Unit 4: Government and the Macroeconomy

Question 1

Define circular flow of income

Answer 1

It shows the movement of income and money around the economy.

Question 2

Define injection

Answer 2

When income is added to the circular flow of income
G
X
I

Question 3

Define withdrawal

Answer 3

When income is removed form the circular flow of income
S
T
M

Question 4

List the 5 macroeconomic goals of government

Answer 4

Economic growth
Reduce unemployment
Stable prices
Balance of payments stability
Redistribution of income

Question 5

List some conflicts between macroeconomic aims

Answer 5

Economic growth - stable prices
Full employment - stable prices
Economic growth - balance of payments stability
Economic growth - redistribution of income

Question 6

What is fiscal policy

Answer 6

government spending and taxation

Question 7

Define current expenditure

Answer 7

• is for short term, includes wages of public sector workers, state pensions, welfare payments

Question 8

Define capital expenditure

Answer 8

• is for long term, includes investments on public infrastructure

Question 9

define tax burden

Answer 9

the total tax revenue as a proportion of the national income of a country

Question 10

Why taxes are used?

Answer 10

to raise revenue
to manage the macroeconomy - increase taxes, reduce demand and inflation
to reduce inequalities
to protect the environment - increase taxes on production activities that create pollution

Question 11

What should a good tax be?

Answer 11

Fair and equitable ( same amount of tax for ppl with same incomes )
Non-distortionary, should be stable from year to year to allow firms and people to plan, should not be set very high to reduce incentives of firms
easy to pay & calculate

Question 12

Define progressive tax system

Answer 12

income tax increases as income increases

Question 13

Define regressive tax system

Answer 13

income tax decreases as income decreases

Question 14

define proportional tax system

Answer 14

income tax is the same for all level of incomes

Question 15

direct taxes

Answer 15

taken directly from individuals or firms

ex. income tax, cooperation tax, inheritance tax

Question 16

indirect taxes

Answer 16

taken indirectly from incomes when spent on goods and services
ex. VAT, tariffs , excise duties

Question 17

What is expansionary fiscal policy

Answer 17

to increase aggregate demand

- cutting taxes

Question 18

What is contractionary fiscal policy

Answer 18

• to decrease aggregate demand

- increase taxes

Question 19

Problems with fiscal policy

Answer 19

taxation reduce incentives for firms ( production cost increases)

• increase inflation , cost - push inflation
• increases unemployment

Question 20

What is monetary policy

Answer 20

money supply and interest rates

Question 21

What is expansionary monetary policy

Answer 21

reduce interest rates, reduces saving, increases consumer spending and investment
increase money supply through quantitative easing

Question 22

What is quantitative easing

Answer 22

government creates electronic money by adding 0 to their account
uses it to buy bonds from firms
this means more cash to loan
increase borrowing, spending, increase aggregate demand

Question 23

What is contractionary monetary policy

Answer 23

increase interest rates, borrowing expensive , reduce disposable income, saving increases
cutting money supply - reduces the amount of money banks have so that there is less money to lend to customers , decrease aggregate demand, increase unemployment

Question 24

What are supply side policies ?

Answer 24

To increase aggregate supply and economic growth 
targeted tax cuts
selective subsidies 
Improve edu and training
minimum wage laws
competition policy 
remove trade barriers 
privatisation

Question 25

What is GDP

Answer 25

GDP measures the total value of a country’s output during a period of time

• only domestic production
• only in the country

Question 26

What is GNP

Answer 26

GNP measures the total value of goods and services produced by factors of production supplied by citizens regardless of location
- outside the country

Question 27

Define recession

Answer 27

A period of time when real GDP is declining for 2 consecutive quarters

Question 28

Difference between real GDP and nominal GDP

Answer 28

real GDP takes in account of inflation

nominal GDP doesn’t

Question 29

Define labour force participation rate

Answer 29

labour force as a percentage of total working age population

Question 30

Formula for unemployment rate

Answer 30

no. of people unemployed/ labour force * 100

Question 31

Types of unemployment

Answer 31

Structural - jobs rapidly shift due to technology, competition
Seasonal - jobs only available at certain times of the year
Cyclical - refers to cyclical trends in growth
frictional - workers leave to find a new job

Question 32

CPI and RPI

Answer 32

both measures inflation

Question 33

3 types of inflation

Answer 33

demand pull
cost push
import

Question 34

Deflation

Answer 34

decrease in general level of prices

Question 35

Disinflation

Answer 35

decrease in the level of inflation

Question 36

Hyperinflation

Answer 36

when prices of goods and services rise more than 50% a month