Role of State in Macroeconomy

Question 1

What are the 3 aspects of Public finance?

Answer 1

• Public expenditure
• Taxation
• Fiscal Deficit

Question 2

Explain public expenditure as role of state in macro

Answer 2

• Capital expenditure –> Long term investments e.g. Hs2
• Current expenditure –> day-to-day expenditure e.g. salary of civil servants
• Transfer payments –> payments made by state to individuals e.g. universal credit

Question 3

What types taxation are there?

Answer 3

• Direct - income tax
• Indirect; ad velorum, specific

Question 4

What 5 factors effect size of public expenditure?

Answer 4

• Level of GDP –> GDP↑, tax revenue↑
• D public services e.g. education, health
• Distrubution of population –> e.g. ageing population
• State of Economy –> Economy in recession, expenditure↑ due to automatic stabilisers
• Rate of Inflation –> Expenditure↑

Question 5

What 4 effects do High public expenditure have on society?

Answer 5

• Productivity ↓ –> Expenditure↑, low profit motive, and competition
• Living standards –> depend on type of expenditure, transfer payments↑ –> living standard↑
• ↑Financial Crowding out –> ↑Public expenditure finances through Gov borrowing ↑D for loans etc. crowds out private sector
• Taxation↑ –> to fund expenditure

Question 6

What are the 6 objectives of Taxation?

Answer 6

• Raise Revenue to finance Public expenditure
• Finance Defence and international security
• Redistribute income
• Internalise external costs e.g. pollution
• Influences pattern of spending
• Manage the economy e.g. fiscal policy

Question 7

Progressive Vs. Proportional Vs. Regressive taxes

Answer 7

Progressive
- Taxes where proportion of tax’s paid↑ as income↑

Proportional
- Proportion of tax paid remains constant as income ↑

Regressive
- Proportion of income paid in tax↓ as Income↑

Question 8

Direct Vs. Indirect taxation

Answer 8

Direct - Taxes on income + wealth; income tax, cooperation tax
Indirect- tax’s on spending; ad velorum, specific

Question 9

What 5 effects does a Increase in direct tax rates have?

Answer 9

• Incentive to work↓ –> unemployed less willing to take jobs, workers less willing to do overtime, retire earlier etc.
• Tax Revenue ↓ - Laffer curve - due to Tax avoidance, disincentive to work, tax evasion, tax exiles
• Income distribution↑ - more equitable
• AD↓ –> ↓R.Income –> ↓Disposable Income
  –> ↓AS –> ↓R. Output + employment
• Trade Balance ↑ - ↓Disposable Income –> ↓Consumption –> ↓Imports –> improvement in Trade balance

Question 10

What 4 effects will an increase in indirect tax have?

Answer 10

• Incentive to work↑ –> P.L↑ - worker work harder to maintain lifestyle
• Tax revenue↑
• Income distribution↓ –> indirect tax regressive
• R. Output + Employment ↓ –> R. Income↓ –> Consumption↓ –> AD↓ –> R. Output↓
  –> FoP Price ↑ –> AS↓ –> R. Output + Employment↓

Question 11

What are automatic stabilisers?

Answer 11

• Changes in Gov expenditure + tax revenue that occurs without gov intervention as GDP ↓ or ↑
  –> to offset fluctuations in GDP + Stabilise
  e.g. GDP↓ –> Consumption↓ –> Indirect tax Rev ↓
  e.g. GDP ↓ –> Unemployment↑ –> Welfare claims↑