The Role Of The State In The Macroeconomy

Question 1

Tell me about the key elements of public finance

Answer 1

The three main components are public expenditure, taxation and public sector borrowing

Question 2

Tell me the aspects of public finance: public expenditure

Answer 2

Current expenditure, capital expenditure, transfer payments

Question 3

Tell me the aspects of public finance: taxation

Answer 3

Direct and indirect

Question 4

Tell me about the aspect of public finance: public sector borrowing

Answer 4

Fiscal (budget deficit)

National debt

Question 5

Expenditure by central and local government can be categorised into 3 distinct types:

Answer 5

Capital expenditure, current expenditure and transfer payments

Question 6

What does capital expenditure relate to

Answer 6

This relates to expenditure on long term investment projects such as new hospitals and roads. It is often referred to as public sector investment.

Question 7

What’s the objective of public expenditure

Answer 7

The objectives of public expenditure include the provision of public goods; defence and internal security; the provision of goods and services which yield external benefits and/or where there may be information gaps and asymmetric information, eg health and education; the redistribution of income; and expenditure to deal with external costs such as pollution and waste.

Question 8

What’s current expenditure

Answer 8

This is day to day expenditure on goods and services, eg salaries of teachers and nurses and drugs used by the NHS.

Question 9

What are transfer payments

Answer 9

These are payments made by the state (from tax revenues) to individuals in the form of benefits for which there is no production in return. Examples include child benefit, state pensions and the Jobseeker’s Allowance.

Transfer payments involve redistribution of income. Therefore they are not relevant to the calculation of a country’s national income.

Question 10

What are the factors influencing the size and pattern of public expenditure:

Answer 10

The level of GDP

The size and age distribution of the population

Political priorities

Redistribution of income

Discretionary fiscal policy

Debt interest

Question 11

Tell me about the reason for the changing size and composition of public expenditure: the level of GDP

Answer 11

As income increases, so do expectations, and the demand for many government-provided services such as health and education rises more than proportionately because demand for them is income elastic.

Question 12

Tell me about the reason for the changing size and composition of public expenditure: the size and age distribution of the population

Answer 12

An increase in the size of the population (eg through immigrations) is likely to place extra pressure on public services, while an ageing population will increase demand for medical services and social services for the elderly.

Question 13

Tell me about the reason for the changing size and composition of public expenditure: political priorities

Answer 13

A government in a developed country might place particular emphasis on improving the quality of health and education services, whereas the priority of a government in a developing country may be to improve infrastructure.

Question 14

Tell me about the reason for the changing size and composition of public expenditure: redistribution of income

Answer 14

Expenditure on those in relative poverty and on those with disabilities increased significantly in many countries before the 2008 financial crisis. However, subsequent austerity measures aimed at reducing fiscal deficits have led to cuts in means tested benefits such as tax credits and housing benefits, resulting in an increase in relative poverty.

Question 15

Tell me about the reason for the changing size and composition of public expenditure: discretionary fiscal policy

Answer 15

The 2008 financial crisis led to the resurrection of fiscal policy as a means of macroeconomic management in many countries, although often only temporarily.

Question 16

Tell me about the reason for the changing size and composition of public expenditure: debt interest

Answer 16

The massive increase in fiscal deficits from 2008 is leading to sharp rises in national debts in many countries. For example, Greece’s national debt as a proportion of GDP increased from over 125% in 2009 to 180% in 2015. In turn, this results in higher interest payments so that less money is available for public services.

Question 17

What may affect the significance of differing levels of public expenditure as a proportion of GDP

Answer 17

Productivity and growth

Living standards

Crowding out

Level of taxation

Equality

Question 18

How could productivity and growth be affected by the differing levels of public expenditure as a proportion of GDP, what would result from this?

Answer 18

Public expenditure on areas such as education, infrastructure and health might cause an increase in productivity and so result in a rightward shift in long run aggregate supply curve.

An increase in public expenditure will also cause an increase in aggregate demand because it represents an injection into the circular flow and so will have a multiplier effect on GDP. Therefore, higher public expenditure would cause an increase in economic growth.

