Role of state in the macroeconomy

Question 1

What is government consumption expenditure?

Answer 1

spending by government on goods and services

Question 2

What is government capital expenditure?

Answer 2

spending by government on capital projects

Question 3

Which body sets bank base rates in the UK?

Answer 3

Bank of England

Question 4

Give three examples of government consumption expenditure

Answer 4

1. education
2. healthcare
3. salaries of civil servants

Question 5

Give two examples of government capital expenditure.

Answer 5

roads
hospitals

Question 6

What’s the difference between universal and means-tested benefits?

Answer 6

• universal - paid to everyone meeting certain non-income/assets related criteria
• means-tested - depends on a person’s income or assets or both

Question 7

Approximately what % of GDP is government expenditure in UK?

Answer 7

20-30%

Question 8

Name two countries with government expenditure significantly lower % of GDP than UK

Answer 8

eg USA, Germany, Spain, Switzerland

Question 9

Give three reasons why higher public expenditure might lead to smaller private sector.

Answer 9

1. fewer workers available to work in private sector
2. higher interest rates if budget deficit so higher cost of borrowing for private sector
3. less demand for private sector if more provided by government

Question 10

What effect might more public sector have on productivity (give one reason for it to increase, one for it to decrease)?

Answer 10

• may be less incentive to be efficient (if no competition or incentive to maximise profits) so productivity falls
• but may be economies of scale, increasing productivity

Question 11

What two effects will high public expenditure have on future public expenditure on public services?

Answer 11

(1) Spend money now so may not need to spend it in fututre
(2) Higher public debt so have to spend money on interest payments rather than public services

Question 12

Give two reasons why higher public expenditure improve economic growth of private sector?

Answer 12

• Improved infrastructure, eg transport, communications, healthcare, education, can make firms more efficient so more potential for growth
• multiplier effect through more pay to public sector workers who then spend more with private sector

Question 13

What are direct taxes?

Answer 13

Tax levied on income, eg personal income tax

Question 14

Is income tax in UK progressive or regressive?

Answer 14

progressive, ie those earning more pay higher %

Question 15

Give two examples of indirect UK taxes.

Answer 15

VAT
excise duties

Question 16

Are indirect taxes progressive or regressive?

Answer 16

regressive, as higher proportion of income spent by lower income households on goods with excise duties, plus higher income households save higher proportion

Question 17

What is a key issue with progressive taxation?

Answer 17

Reduces incentive to work

Question 18

What is one problem with corporation tax?

Answer 18

reduced incentives - may discourage foreign direct investment into UK or encourage UK firms to invest elsewhere, or discourage from setting up company at all (or from being efficient)

Question 19

What effect will higher income tax have on multiplier?

Answer 19

reduces multiplier through lower marginal propensity to consume, although can be offset to some extent by higher government spending

Question 20

Does an increase in tax rate always lead to rise in tax revenue?

Answer 20

no, as higher tax revenue from rate increase but offset due to disincentives

Question 21

What does the Laffer curve show?

Answer 21

relationship between tax rate and tax revenue

Question 22

What shape is the Laffer Curve?

Answer 22

inverted U-shape

Question 23

How is government budget deficit calculated?

Answer 23

government expenditure less government revenue

Question 24

What is a fiscal deficit?

Answer 24

when government expenditure greater than government revenue

Question 25

Define *national debt*.

Answer 25

total government debt based on accumulated past deficits offset by past surpluses

Question 26

What is a *cyclical deficit*?

Answer 26

budget deficit that occurs during downturn of business cycle but disappears during upturn

Question 27

What is a *structural deficit*?

Answer 27

deficit that persists even when economy is at full employment

Question 28

What shape do monetariest believe the aggregate supply curve is?

Answer 28

vertical

Question 29

What impact do monetarists think increases in aggregate demand will have?

Answer 29

* prices increase * no change in real output * equilibrium at natural rate of output

Question 30

What shape do Keynesians think aggregate supply curve is?

Answer 30

sloping upwards then vertical

Question 31

Do Keynesains think equilibrium only occurs at full employment?

Answer 31

no

Question 32

What is *crowding out*?

Answer 32

when government expenditure raises cost of borrowing thus reducing private sector expenditure

Question 33

What is *crowding in*?

Answer 33

when decrease in government expenditure reduces cost of borrowing thus increasing private sector expenditure

Question 34

What are *automatic stabilisers*?

Answer 34

process by which government expenditure and revenue varies over busines cycle, helping to stabilise economy without government intervention

Question 35

Give two examples of *automatic stabilisers*.

Answer 35

* In recession, more unemployed so more government expenditure on benefits * In recession, tax revenues fall

Question 36

If there is full employment, what effect will increased government expenditure have?

Answer 36

pushes up prices with no change to real output

Question 37

Give two examples of reasons for government expenditure due to market failure.

Answer 37

* taxes to correct effect of externalities such as pollution * expenditure to ensure provision of public goods such as street lighting

Question 38

Why might X-inefficiency be an argument for privatisation?

Answer 38

if anagers of public sector services aren't sufficiently accountable for their actions, leading to inefficiency

Question 39

Will a switch from direct to indirect taxes increase or reduce inequality?

Answer 39

increase

Question 40

Why did Liz Truss focus on cutting taxes in her ill-fated spell as prime minister in 2022?

Answer 40

to fuel economic growth by reducing disincentives

Question 41

Give three reasons why tax collection may be difficult in developing countries.

Answer 41

1. ineffective administration system 2. many living in absolute poverty 3. can't effectively tax those in subsistence (eg grow enough to eat but don't otherwise work)

Question 42

Name a country thtqa printed money in late 2000s leading to hyperinflation

Answer 42

Zimbabwe

Question 43

What is the *Golden Rule of Fiscal Policy*?

Answer 43

Over economic cycle, net government borrowing will be for investment only, not for current spending.

Question 44

Who introduced the*Golden Rule of Fiscal Policy*?

Answer 44

UK Labour government (1997-2010)

Question 45

Labour government (1997-2010) introduced rule to keep public sector debt below 40% of GDP - what two key events caused this to be broken over that period and later?

Answer 45

financial crisis Covid-19 pandemic

Question 46

What is *transfer pricing*?

Answer 46

process by which a transnational company can minimise its global tax liability by manipulating internal transactions between its branches in different countries

Question 47

Give three general problems that make it difficult to design and implement macroeconomic policies.

Answer 47

* information inaccuracy (often just that it's out of date) * uncertainty abotu future * external shocks

Question 48

What was the Coronovirus Job Retention Scheme (known as "the furlough scheme")?

Answer 48

UK government provided support for people unable to work due to lockdown

Question 49

How did UK government finance the furlough scheme and loss of tax revenue due to pandemic / lockdowns?

Answer 49

increase in quantitative easing

Answer 50

* risk/uncertainty * interruption of supply chains, eg energy (with lots of oil and natural gas normally imported from Russia into Europe) and grain * inflation (due to oil and grain supplies reducing)