Lesson 49-Public expenditure

Question 1

Give two examples of current spending

Answer 1

.Salaries of NHS employees
.Drugs used in healthcare
.Road maintenance budget
.Army logistic supplies

Question 2

Give two examples of capital spending

Answer 2

.Construction of new motorways and bridges
.New equipment in the NHS
.Flood defence schemes
.Extra defence equipment

Question 3

What is the significance of government spending?

Answer 3

.Is a key component of aggregate demand
.Can have a regional economic impact
.Important in providing public and merit goods
.Can help to achieve greater equity in society

Question 4

How can government spending affect household incomes?

Answer 4

.Welfare state transfers such as child benefits and universal credit
.State provided services such as education and housing-these offer ‘in kind’ benefits to people

Question 5

Give two justifications for government spending

Answer 5

.To provide a socially efficient level of public goods and overcome market failures
.To provide a safety-net system of welfare benefits to supplement the incomes of the poorest in society
.To provide necessary infrastructure through capital spending
.Government spending can be justified as a way of spreading equity
.Govt spending can be used to increase and manage the growth of AD

Question 6

What is meant by crowding out?

Answer 6

The crowding out view is that a rapid growth of government spending leads to a transfer of scarce productive resources from the private to the public sector where productivity might be lower

Question 7

What is meant by the term ‘crowding in’?

Answer 7

When an increase in government spending/investment leads to an expansion of economic activity/real GDP-this in turn incentivises private sector firms to raise their level of capital spending

Question 8

Give two micro impacts of a cut in government spending

Answer 8

.Output/jobs/profits in construction, transport and defence sections
.Effects on real income and relative poverty of households
.Effective demand for goods and services
.Cuts in pension spending might lead some people to delay their retirement

Question 9

Give two macro effects of a cut in government spending

Answer 9

.Multiplier effects of cuts in public sector spending and employment
.Lower fiscal deficit might help investor confidence/attract investment
.Risks of deflationary measures if cutting spending creates excess capacity
.Bank of England more likely to keep interest rates at very low levels