Theme 4

Question 1

what are the three types of spending to cause a budget deficit

Answer 1

transfer spending
current spending
capital spending

Question 2

what is transfer spending

Answer 2

a type of spending that distributes payments directly from government to households e.g benefits

Question 3

what is capital spending

Answer 3

spending on infrastructure that improves LRAS

Question 4

what is current spending

Answer 4

spending on the public sector e.g their wages

Question 5

which spending is short term and which is long term

Answer 5

transfer/current is ST
Capital is LT

Question 6

which spending is superior overall as an EV

Answer 6

capital

Question 7

list 3 policies to counteract a current account deficit

Answer 7

• ssp
• expenditure switching policies
• expenditure reduction policies

Question 8

explain the use of expenditure switching policies

Answer 8

used to reduce C.A deficit
- uses appreciation and depreciation to redirect the spending of foreigners and domestic consumers
- for example if there is a depreciation:
- cost of imports become expensive so less imports are bought
- exports become cheaper so more exports are bought
as a result closes the current account deficit

Question 9

explain expenditure reduction policies

Answer 9

policies targeted to influence consumer spending and help close budget deficit by reducing peoples incomes.
- as a result they’re unable to afford expensive imports and instead buy cheaper domestic produced goods

Question 10

give examples of supply side policies to improve infrastructure (3)

Answer 10

1. tax breaks and subsidies in private sector
2. deregulation especially in housing market
3. increase government capital spending

Question 11

give supply side policies to improve the skills of a work force (productivity)

Answer 11

• increase availability of apprenticeships
• performance related pay
• 4 day week
• changes in immigration policies to attract skilled migrant workers

Question 12

give ssp to increase labour market flexibility (deregulation)

Answer 12

• restrict power of TU
• reduce minimum wage or remove it
• allow 0 hour contracts

Question 13

ssp to promote competition between firms

Answer 13

• block mergers and acquisitions
• reduce corp tax
• subsidies for new entrants
• privitisation

Question 14

ssp to increase incentive to work

Answer 14

• cut and reform benefits
• increase personal allowance
• increase childcare provisions
• reduce income tax
• increase NMW

Question 15

what are the two types of crowding out

Answer 15

financial crowding out
resource crowding out

Question 16

explain financial crowding out

Answer 16

• when government debt is high and they continue to borrow from the central bank
• central bank would increase I.R
• private sector firms are deterred from loans due to high I.R leading to crowding out
• therefore public sector has higher market share of loans

Question 17

2 benefits of C.A deficit

Answer 17

• sign of boom and high consumption (rise in quality of life)
• reduced protectionism = comparative advantage trades

Question 18

2 cons of C.A deficit

Answer 18

• fall in LRAS due to low productivity and high inactivity (22.2%) leads to fall in international competitiveness
• fall in AD and negative multiplier effect

Question 19

Evaluation to current account deficit

Answer 19

• 1/3 of BOP
• ST C.A vs Persistent LT C.A
• use of policies for corrections (3) ssp, expd switch, expd red

Question 20

effects of LT C.A deficit (persistent)

Answer 20

• brain drain, capital flight, ho money outflow and hysterisis

Question 21

Why may a budget deficit be good for the export industry?

Answer 21

increase capital spending
- increase in LRAS
- fall in cost of production
- fall in price of X
- increase in international competitiveness

Question 22

2 cons of budget deficit

Answer 22

• increase in national debt (negative ME) kills future growth
• financial crowding out

Question 23

what does the budget deficit depend on?

Answer 23

• depends on the type of spending
• original budget position
• size of the deficit (% of GDP)
• ST or LT deficit
• how it is financed as it better to be from tax revenue then from borrowing