T4.5: Role Of The State In Macroeconomies

Question 1

What is capital expenditure?

Answer 1

Government expenditure on capital items and infrastructure that should generate a future income stream.

Question 2

What does government expenditure on public sector worker wages include?

Answer 2

Expenditure on wages and raw materials that are used up immediately, such as school dinners and pharmaceuticals for the NHS.

Question 3

What is the crowding out view?

Answer 3

The view that rapid growth of government spending transfers scarce productive resources from the private sector to the public sector, potentially leading to lower productivity, higher taxes, and interest rates.

Question 4

What is government debt?

Answer 4

Money (or credit) owed by a central government to creditors, both domestic and international.

Question 5

What is the role of the Financial Policy Committee (FPC) in the UK?

Answer 5

To identify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system.

Question 6

What is financial stability?

Answer 6

The condition in which the financial system can withstand shocks and the unravelling of financial imbalances.

Question 7

What are fixed interest bonds?

Answer 7

Government bonds that pay a fixed annual interest known as the coupon.

Question 8

What is the Prudential Regulation Authority (PRA)?

Answer 8

Part of the Bank of England responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms.

Question 9

What is public sector debt?

Answer 9

Debt owed by central and local government and by public corporations.

Question 10

What is quantitative easing?

Answer 10

A central bank’s method to increase the base supply of money in the banking system to encourage lending at cheaper interest rates.

Question 11

What is the real interest rate?

Answer 11

The money rate of interest minus the rate of inflation, important for spending and saving decisions.

Question 12

What is the structural deficit?

Answer 12

The part of the deficit not related to the state of the economy, which will not disappear when the economy recovers.

Question 13

What is the incidence of a tax?

Answer 13

How the final burden of a tax is shared out among producers and consumers.

Question 14

What does income represent?

Answer 14

A flow of earnings from using factors of production to generate goods and services.

Question 15

What is an indirect tax?

Answer 15

A tax imposed on producers by the government, such as excise duties and value-added tax.

Question 16

What is the Laffer Curve?

Answer 16

A relationship suggesting there is an optimum tax rate that maximizes total tax revenue.

Question 17

What is a progressive tax?

Answer 17

A tax where the marginal rate rises as income increases.

Question 18

What is a proportional tax?

Answer 18

A tax with a constant marginal rate leading to a constant average rate of tax.

Question 19

What is a regressive tax?

Answer 19

A tax where the rate falls as income rises, resulting in a lower average rate for higher incomes.

Question 20

What is the tax burden?

Answer 20

Total tax revenues as a percentage of GDP.

Question 21

What are automatic stabilizers?

Answer 21

Features of the tax and transfer system that reduce economic activity during booms and stimulate activity during slumps.

Question 22

What is a cyclical budget (fiscal) deficit?

Answer 22

When government expenditure exceeds tax revenue in a given year.

Question 23

What is debt servicing?

Answer 23

The repayment of interest and principal to external creditors.

Question 24

What is debt sustainability?

Answer 24

The ability to manage debts so they do not grow and impede economic stability or growth.

Question 25

What is discretionary fiscal policy?

Answer 25

Deliberate attempts to affect the level and growth of aggregate demand through changes in government spending and taxation.

Question 26

What is national saving?

Answer 26

Total public and private sector saving measured as a share of GDP.

Question 27

What is the public sector?

Answer 27

Comprises central government, local government, and public corporations.

Question 28

What is a structural budget deficit?

Answer 28

The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers.

Question 29

What is an AAA Credit Rating?

Answer 29

The best credit rating that can be given by credit rating agencies to corporate investment bonds, indicating low risk of debt default.

Question 30

What does balanced growth refer to?

Answer 30

Balanced growth refers to the expansion of the capital components of aggregate demand.

Question 31

What is an external shock?

Answer 31

An unexpected event beyond the control of the country’s officials that has a large negative impact on its economy.

Question 32

What are financial shocks?

Answer 32

Financial shocks occur in the global financial system, such as increased stress in the international banking system or financial markets.

Question 33

What is the long run Phillips Curve?

Answer 33

The long-run Phillips Curve is assumed to be a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on the rate of unemployment.

Question 34

What does monetary stability mean?

Answer 34

Monetary stability means stable prices and confidence in the currency.

Question 35

What is the nominal interest rate?

Answer 35

The nominal interest rate is the price of borrowing a unit of domestic currency for some period of time unadjusted for inflation.

Question 36

How is the real interest rate calculated?

Answer 36

Real rate of interest = nominal rate of interest - rate of inflation.

E.g. if inflation is 2% and nominal interest rate is 6%, then real interest rate is +4%.

Question 37

What is re-balancing in economics?

Answer 37

A process of changing the nature of economic growth and development, such as increasing reliance on domestic demand and achieving more equal income distribution.

Question 38

What is a sovereign debt crisis?

Answer 38

A broad term for the widespread problem of high government fiscal deficits and rising national debts in many developed countries, especially in vulnerable countries inside the European currency zone.

Question 39

What is a sovereign wealth fund (SWF)?

Answer 39

A government or state-run fund usually created by profits from natural resources, often secretive and growing dramatically when oil prices rise.

Question 40

What is transfer pricing?

Answer 40

The price at which divisions of a company transact with each other, such as the trade of supplies or labour between departments.

Question 41

What are transnational companies (TNCs)?

Answer 41

TNCs base their manufacturing, assembly, research, and retail operations in a number of countries.

Question 42

What is an unbalanced economy?

Answer 42

Imbalances are a common feature of many modern economies, such as imbalances between savings and investment, domestic and external demand, and public and private sectors.

Question 43

What is under-employment?

Answer 43

When people want to work full time but find that they can only get part-time work, resulting in a loss of hours that the economy can use.