Pack 5: Role of the State in the Macroeconomy

Question 1

What is public expenditure?

Answer 1

Spending by government, such as on healthcare education and welfare

Question 2

What is capital expenditure?

Answer 2

Spending by government on investment goods, e.g. new roads, hospitals or streetlights

Question 3

What is current expenditure?

Answer 3

Spending by government on goods and services consumed in the short-term, also transfer payments and debt interest

Question 4

what are transfer payments?

Answer 4

Spending for which there is no corresponding real output, they are welfare payments, e.g. state pensions or child benefits

Question 5

What is public expenditure made up of?

Answer 5

Capital expenditure + Current expenditure

Question 6

What are the reasons for changing public expenditure?

Answer 6

~Economic development
~Demographics
~Political ideology
~Trade cycle
~Economic crisis

Question 7

What are the economic effects of public expenditure?

Answer 7

~Productivity and growth
~Living standards and equality
~Tax revenue and national debt

Question 8

What is crowding out?

Answer 8

When extra government spending leads to lower private sector spending

Question 9

What are regressive taxes?

Answer 9

Tax where proportion of income paid in tax falls as income of taxpayer rises

Question 10

What are progressive taxes?

Answer 10

Tax where proportion of income paid in tax rises as income of taxpayer rise

Question 11

What is proportional tax?

Answer 11

Tax where proportion paid in tax remains the same as income of taxpayer rises

Question 12

Whats the benefit of indirect taxation?

Answer 12

It doesn’t effects the incentive to work

Question 13

What does the Laffer curve show?

Answer 13

The Laffer Curve shows that there is an optimal rate of tax where revenue will be the highest

Question 14

What is discretionary fiscal policy?

Answer 14

Deliberate manipulation of government expenditure and taxes to influence the economy

Question 15

What are automatic stabilisers?

Answer 15

Mechanisms reducing impact of changes in economy on national income, in the form of taxation and public expenditure

Question 16

What is national debt?

Answer 16

Total accumulated borrowing of government which remains to be paid to lenders

Question 17

What’s a cyclical deficit?

Answer 17

Part of the fiscal deficit which is caused by government spending and taxes changing through trade cycle

Question 18

What’s a structural deficit?

Answer 18

Part of the fiscal deficit not related to trade cycle and won’t disappear when economy recovers

Question 19

What is the fiscal deficit made up of?

Answer 19

Cyclical deficit + structural deficit

Question 20

What factors influence the size of the fiscal deficit and national debt?

Answer 20

~Trade cycle
~Government policy
~Unplanned events
~Debt interests

Question 21

What’s the significance of the size of fiscal deficits and national debts?

Answer 21

~Financing debt (Opportunity cost)
~Credit rating
~Crowding out
~Foreign direct investments
~Inter-generational equity

Question 22

What are the uses of government spending cuts?

Answer 22

~Up economic efficiency
~Less distortion of economic incentives

Question 23

What are the costs of government spending cuts?

Answer 23

~Impact on public services
~Impact on poor + living standards
~Impact on jobs and growth

Question 24

What is an external shock?

Answer 24

Events from outside domestic economic system, e.g. global financial crisis, up oil prices

Question 25

What is the difference between demand-side and supply-side shocks?

Answer 25

Demand causes reduction in AD while supply causes reduction in aggregate supply and can lead to stagflation

Question 26

What is exchange rate policy?

Answer 26

Manipulation of the price of a country’s currency by government or policymakers to achieve macro objectives

Question 27

What are direct controls?

Answer 27

Government measures that are imposed on the price/quantity of a single product or factor of production, e.g. Maximum price on food or quotas on imports

Question 28

What is uncertainty?

Answer 28

Situation where there is a lack of knowledge and events, outcomes or consequences are unpredictable

Question 29

What is risk?

Answer 29

The chance of incurring misfortune or loss