Topic 2 - The role of the Government

Question 1

Name the 5 direct taxes

Answer 1

• Income
• Inheritance
• National Insurance (NIC)
• Corporation
• Capital gains

Question 2

Give the main example of both indirect and direct taxes

Answer 2

• Indirect - VAT
• Direct - Income

Question 3

Who is responsible for tax and who collects it

Answer 3

• The Treasury are responsible for tax and HMRC collect

Question 4

What happens in contractionary fiscal policy

Answer 4

• Tax INCREASED and Government spending DECREASED
• This lessens demand due to less disposable income

Question 5

What happens in expansionary fiscal policy

Answer 5

• Tax DECREASED and Government spending INCREASED
• Capital can be raised fro this through Gilts and Treasury Bills

Question 6

What is meant by ‘imposing exchange controls’

Answer 6

• Pegging or tying domestic currency to another currency
• Allows better control of domestic currency
• Limits amount of currency imported or exported

Question 7

What is ‘balance of payments’ and how can a deficit be fixed

Answer 7

• The balance of money between CREDIT from exports and DEBIT from imports

Can be fixed by:

• Increasing interest rates to encourage overseas investment
• Imposing tariffs and import quotas
• Imposing exchange controls

Question 8

What happens if money supply exceeds value of goods and services

Answer 8

• INFLATION - People have more money, price of G&S goes up

Question 9

3 main ways quantitative easing affects economy

Answer 9

• Lower borrowing costs and more spending
• More business development
• More money to be lent out by banks

Question 10

What is quantitative easing and how is it achieved

Answer 10

• ‘Printing’ of money to increases money supply in economy
• Money spent on Bonds and Gilts from private sector companies

Question 11

What is the MPC and what do they do

Answer 11

• Monetary Policy Committee
• Sets BoE’s interest rates for short-term - lending to banks
• Known as the ‘Bank rate’

Question 12

Explain the process of how Monetary Policies can be achieved

Answer 12

1. Banks need to borrow money
2. Central bank raises/lowers interest rates
3. ‘Bank rate’ reflected onto all the UK’s bank rates
4. Makes borrowing more expensive
5. Makes money increase or decrease in value

Question 13

4 tier process of UK regulation

Answer 13

• Acts of Parliament
• Regulatory bodies
• Policies of financial institutions themselves
• Arbitration schemes

Question 14

What are the 2 state benefits for the unemployed

Answer 14

• JSA
• UC

Question 15

Difference between nominal and real interest rates

Answer 15

• Nominal - actual interest rate paid
• Real - rate paid after accounting for inflation

Question 16

3 indices used to keep track of inflation

Answer 16

• CPI
• RPI
• AWE - Average weekly earnings

Question 17

Difference between M0 and M4

Answer 17

• M0 - ‘narrow money’ (cash)
• M4 - ‘broad money’, Bank and Building society deposits and new money from loans and overdrafts

Question 18

Difference between micro/macroeconomics

Answer 18

• Macro - economy of whole nation - decisions and policies affect the whole economy
• Micro - How areas within the economy affect the economy as a whole

Question 19

Difference between Fiscal and Monetary Policy

Answer 19

• Fiscal - money spent and gained by the Government to influence/build the economy
• Monetary - Government policies that affects supply and price of money, mainly through interest rates

Question 20

4 objectives of the government economic policy

Answer 20

• Price stability
• Low unemployment
• Balance of payments
• Economic growth

Question 21

2 forms of EU legislation

Answer 21

• Regulations - acts that must be implemented directly into member states’ law
• Directives - outline an objective that can be achieved by member state however they see fit