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Theme 4 Economics > Role Of The State In The Macroeconomy > Flashcards

Role Of The State In The Macroeconomy Flashcards

1
Q

Capital Government Expenditure

A

Spending on investment goods like new roads/education/hospitals

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2
Q

Transfer payments

A

Payments with no corresponding output, from one group to another I.e pensions/benefits

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3
Q

Current government expenditure

A

General government final consumption + transfer payments + interest payments

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4
Q

Uk government main areas of spending

A

Education (12%), defence (6%), pensions (20%), defence (6%)

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5
Q

What is the size of government expenditure usually relative to?

A

Average income of the country - lower income means lower tax revenues for the government, and HICs demand more services from the government

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6
Q

Impact of the 2008 financial crisis on government spending

A

Huge increases in government spending as welfare payments increased and money was needed to bail out banks (I.e Lloyds)

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7
Q

What has been the UK government’s policy since 2010?

A

Reducing their debt

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8
Q

Why will Europe/Japan suffer from increased government spending in the future?

A

Ageing population

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9
Q

Positive impacts of increased government spending on productivity and growth

A

Improves infrastructure, economies of scale so improved productivity, education creates human capital for growth and healthcare creates an active workforce, can target areas with high unemployment to create a multiplier effect

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10
Q

Positive impacts of increased government spending on living standards

A

Corrects market failure + provides public goods, reduces absolute poverty through benefits

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11
Q

Negative impacts of increased government spending on productivity and growth

A

Free market economists argue spending is wasteful as government lack knowledge + efficiency is lower as less expertise

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12
Q

Negative impacts of increased government spending on living standards

A

Government inefficiency may disincentivise workers which reduces output, principal agent problem- government spending taxpayers money, doesn’t benefit them

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13
Q

Why may the principal agent problem not be as much of an issue for the UK government?

A

Democratic political system, people choose government

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14
Q

Crowding out effect

A

Government must borrow money to increase spending, so increased demand for loans raises the interest rates which crowds out private sector investment as it becomes more risky

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15
Q

Other examples of government crowding out private sector

A

Government use resources which then can’t be used by the private sector

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16
Q

When is crowding out effect worst?

A

High employment as may cause people to lose jobs - if there is high unemployment it may lead to crowding in

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17
Q

Crowding in explained

A

Increased in government spending leads to an increase in growth, which boosts private sector investment as greater confidence

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18
Q

What are the issues with high government spending regarding taxation?

A

Tax levels must be high to sustain spending, which disincentivises the rich but improves equality

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19
Q

Impacts of government spending on equality

A

More spending increases equality, reduces poverty

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20
Q

Progressive tax definition

A

Those on higher incomes pay a higher proportion of the tax (I.e income tax)

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21
Q

Regressive tax definition

A

When income increases the proportion of tax paid becomes smaller, usually when tax is the same for everyone (I.e VAT)

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22
Q

Which regressive taxes have the worst effect on lower incomes?

A

Alcohol duties and cigarette taxes - causes issues as addictive, leads to high proportion of income being spent on these goods

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23
Q

Proportional tax

A

When proportion of income spent on tax remains the same whilst income changes (I.e tax is 10% of income’

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24
Q

Negative impacts of tax changes on incentives to work

A

Higher taxes discourage work, those on higher income may move abroad which creates brain drain, those on lower income may be stuck in the poverty trap

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25
Q

Which tax most affects people’s incentive to work?

A

Income tax - a switch to indirect taxes may increase incentives to work

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26
Q

Indirect tax

A

A tax levied on goods or services rather than an individual of company (I.e VAT)

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27
Q

Direct tax

A

A tax that a person or business pays directly to who imposed the tax (usually the government)

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28
Q

Argument that higher taxes increases incentive to work

A

Means people work longer to maintain income so incentive to work increases

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29
Q

Example of a country with high tax and high growth

A

Sweden

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30
Q

What does the Laffer Curve show?

A

A rise in tax doesn’t always increases tax revenue as may encourage avoidance/evasion

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31
Q

Why is revenue from indirect taxes not always dependent on tax levels?