Question 19

How could living standards be affected by the differing levels of public expenditure as a proportion of GDP, what would result from this?

Answer 19

Higher public expenditure as a proportion of GDP could result in an increase in living standards if, for example, much of it went to the improvement of public services such as health and education, or to housing and infrastructure. However, this would not necessarily be the case if most went on defence or on interest payments on the national debt.

Question 20

How could crowding out be affected by the differing levels of public expenditure as a proportion of GDP, what would result from this?

Answer 20

Increased public expenditure could cause crowding out. This might take two forms: resource and financial

Question 21

What’s resource crowding out

Answer 21

Resource crowding out occurs when the economy is operating at full employment and an increase in public expenditure results in insufficient resources being available for the private sector.

Question 22

What’s financial crowding out

Answer 22

Financial crowding out occurs when increased public expenditure or tax cuts are financed by increased public sector borrowing, so increasing the demand for loanable funds and driving up interest rates.

Question 23

How could the level of taxation be affected by the differing levels of public expenditure as a proportion of GDP, what would result from this?

Answer 23

Countries which have relatively low public expenditure as a proportion of GDP may also have relatively low levels of taxation. Some economists consider that this is desirable on the basis that the state is less efficient at allocating resources than the free market; that it gives consumers more choice in spending decisions; and that growth tends to be higher in countries in which public expenditure does not rise above 35% of GDP. However, Scandinavian countries have high living standards despite public expenditure being a relatively high proportion of GDP.

Question 24

How could equality be affected by the differing levels of public expenditure as a proportion of GDP, what would result from this?

Answer 24

The impact of different levels of public expenditure on equality will also depend on the composition of that public expenditure. In countries in which public expenditure is weighted towards means tested benefits, social housing, education, health and subsidies on basic food items, income distribution is likely to be more evenly distributed than in countries where public expenditure is weighted more to defence, universal benefits and prestigious investment projects.

Question 25

What are the three broad categories of tax

Answer 25

Progressive, proportional and regressive.

Question 26

What’s progressive tax

Answer 26

This is a tax in which the proportion of income paid in tax rises as income increases. Therefore, there are likely to be several tax bands, eg 10%, 20% and 45%, so that as income increases beyond a certain limit any further income is taxed at a higher tax rate.

Question 27

What’s proportional tax

Answer 27

This is a tax in which the proportion of income paid in tax remains constant as income increases. For example, some countries eg Latvia, Estonia and Hong Kong have a flat rate of income tax.

Question 28

What are regressive taxes

Answer 28

This is a tax in which the proportion of income paid in tax falls as income increases. Although governments do not deliberately set regressive taxes, some taxes have a regressive effect, most typically those on expenditure.

Question 29

What do direct taxes tax

Answer 29

Income and wealth

Question 30

What do indirect taxes tax

Answer 30

Expenditure

Question 31

For direct taxes, where does the incidence of the tax fall, ie, who bears the final burden of paying the tax?

Answer 31

A direct tax is paid by a person on whom it is legally imposed. Therefore, the burden of the tax cannot be shifted to any other person.

Question 32

For indirect taxes, where does the incidence of the tax fall, I.e who bears the final burden of paying the tax

Answer 32

The burden of an indirect tax may be shifted in whole or in part from the person on whom it is imposed to a third party. For example, a business may be legally responsible for paying VAT but part or all of the burden may be passed on to consumers.

Question 33

Tell me examples of direct taxes

Answer 33

Income tax, capital gains tax, corporation tax

Question 34

Tell me examples of indirect taxes

Answer 34

Value added tax, excise duties, tariffs.

Question 35

List me the economic effects of changes in tax rates (indirect and direct)

Answer 35

Incentives to work Tax revenues Income distribution Real output and employment The price level The trade balance FDI flows

Question 36

Tell me how changes in direct tax rates would effect: incentives to work

Answer 36

An increase in tax rates might have significant disincentive effects. For example, if the basic rate of income tax were raised, there would be less incentive for the unemployed or those not currently participating in the workforce to accept jobs. Similarly, if the higher rate of tax were increased, then people might be less willing to do overtime and more inclined to reduce their working hours, retire early or not seek promotion.

