Government Policies CH26-28

Question 1

Define Government Budget

Answer 1

The financial plans of the government in terms of revenue and expenditure.

Question 2

What is a balanced budget, budget deficit and budget surplus

Answer 2

Balanced budget - Government spending is the same as its revenue.

Budget deficit - Government spends more than it earns.

Budget surplus - Government earns more than it spends.

Question 3

Reasons for government spending

Answer 3

Essential services - (housing, healthcare, education)

Redistribution of income - (welfare benefits, state pensions)

Correction of market failure - (subsidies to provide incentives to produce)

Question 4

Reasons for government taxation

Answer 4

Tax on salary/profit - for better redistribution of income in the economy.

Tax on goods/services - raise costs of production to limit consumption of demerit goods.

Question 5

Define tax burden

Answer 5

Amount of tax which households and firms must pay.

Question 6

Different taxes

Answer 6

Income tax - direct tax on income

GST - indirect tax on goods/services

Corporation tax - tax on firm profits

Capital gains tax - tax on earnings made from investments

Inheritance tax - direct tax on transfer of income/wealth down from one person to another.

Stamp duty - progressive tax paid on sale of commercial/residential property.

Carbon tax - tax imposed on vehicle manufactures/firms which produce excessive carbon emissions.

Question 7

Define direct and indirect taxation

Answer 7

Direct tax - tax on income for households, profits for firms

Indirect tax - tax included in expenditure for goods/services

Question 8

Progressive, regressive, proportional taxation

Answer 8

Progressive tax - the higher your income, the higher rate of tax you pay

Regressive tax - the higher your income, the lower rate of tax you pay

Proportional tax - No matter how much you earn, everyone pays the same rate of tax.

Question 9

Principles of taxation

Answer 9

Equitable - tax should be based on taxpayer’s ability to pay.

Economical - tax should be cheap and easy to collect (maximizes collection to cost of collection)

Convenience - Method of payment must be convenient to taxpayer

Certainty - taxpayer should know what, when, where and how to pay the tax.

Efficiency - tax system should achieve its aims without undesirable effects.

Flexibility - taxes should be flexible enough to change in the economic environment.

Question 10

impact of taxation on price/quantity

Answer 10

Introducing sales tax shifts the supply curve to the left due to higher costs of production. Firms increase prices which reduces quantity produced/sold.

Question 11

what is the difference between expansionary and contractionary fiscal policy?

Answer 11

expansionary fiscal policy is the government decreasing tax rates and increasing their spending. Contractionary is the opposite.

Question 12

Reasons for fiscal policy?

Answer 12

• for the redistribution of income
• lowering the amount of demerit goods purchased
• increase economic growth by spending on capital goods
• to control inflation by adjusting taxes
• employment by giving incentives to work with decreasing income tax
• to decrease the pay gap between rich and poor

Question 12

what is monetary policy?

Answer 12

the use of interest rates to control the level of economic activity (spending and investment)

Question 13

effects of monetary policy to macroeconomic aims

Answer 13

economic growth -
lower interest rates reduce cost of borrowing for firms/households. this encourages borrowing and spending leading to higher consumption. High consumption, spending and investment can lead to economic growth.

full employment -
More spending and investment of households/firms tends to create more jobs.

Low inflation -
increased consumption and investment expenditure from low interest rates by firms can increase the productive capacity so more can be produced without higher prices. High interest rates limit consumption and investment if prices are too high.

Question 14

what is supply-side policy?

Answer 14

long-term measures to increase the productive capacity of an economy (so mainly affecting firms.)

Question 15

Supply side measures

Answer 15

education and training -
government spending on training/education can benefit in the long run for more skilled and trained workers being able to be more produce better goods and more efficiently.

incentives to work -
direct tax cuts (income tax) can encourage individuals to find work. Decreasing welfare benefits can also encourage people to find work as being unemployed is now less attractive.

Question 16

effects of supply-side policy on macroeconomic aims

Answer 16

economic growth -
by successfully increasing the productive capacity of the economy, economic growth can be achieved.

full employment -
increasing the productive capacity of an economy will increase the countries output, allowing for more vacant job spots.

low inflation -
supply-side policies can increase the productive potential of the economy, which helps to keep the general price of goods low.

redistribution of income -
increasing supply side measures such as training, education and incentives to work can benefit low income earners than high which reduces the pay gap.