A

Dependent on consumer spending, lower taxes may increase revenue as more consumption due to lower prices

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32
Q

Impacts of tax increases on income distribution

A

Progressive taxes increase equality, regressive taxes worsens equality - switch to direct taxes to improve equality

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33
Q

Which tax has the greatest impact on improving income distribution if increased?

A

Inheritance tax -most progressive tax form

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34
Q

Why does redistributing tax to improve equality not necessarily help the poor?

A

Benefits are also needed as the poor don’t get the money directly, government could spend it on other goods like defence

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35
Q

Impact of a rise in direct taxes on output and employment

A

Rise in direct taxes decreases AD as people have less disposable income

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36
Q

Impact of a rise in indirect taxes on output and employment

A

Rise in indirect taxes decreases AS as hurts firms more

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37
Q

How can income taxes affect LRAS?

A

High income tax may decrease LRAS as less incentive to work

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38
Q

Impact of taxes on price levels

A

Rise in indirect taxes causes cost-push inflation , rise in income taxes reduces AD so prices lower

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39
Q

Impact of change in tax levels on trade balance in the short-run

A

Rise in taxes reduces AD, which benefits the BoP in the short-run as demand for imports decreases

40
Q

Impact of changes in tax levels on trade balance in the long run

A

Reduced invesment due to lower availability of credit may hurt export competitiveness, worsening the trade balance

41
Q

Impact of tax changes on FDI flows

A

Low taxes encourages investment x issue is countries compete to lower taxes to attract FDI which worsens debt

42
Q

Automatic stabilisers definition

A

Mechanism which reduces economic changes on income - recession (benefits increase), boom (taxes increase) - controls AD

43
Q

What is an issue with automatic stabilisers?

A

They are unable to prevent economic changes, just reduce the size of the impact

44
Q

National debt definition

A

Sum of all the fiscal deficits built up over time

45
Q

Fiscal deficit definition

A

The difference between government spending and government revenue over a year

46
Q

UK debt levels in 2024

A

101.3% of GDP

47
Q

Uk deficit levels in Q4 of 2023

A

6% of GDP (£40 billion)

48
Q

Cyclical deficit

A

When a deficit occurs due to the state of the economy - recession likely to have a larger deficit

49
Q

Structural deficit

A

Long-term deficit that isn’t related to the economy

50
Q

Actual deficit

A

Structural + Cyclical deficit

51
Q

Issues measuring deficit levels

A

Difficulty knowing what is structural and cyclical deficit

52
Q

Factors influencing the size of fiscal deficits?

A

Trade cycle, natural disasters, interest rates, privatisation, government aims, number of dependants

53
Q

How does the trade cycle influence the size of the deficit?

A

During a recession deficit worsened ( 2010 deficit reached 10.1% of GDP)

54
Q

How do interest rates influence the size of the deficit?

A

If interest rates on government repayments increase then the real size of the deficit increases ( 7% of UK government spending is in interest repayments on loans)

55
Q

How does privatisation influence the size of the deficit?

A

The one-off payment to the government improves the deficit in the short-term

56
Q

What is the UK government aims influencing the size of the deficit?

A

UK austerity policy since 2010, fiscal deficit reduced by 75% since 2010

57
Q

Factors influencing the size of national debt

A

Consistent fiscal deficit grows national debt, ageing population worsens debt as more spent on pensions/healthcare

58
Q

Significance of deficit/debt on interest rates

A

High levels of spending may raise interest rates as there is an increase for demand of money - not always the case as the government may borrow overseas

59
Q

Significance of deficit/debt on future generations

A

Interest repayments means future generations pay for todays spendings - argument is fair if spending is in capital like infrastructure

60
Q

Significance of deficit/debt on inflation

A

If government increase spending and private sector spending doesn’t fall, AD may rise too much causing severe inflation

61
Q

How does the deficit/debt cause hyperinflation

A

If the government can’t borrow money they may print money, which if not controlled causes increase in supply,t and fall in value of currency (Zimbabwe 2008)

62
Q

Significance of deficit/debt on investment to government

A

Likely to reduce as is more risky as if debt rises, government may default on payments

63
Q

How can government borrowing improve growth?