Question 37

Tell me how changes in direct tax rates would effect: tax revenues

Answer 37

Some economists consider that, if tax rates are increased too much, tax revenues may actually fall because the disincentives to work are so great. If the higher rate of income tax is increased, then there is likely to be an increase in tax avoidance (legal) and tax evasion (illegal) and a rise in the number of tax exiles. The Laffer curve shows this effect.

Question 38

What does the Laffer curve look like

Answer 38

``` Tax revenue on y axis Tax rate (% ) on x axis ``` It’s like an n shape If tax rates increase too much tax revenues will start to fall.

Question 39

Tell me how changes in direct tax rates would effect: income distribution

Answer 39

Most countries have a progressive income tax system so that the proportion of income paid in tax increases as income increases. Consequently, income tax makes income distribution more equitable.

Question 40

Tell me how changes in direct tax rates would effect: real output and employment

Answer 40

An increase in income tax rates would cause a fall in disposable income. In turn, this would cause a reduction in consumption and, therefore, a fall in aggregate demand. It may also be argued that the disincentive effects of higher income tax would cause a leftward shift in the aggregate supply curve. Both of these would, therefore, cause a fall in real output and an increase in unemployment. An increase in income tax rates would cause a fall in disposable income. In turn, this would cause a decrease in consumption and, therefore, in aggregate demand. Consequently, the aggregate demand curve would shift to the left and real output would fall. The disincentive effect of higher income tax rates could cause the aggregate supply curve to shift to the left, so real output would ultimately decrease. ^ can be explained either way

Question 41

Tell me how changes in direct tax rates would effect: the price level

Answer 41

The fall in aggregate demand (described before) would tend to depress the price level, although this may be offset slightly by a leftward shift in the aggregate supply curve resulting from an increased disincentive to work.

Question 42

Tell me how changes in direct tax rates would effect: the trade balance

Answer 42

An increase in income tax rates would cause a fall in disposable income. In turn, this would cause a reduction in consumption and, therefore, a fall in imports. This would result in an improvement in the trade balance.

Question 43

Tell me how changes in direct tax rates would effect: FDI flows

Answer 43

Higher income tax rates might act as a deterrent to FDI because entrepreneurs and senior managers from the global company would face a decrease in their disposable incomes, assuming they would be based in the country for which the FDI is destined.

Question 44

Tell me how changes in indirect tax rates would effect: incentives to work

Answer 44

Indirect taxes have a less obvious impact on incentives to work than direct taxes. However, it is possible that an increase in indirect taxes will encourage people to work harder so that they can maintain their current standard of living.

Question 45

Tell me how changes in indirect tax rates would effect: tax revenues

Answer 45

If VAT or other indirect taxes are increased then it is likely that tax revenues will increase. However, there is a danger that placing excessively high taxes on specific products might result in a fall in tax revenues. For example, high taxes on whisky in the UK resulted in less tax revenue, while high taxes on tobacco resulted in a considerable increase in smuggling.

Question 46

Tell me how changes in indirect tax rates would affect: income distribution

Answer 46

Many indirect taxes have a regressive effect, ie people on low incomes pay a higher proportion of their incomes in indirect taxes than those on higher incomes. This is particularly true of specific taxes which are a set amount per unit. Consequently, indirect taxes usually make income distribution less equal.

Question 47

Tell me how changes in indirect tax rates would affect: real output and employment

Answer 47

An increase in indirect tax rates would cause a fall in real income. In turn, this would cause a reduction in consumption and, therefore, a fall in aggregate demand. Consequently, real output and employment would fall.

Question 48

Tell me how changes in indirect tax rates would affect: the price level

Answer 48

The fall in aggregate demand as a result of increased indirect tax rates would cause a fall in the price level. However, an increase in indirect taxes will raise the price of most goods and services. If workers and trade unions respond by demanding wage increases to compensate for price rises, then an inflationary wage price spiral could result.

Question 49

Tell me how changes in indirect tax rates would affect: the trade balance

Answer 49

An increase in VAT or excise duties would have no impact on the trade balance. However, an increase in tariffs would reduce imports and so result in an improvement in the trade balance.

Question 50

Tell me how changes in indirect tax rates would affect: FDI flows

Answer 50

Higher indirect tax rates might act as a deterrent to FDI because prices of finished products would be higher, so reducing the real income of consumers. However, if the product is primarily aimed at the export market, this may not be a significant consideration.

Question 51

Tell me two other effects of an increase in indirect tax rates

Answer 51

