unit 6: the role of the government in an economy

Question 1

explain the government as a producer and an employer

Answer 1

as a producer
- private enterprise isn’t interested in getting in the supply and production of essential goods or services’ not profitable. goods that are a natural monopoly may be provided by the government. such goods are education and health services, sanitation, provision of bulk electricity and water services, public parks and recreational services where the supplier must aim to serve the community rather than making a profit.

as an employer
- to provide goods/services, the government must employ factors of production, including labour. thus, the government can have a significant role as an employer- especially those governments that operate in a mixed economy

Question 2

define the government economic policy

Answer 2

the government economic objectives and the way in which it tries to achieve these objectives

Question 3

list and explain 3 objectives of the government economic policy

Answer 3

full employment- to create job opportunities for people who are willing to work and able to find jobs within a reasonable period of time

prevention of inflation- preventing and redusicng inflation. stable price levels can result in better and more investment

sustainable rate economic growth- increase the real gross domestic product, an increase in the annual output of goods and services

Question 4

list and explain 2 objectives of the government economic policy

Answer 4

satisfactory balance of payments position- imports must be controlled because when there are more imports than exports, the country will have a deficit on its balance of payments. more money will flow out of the country through paying for imports than come into the country through exports.

redistribution of income- there is an unequal distribution of income in all parts of the world. governments try to reduce this inequality by altering the allocation of public resources through changing expenditures and taxes

Question 5

explain the fiscal and monetary policy

Answer 5

fiscal- the plan of expenditures a government undertakes to provide goods or services and the way in which it finances these expenditures; main instruments are taxation and the budget.

monetary- the use of a variety of mechanisms in the market to influence the amount of money in circulation. it is about the rate at which money supply grows and how to control it.

Question 6

define tax

Answer 6

a compulsory contribution to the state by individuals to enable it to achieve its economic aims, such as poverty reduction snd full employment.

Question 7

why does the government impose taxes?

Answer 7

• to provide the government with the money it needs to pay for the many services it proiveds
• to control the amount of spending in the economy
• can help reduce the inequalities in distribution of income; higher-income groups can be made to pay higher taxes
• to protect local industries from foreign competition through tariffs.
• to discourage the consumption of some commodities

Question 8

list and explain the types of taxes

Answer 8

direct taxes - tax the government takes directly from income and wealth and the responsible peron cannot shift it to the next person

indirect tax - taxes on expenditure, the person responsible for paying it canshift it to the next peron in the form of high prices.

Question 9

list and explain the methods of paying tax

Answer 9

proportional taxes- all tax payers pay the same percentage of their income on tax

progressive taxes- higher income-earners pay a larger percentage of their income.

regressive taxes- tax where the ratio of tax paid to income falls as income rises.

Question 10

list the 3 types of fiscal policy

Answer 10

fiscal neutral policy - taxation is equal to government spending
expansionary fiscal policy - government spending is greater than taxation
contractionary fiscal policy - government is less than taxation

Question 11

how does the government use taxation to influence business activities?

Answer 11

increasing tax
- will result in a decrease in demand, as consumers have less disposable income.
- businesses will experience a drop in salesand consequently, a drop in profit.
- smaller businesses will be negativley affected and may be forced to close down.
- this will cause a decrease in employment and economic activity.

vice versa for a decrease in taxation.

Question 12

how does the government use interest rates to influence business activies?

Answer 12

an increase in interest rates
- results in less borrowing of individuals and businesses
- so individuals will have less disposable income and businesses will not have enough money for expansion and growth.
- they may experience a drop in sales and profit
- smaller businesses will have to close down and there will be a decrease in employment

vice versa for a decrease in interest rates

Question 13

what is the economic effect of taxation on income?

Answer 13

advantage
- progressive tax reduces income inequalities in the distribution of income

disadvantage
- it may affect people’s incentive to work or to take more responsible jobs where they can earn higher incomes

Question 14

what is the economic effect of taxation on expenditure?

Answer 14

advantage
- raises a vast sum of money for the government, especially tax on inelastic products

disadvantage
- takes a larger % of income from poorer people
- it can lead to wage claims and inflation