Government & The Economy

Question 1

Fiscal Policy

Answer 1

the use of government spending & taxation to achieve the government’s economic objectives (economic growth, reduce unemployment & income inequality)

Question 2

The Federal Budget

Answer 2

The Budget is an annual statement from the government of its income (revenue) and expenditure plans for the next financial year

The Budget is also a useful tool in assisting in the stabilisation of economic activity, reallocation of resources and redistribution of income

Question 3

Budget Surplus

Answer 3

G>T

Question 4

Budget Deficit

Answer 4

G

Question 5

Balanced Budget

Answer 5

G=T

Question 6

Fiscal/Budget Stance

Answer 6

The impact (expansionary or contractionary) that Fiscal policy will have on economic activity

Question 7

Cyclical Factors

Answer 7

Changes in the level of economic activity changing government spending & tax

Counter-cyclical role - they reduce the size of fluctuations by attempting to increase or decrease economic activity “automatically”

Examples include unemployment benefits & progressive income tax

Question 8

Structural Factors

Answer 8

A deliberate change in expenditure or taxation will impact on aggregate demand/economic activity but also affect the budget outcome

Used to deliberately stabilise economic activity, reallocate resources or redistribute income

Examples include government spending on infrastructure, changes to GST or the introduction of a new tax

Question 9

Redistribution of Income

Answer 9

Takes place through the taxation system and social welfare payments

Question 10

Average Rate of Tax

Answer 10

the amount of tax payable divided by the total taxable income

Question 11

Marginal Rate of Tax

Answer 11

the change in tax payable as one more dollar of taxable income is earned

Question 12

Progressive Taxation

Answer 12

as income increases, the proportion of income paid in tax is higher

Question 13

Regressive Taxation

Answer 13

where lower income earners pay proportionally more tax

Question 14

Proportional Taxation

Answer 14

where all income earners pay proportionally the same amount of tax

Question 15

Social Welfare Payments

Answer 15

Transfer money from the higher income earners to the lower income earners

Question 16

Reallocation of Resources

Answer 16

The government changes the patterns of production by encouraging & discouraging some industries and encouraging efficient use of resources

Question 17

Taxation

Answer 17

a compulsory payment made by individuals and businesses to the government for which no good/service is provided in return

Question 18

Direct Taxation

Answer 18

paid by the individuals or business on which they are levied, they cannot be passed onto someone else (eg Personal Income Tax)

Question 19

Indirect Taxation

Answer 19

are levied on individuals and businesses but can be passed onto someone else (eg GST, passed on from business to customer)

Question 20

Main Areas of Government Spending

Answer 20

The provision of infrastructure
Labour market assistance through training & education
Industry Assistance (subsidies & grants)
Government institutions such as the ACCC and APRA

The spending of money in these areas will attract resources to these areas that may not have originally occurred

Question 21

Government Regulation

Answer 21

The government can use its regulatory power to prohibit certain behaviours in the marketplace

Question 22

Government Business Enterprise

Answer 22

The government have traditionally operated GBEs that provide essential infrastructure, such as in the areas of rail, water supply, electricity, postal services, banking and telecommunications

Question 23

Justification for Operating GBE’s

Answer 23

They have the interests of the wider community in mind, not maximising profit
They are able to deal with the high establishment costs of nation-wide services