An increase in indirect tax on a product will cause a leftward shift in the supply curve. The incidence of the tax on consumers and producers depends on the price elasticity of demand. The price of the product will increase above marginal cost, so resulting in allocative inefficiency, unless external costs are associated with the production of the product.

Question 52

What does fiscal policy refer to

Answer 52

Fiscal policy refers to the use of government expenditure and taxation in order to influence the level of economic activity in a country. From the 1980’s until 2008, it’s primary role was to ensure stable public finances. However, since 2008 it has once again assumed a role in macroeconomic management not only in the UK but also in China, the USA and a variety of other countries. Key features of fiscal policy include: Automatic stabilisers Discretionary fiscal policy

Question 53

What do automatic stabilisers relate to

Answer 53

They relate to the fact that some forms of government expenditure and revenues from some taxes change automatically in line with changes in GDP and the state of the economy. These stabilisers help to reduce fluctuations caused by the trade/balance cycle. Examples include progressive taxation and welfare payments such as unemployment pay and various means tested benefits eg pension credits for elderly people living on low incomes.

Question 54

What does discretionary fiscal policy refer to

Answer 54

Refers to deliberate changes in taxes and public expenditure designed to achieve the governments macroeconomic objectives. For example, the global economic crisis has led many countries to introduce a ‘fiscal stimulus’ to prevent severe recession. Typically, this has included: increases in public expenditure on infrastructure (roads and bridges in the USA); green technology and targeted subsidies to distressed industries (eg the car industry); and tax cuts.

Question 55

What’s the fiscal (budget) deficit

Answer 55

This occurs when public expenditure (both current and capital) is greater than tax revenues. Public sector net borrowing is the official term used to describe a fiscal deficit.

Question 56

What’s the official term for a fiscal deficit

Answer 56

Public sector net borrowing

Question 57

What is the national debt also referred to as

Answer 57

Public sector net debt

Question 58

What is national debt

Answer 58

The cumulative total of past government borrowing.

Question 59

What’s the ‘structural’ fiscal deficit

Answer 59

The structural fiscal deficit is an estimate of how large the deficit would be if the economy were operating at a normal, sustainable level of employment and activity. However, it is difficult to estimate precisely what this normal level would be.

Question 60

What’s the ‘cyclical’ fiscal deficit

Answer 60

The part of the fiscal deficit associated with recession.

Question 61

List me factors that influence the side and pattern of public expenditure and so fiscal deficit

Answer 61

GDP The size and age distribution of the population Discretionary fiscal policy Debt interest

Question 62

Tell me how GDP influences the size of fiscal deficits

Answer 62

During a recession, real GDP will be falling. In turn, public expenditure on automatic stabilisers will be rising while tax revenues will be falling. Consequently, fiscal deficits will be increasing. In contrast, during a period of rising real GDP, public expenditure on automatic stabilisers will be falling while tax revenues will be rising and so fiscal deficits will be increasing. However, the demand for many government provided services such as health and education rises more than proportionately because demand for them is income elastic, putting upward pressure on public expenditure.

Question 63

Tell me how the size and age distribution of the population influences the size of fiscal deficits

Answer 63

An increase in the size of the population is likely to mean an increase in public expenditure on health, education and infrastructure. An ageing population will lead to an increase in the dependency ratio, ie fewer workers per pensioner. This implies lower tax revenue from workers combined with higher expenditure on pensions to retire people, so causing an increase in fiscal deficits.

Question 64

Tell me how discretionary fiscal policy influences the size of fiscal deficits

Answer 64

The 2008 financial crisis led to the resurrection of fiscal policy as a means of managing the economy in several countries. In July 2015, South Korea pumped $10 billion into its economy to offset falling exports and an outbreak of Middle East respiratory syndrome (MERS)

Question 65

Tell me how debt interest influences the size of fiscal deficits

Answer 65

The massive increase in fiscal deficits from 2008 in the uk and many developed economies led to sharp rises in these countries national debts. In turn, this is resulting in higher interest payments on the national debt.

Question 66

Tell me the factors influencing the size of national debts

Answer 66

The national debt of a country would be affected by the following: Fiscal deficits or fiscal surpluses Fiscal deficits might be caused by recessions

Question 67

Tell me how fiscal deficits or fiscal surpluses can influence the size of national debts

Answer 67

If a country had persistent fiscal deficits then the national debt would be increasing, whereas if there were persistent surpluses then the size of the national debt is likely to fall.

Question 68

Tell me how the fact that fiscal deficits might be caused by recession is a factor influencing the size of national debts

Answer 68

Fiscal deficits might be caused by recessions, which would result in automatic stabilisers. Ie government expenditure on means tested benefits would increase, whereas tax receipts would fall. Further, fiscal deficits might arise because of ageing populations, which result in increased expenditure on state pensions, healthcare and social care.

