Macro L15

Question 1

Types of public expenditure:

Answer 1

1) Current expenditure
2) Capital expenditure
3) Transfer payments

Question 2

Current expenditure:

Answer 2

Gov’s day to day expenditure on goods and services

Question 3

Capital expenditure:

Answer 3

Gov expenditure on infrastructure

Question 4

Transfer payments:

Answer 4

Payments given by state to individuals, typically used to redistribute income

Question 5

Reasons for changes in levels of public expenditure:

Answer 5

1) Economic development/Rising incomes
2) Pop structure change
3) Stage in business cycle
4) Financial crisis
5) Levels of gov debt

Question 6

Impacts of changes in levels of public expenditure:

Answer 6

1) Productivity
2) Living standards
3) Taxation
4) Inequality

Question 7

Crowding out:

Answer 7

Increased gov spending results in lower private sector spending

Question 8

Why does crowding out occur?

Answer 8

1) Reallocation of resources towards public sector spending when economy is at full employment reduces private sector spending
2) If increased gov spending is financed thru borrowing, interest rates may increase due to increased demand for borrowed funds –> discourages private sector borrowing for consumption and investment

Question 9

Evaluation of crowding out:

Answer 9

• If gov spending leads to higher economic growth, overall productive capacity of economy is larger
• Crowding out may not even occur at full employment

Question 10

Crowding in:

Answer 10

Increased gov spending results in higher private sector spending

Question 11

Evaluation of crowding in:

Answer 11

Dependent on size of multiplier –> gov spending may be used ineffectively