A

If is used for capital spending will boost supply side

64
Q

How can the government use loose fiscal policy to reduce deficit/debt?

A

Increasing spending will cause a demand stimulus which benefits debt in the long run as increases tax revenue

65
Q

How can the government use tight fiscal policy to reduce debt/deficit?

A

Decreasing spending reduces import demand and raising taxes increases tax revenue

66
Q

Negative drawbacks of tight fiscal policy

A

Worsens equality, living standards and growth

67
Q

How can the government reduce poverty/inequality?

A

Use a progressive tax system, use benefits/transfer payments, provide public goods, reduce wage differentials, improve access to education/training, use price controls

68
Q

How may a progressive tax system worsen poverty/inequality?

A

Laffer curve - may encourage avoidance ( example USA)

69
Q

What % of government spending is in transfer payments?

A

30%

70
Q

How can the government reduce wage differentials?

A

Implement a minimum/maximum wage, trade union legislation, employers provide pensions

71
Q

Issues with the use of a minimum wage?

A

Increases unemployment

72
Q

Issues with the use of a maximum wage?

A

Brain drain

73
Q

Example of the Uk government improving access to education?

A

Pupil premium scheme

74
Q

Trickle down argument

A

Increasing income of the rich may increase income of the poor as the rich invest money increasing employment

75
Q

Use of price controls to reduce poverty/inequality

A

Price controls on essential goods like electricity- but may create black market

76
Q

Domestic reason for changing interest rates

A

Control inflation

77
Q

Global reason for changing interest rates

A

Lower the exchange rate

78
Q

Issues due to Globalisation of the financial market

A

Difficulties managing domestic money supply

79
Q

When can quantities easing be used?

A

When the country is suffering from the liquidity trap?

80
Q

Supply side measures to boost international competitiveness?

A

Improved productivity - increased competition lowers export prices

81
Q

How can the government boost international competitiveness?

A

Decrease taxes on export industries to reduce prices

82
Q

Exchange rate policies to boost international competitiveness?

A

Control inflation (used in China)

83
Q

How else can a country improve international competitiveness?

A

Join WTO/sign trade agreements

84
Q

Issues with increasing interdependency of countries in the UK?

A

Rise in prices in other countries (I.e oil) effects UK GDP - shocks in global economy accounts for 2/3 of weakness in UK output

85
Q

Issues with Brexit regarding UK economy

A

Inflation rose due to falling value of the pound as demand for imports fell (£35 billion spent to leave EU)

86
Q

Positives of TNCs

A

Can bring huge gains to the economy - jobs, knowledge and investment

87
Q

Isssues with TNCs

A

Can corrupt government, damage culture, capital flight

88
Q

How can capital flight be reduced?

A

Making TNCs set up a joint company with a local partner meaning some profits are retained in the country

89
Q

How do firms avoid tax?

A

Use of transfer/shadow pricing

90
Q

What regulation is done to prevent transfer/shadow pricing?

A

Transfer Pricing Guidelines 1995 - however issue as not regulated well

91
Q

Dutch sandwich meaning

A

Costs/revenue/profits are sent from an Eu country (I,e Britain) through the Netherlands or Luxembourg then sent to a tax haven like Barbados

92
Q

Impact of Dutch sandwich on countries tax revenue ?

A

For every £1 Luxembourg gain, other countries lose £1000 of tax revenue

93
Q

Difficulties with stopping transfer pricing/dutch sandwich tax avoidance

A

Solutions require a worldwide agreement - a solution that would benefit the Uk would hurt Luxembourg and Bahamas

94
Q

Problems facing policy makers in the UK

A

Inaccurate information, uncertainty of how consumers will react, external shocks

95
Q

What is another name for interventionist strategies?

A

Inward-looking

96
Q

What is another name for market-based strategies?

A

Outward-looking strategies

97
Q

If the question states for ‘other’ strategies to promote development, what should you use?

A

Lewis Model/Develop Tourism

Theme 4 Economics (6 decks)

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