Question 69

How can a large national debt be justified

Answer 69

Some argue that, if the money is being used to finance improvements in infrastructure and other capital products, then a large national debt might be justified because it would be increasing a country’s future productive potential, so making it easier to repay in the future.

Question 70

List me problems that may arise with large national debts

Answer 70

Opportunity cost Crowding out Danger of inflation

Question 71

How is opportunity cost an issue of national debts

Answer 71

There is an opportunity cost for future generations. Interest payments on the national debt mean that less money will be available for public services.

Question 72

How is crowding out an issue of large national debts

Answer 72

If the increasing size of the national debt is an indication of an increase in the size of the public sector, then resource or financial crowding out might occur.

Question 73

How is the danger of inflation an issue with large national debts

Answer 73

If the rising national debt has been caused by successive fiscal deficits, then there is a danger that inflationary pressures will develop, since injections will be rising relative to leakages. In the long run, future governments might be forced to raise taxes and/or cut public expenditure so that the national debt can be reduced.

Question 74

Tell me about general measures to reduce fiscal deficits and national debts

Answer 74

To reduce fiscal deficits and national debts a government might increase taxes and/or reduce public expenditure. However, there is a danger that such austerity measures might make the situation worse if the fall in aggregate demand caused by such measures causes a significant fall in real output. The higher unemployment associated with a fall in real output would cause tax revenues to fall, while expenditure on means tested benefits would increase.

Question 75

Tell me about measures to reduce poverty and inequality

Answer 75

Governments could take a variety of measures to reduce poverty and inequality, including: Increase in means tested benefits Increase in the progressiveness of the tax system, eg by increasing the rates of tax on higher incomes and/or by increasing the number of tax rates. Increase in the national minimum wage Subsidised housing for the very poor Increased support for children from low income families, eg free childcare for the under 5s; pupil premium, i.e extra finance to schools based on the number of children from poor backgrounds.

Question 76

Changes in interest rates and the supply of money are part of....

Answer 76

Monetary policy

Question 77

Tell me what changing interest rates might achieve

Answer 77

Interest rate changes are used to influence the cost of money and, in many countries, to achieve the inflation target set by the government. For example, if the inflation rate is predicted to rise above its target, then the central bank would increase the base interest rate. However, the use of interest rates has various disadvantages, eg the full effect of an increase in the rate of interest takes between 18 and 24 months to work through the economy; business costs rise; the exchange rate of the currency may increase, making a country’s goods less price competitive; and if confidence is high, businesses and consumers may continue to borrow and spend.

Question 78

Tell me how changes in the money supply might be achieved

Answer 78

In recent years changes in the money supply have been achieved through quantitative easing. This relates to the action of the central bank in buying up government bonds and corporate bonds from the commercial banks and other financial institutions. This has the effect of increasing bank deposits, thereby giving banks the ability to lend more easily to private and business customers.

Question 79

Why may changes in the money supply via quantitative easing be ineffective

Answer 79

Some argue that this policy is unlikely to be effective if the banks are risk averse and remain unwilling to lend unless the loan is risk free. There is also the danger that the increased supply of money in the economy could unleash a serious bout of inflation (based on the monetarist belief in the quantity theory of money). An increase in the money supply could also cause a depreciation in the exchange rate which, in turn, would result in an increase in net exports and so increase aggregate demand.

Question 80

Define quantity theory of money

Answer 80

States that there is a direct and proportionate relationship between changes in the money supply and the price level.

Question 81

Tell me about general measures to increase international competitiveness

Answer 81

Firms can improve the competitiveness of their products by investing in new capital equipment with the aim of raising productivity. They could improve the design and quality of their products through research and development. Governments can try to improve international competitiveness through a variety of supplyside policies.

Question 82

Tell me some supply side policies to increase international competitiveness

Answer 82

Measures to increase occupational mobility, such as education and training schemes. Macroeconomic stability, eg a low and stable inflation rate, sound public finances, a relatively stable exchange rate; steady economic growth. Public sector reform aimed at reducing red tape Government expenditure to improve infrastructure Privatisation Incentives for investment, such as tax breaks if companies use profits for investment rather than for distribution to shareholders.

