L15- Types of expenditure

Question 1

Types of govt. expenditure

Answer 1

• current expenditure
• capital expenditure
• transfer payments

Question 2

how do we compare levels of public spending both over time and between different countries

Answer 2

• proportion of public expenditure to GDP

Question 3

what is current expenditure

Answer 3

the govts, day to day spending on goods and services e.g. wages and salaries of civil servants, drugs used by NHS ( spending recurs, lasts for short time)

Question 4

what is capital expenditure

Answer 4

• govt. expenditure on infrastructure such as roads and hospitals (can be used multiple times)

Question 5

what are transfer payments

Answer 5

• welfare payments given by the state to individuals e.g. state pensions
• typically used to redistribute income
• unlike capital and current expenditure, govt. gets no goods or services in return for this expenditure

Question 6

why is govt, spending likley to rise during a recession

Answer 6

1. unemployment benefits will rise
2. income tax revenue will fall as incomes fall and unemployment rises
3. expansionary fiscal policy may be used to recover from the recession

Question 7

reasons for changing the size and composition of public expenditure

Answer 7

1. economic development/ rising incomes
2, changes in structure of population
3. stage in the business cycle
4. financial crises
5. levels of govt. debt

Question 8

impacts of changes in levels of public expenditure

Answer 8

• productivity
• living standards
• taxation
• inequality
• crowding out
• crowding in

Question 9

what is crowding out

Answer 9

when increased govt. spending results in lower private sector spending

Question 10

why does crowding out occur

Answer 10

1. reallocation of resources towards public sector spending when the economy is at full employments will reduce private sector spending
2. if increased govt. spending if financed through borrowing, may increase interest rates due to increase in demand for borrowed funds= discourage private sector borrowing for consumption and investment

Question 11

eval of crowding out

Answer 11

may not occur at full employment if govt. spending leads to higher economic growth as overall productive capacity of the economy is larger

Question 12

what is crowding in

Answer 12

when increased govt spending results in higher private sector spending

Question 13

eval of crowding in

Answer 13

depends on size of the multiplier, govt. spending may be used ineffectively

Question 14

explain diagram or crowding out (demand up, interest rate up, quantity of money same)

Answer 14

• to facilitate spending, govts need to borrow (budget deficit, adding to national debt)- govt. needs to sell bonds (debt)
• ppl want bonds to retain value of savings
• govt hands out more bonds- more ppl wanna buy- demand up- ppl have more money- consumer spending up- banks put interest rate up = harder for private sector to afford loans for expansion, investment, r+d