the interest rate raise, the demand in the economy will fall since it is more expensive to borrow money

When the interest rate fall, the demand in the economy will raise since it is cheaper to borrow money

Question 33

Why high interest rate are bad for the businesses?

Answer 33

When the interest rate are high, the costs for businesses which have taken out loans will raise, which reduce the profit resulting to cut dividends and lower investments which interferes with the growth of business.

The purchasing of capital goods funded by borrowing is discourage as they are now more expensive, so, businesses will be reluctant to buy new machinery and there will be postponement of cancellation of investment projects which harm the growth of business and reduce competitiveness.

When the interest rate raise, it will negative impact business with the result of falling demand because customers are less willing to borrow money to fund spending.

Question 34

Who will have bigger impact by changes in the exchange rate?

Answer 34

Business which have lots of debts.

Question 35

How higher interest rate affect consumers spending?

Answer 35

Where there is higher interest rate, the house owners with mortgages will negatively impacted since most people’ mortgage raise which mean they will gain lower disposable income.

The demands of goods bought with borrowed money will fall when the interest rate raised as they are now more expensive, so, consumers will have less chance to spend on non-essential products or services such as entertainment service.

However, savers will benefit from higher interest rate because they will get more interest on their savings, consequently, increasing their purchasing power.