Question 83

How may international agreements prevent countries increasing international competitiveness

Answer 83

It should be noted that international agreements are likely to prevent individual countries increasing their competitiveness by raising tariffs. For example, the UK cannot simply introduce tariffs on goods from other EU countries because of its legal obligations as a member of the EU. Similarly, most countries are members of the World Trade Organisation (WTO), whose rules prevent a country unilaterally imposing protectionist measures unless there is justifiable case.

Question 84

Can the UK change its exchange rate

Answer 84

It is not correct to suggest that ‘the UK government could devalue its currency’ because the pound is a floating currency. Also, since the Bank of England is independent, the government cannot directly engineer a depreciation in the exchange rate of the pound through a reduction in interest rates because control over interest rates is no longer in its hands.

Question 85

External shocks to the global economy may take a variety of forms. Examples include:

Answer 85

A sudden increase in oil prices A severe weather event such as a tsunami which has implications for the global economy or a long lasting drought affecting crops across the world A major financial crisis which has repercussions for the global banking system Wars and civil unrest which disrupt transport links Cyber attacks which have implications for communications globally

Question 86

How can policy responses vary

Answer 86

The policy response will vary according to the situation and priorities of policy makers. It should be remembered from theme 1 that economists are unable to conduct laboratory experiments, so policies used at one time in one set of circumstances may have a different impact than exactly the same policy measures used at a different time. In the 2008 financial crisis, there was a coordinated monetary policy response, which meant that many central banks slashed their base interest rates. In the UK, the base rate was cut to 0.5% in March 2009. In addition, many governments adopted a fiscal stimulus involving cuts in taxes and increases in public expenditure. These measures were designed to prevent a 1930s style depression.

Question 87

Tell me two measures to control global companies’ (transnationals’) operations

Answer 87

The regulation of transfer pricing Limits to government ability to control global companies

Question 88

Tell me about the regulation of transfer pricing as a measure to control global companies (transnational) operations

Answer 88

Global companies may own various subsidiary companies which adopt pricing policies for transactions between these subsidiaries that are aimed at minimising tax liability. They do this by ensuring that the most profit is made in the countries in which corporation tax and other taxes are lowest. In practice, it is very difficult for an individual government to regulate transfer pricing without global agreements.

Question 89

Tell me about the limits to government ability to control global companies

Answer 89

Many transnational (global) companies are ‘footloose’, ie they can move easily from one country to another to take advantage of lower operating costs, eg wages, corporation tax, labour and environmental regulations. Further, their investment decisions may have a significant impact on the economy of a country. Consequently, it is very difficult for any individual government to control these global companies.

Question 90

Tell me three problems facing policy makers when applying policies

Answer 90

Inaccurate information Risks and uncertainties Inability to control external shocks

Question 91

Tell me how inaccurate information is a problem facing policy makers when applying policies

Answer 91

Information regarding GDP, the balance of payments on current account and retail sales is notoriously inaccurate and subject to subsequent revisions. This can make it very difficult for policy makers to devise appropriate policies, given that they may be working with data which do not accurately reflect the state of the economy.

Question 92

Tell me how risks and uncertainties is a problem facing policy makers when applying policies

Answer 92

Some commentators consider that the financial crisis has had long term repercussions for savings and investment. Such uncertainties make it more difficult for policy makers in formulating economic policy. Similarly, there is considerable uncertainty about the possible long run impact of quantitative easing in the eurozone. Some monetarist economists argue that it could risk unleashing a massive bout of inflation (because money supply is being increased), while others consider that previous experience in other countries suggests that it will have little effect on the economy.

Question 93

Tell me how the inability to control external shocks is a problem facing policy makers when applying policies

Answer 93

Policy makers are usually unable to predict external shocks or their potential consequences. As a result, it may be difficult for them to formulate appropriate policy responses. Such external shocks could include a sudden and dramatic increase in oil and commodity prices; the exit of a country from the eurozone or political conflict.

Question 94

The public sector plays a significant role in the macroeconomy in which type of countries

Answer 94

In many developed economies.

Question 95

What was the UK public expenditure in 2014/15 as a % of GDP

Answer 95

45%

Question 96

What are the three distinct forms of public expenditure

Answer 96

