Government policy and Economy

Question 1

What are the two methods the government uses to control the economy?

Answer 1

Fiscal policy, and

Monetary policy

Question 2

What does high tax reduce?

Answer 2

Consumers disposable income

Question 3

What does low tax encourage?

Answer 3

Consumer spending

Question 4

What do high taxes for businesses mean?

Answer 4

After tax profits are reduced

Question 5

How do tax rates affect their decisions

Answer 5

Because businesses want to minimise costs so they relocate to countries with low tax rates

Question 6

What does increasing income tax do?

Answer 6

It reduces spending power, cuts demand and lowers economic activity

Question 7

What does the effect of a tax cut on sales depend on?

Answer 7

Income elasticity of the good or service

Question 8

What are the two things fiscal policy does?

Answer 8

Sets tax rates and the amount of government spending.

Question 9

What does an increase in VAT result in the short term?

Answer 9

It tends to cause inflation because the higher tax means goods and services cost more.

Question 10

What does an increase in VAT result in the long term?

Answer 10

It decreases consumer spending and prices have to fall, so it causes deflation

Question 11

How will a increase in welfare benefits affect the economy

Answer 11

It will increase spending

Question 12

How quick is the impact of government spending on infrastructure?

Answer 12

Very slow

Question 13

What is expansionary fiscal policy?

Answer 13

It is fiscal policy to increase demand for goods

Question 14

When is expansionary fiscal policy used?

Answer 14

Economic downturn

Question 15

How is expansionary fiscal policy done?

Answer 15

Cut taxes

Question 16

What is contractionary fiscal policy

Answer 16

It is fiscal policy to reduce demand for goods and services

Question 17

When is contractionary fiscal policy used?

Answer 17

When production capacity is at 100% or at a high risk of high inflation

Question 18

How is contractionary fiscal policy carried out?

Answer 18

Raising taxes and/or cutting spending.

Question 19

What is monetary policy?

Answer 19

Tweaking the interest rate to control inflation and exchange rates

Question 20

What happens when interest rates are high?

Answer 20

Foreign investors want to save money in UK banks

Question 21

How do foreign investors save money into UK banks and what does it result in?

Answer 21

They buy Pounds, which boosts demand resulting in exchange rates going up

Question 22

What happens when interest rates are low?

Answer 22

Investors prefer to save abroad, so they sell their pounds and exchange rates fall.

Question 23

What are the aims of monetary policy? 4

Answer 23

Control inflation.
Control the overall rate of economic growth.
Manage unemployment levels.
Influence foreign exchange rates.

Question 24

What is protectionism?

Answer 24

When government protects domestic businesses and jobs from foreign competition?

Question 25

How do governments protect businesses?

Answer 25

Giving subsidies, imposing tariffs on imports

Question 26

Advantages of protectionism? 2

Answer 26

Countries develop variety of new industries

Allows small businesses to grow

Question 27

Disadvantages of protectionism 2

Answer 27

Price of imported goods rise

Other countries might restrict trading in theirs

Question 28

Advantages of open trade 3

Answer 28

Countries specialise in what they’re good at.
Countries benefit from economies of scale
More choice and lower prices

Question 29

Disadvantages of open trade 3

Answer 29

Fewer local jobs as multinationals expand abroad.
Employee skills concentrated around certain jobs.
Child labour to compete.