``` Capital (on long term projects such as roads) Current (day to day expenditure) Transfer payments (expenditure for which there is no production in return) ```

Question 97

What are the three different categories of taxes

Answer 97

Progressive Proportional Regressive

Question 98

What are the two different types of tax

Answer 98

Direct (on income and wealth) | Indirect (on expenditure)

Question 99

The relationship between public expenditure and tax revenues is expressed in terms of...

Answer 99

A fiscal surplus or fiscal deficit

Question 100

What does fiscal policy involve

Answer 100

Fiscal policy involves the use of changes in public expenditure and taxation to influence the level of economy activity

Question 101

What does monetary policy involve

Answer 101

Involved the use of changes in interest rates and money supply to influence the levels of economic activity.

Question 102

What do supply side policies involve

Answer 102

Designed to influence the supply side of the economy through increasing competition and incentives aimed at increasing productivity.

Question 103

What are the two key characteristics of public goods

Answer 103

Non excludability, ie it is impossible to prevent people from consuming a product once it is provided Non rivalry ie consumption by one person does not limit consumption by others

Question 104

How would an increase in income tax affect the opportunity cost of work

Answer 104

When income tax rises, people will substitute away from work to leisure because the opportunity cost of work is now lower, ie the loss of earnings from work is now lower (this is called the substitution effect)

Question 105

How would an increase in income tax rates affect the value of the multiplier

Answer 105

It would cause the value of the multiplier to fall because leakages would have risen.

Question 106

How would public finances be affected by a recession

Answer 106

It is likely that public finances would deteriorate: automatic stabilisers mean that government expenditure on social benefits for the unemployed would increase, while tax revenues would fall (not only from incomes but also from a reduction in revenues from expenditure taxes eg VAT, and from corporation tax)

Question 107

What factors might limit the effectiveness of monetary policy

Answer 107

Banks might be charging considerably higher interest rates on loans from the Bank of England’s base rate. Further, banks may be unwilling to lend if they consider the risks of non repayment to be too great. A lack of confidence might mean that firms and consumers are unwilling to borrow.