2.2.4 Governmenr Spending

Question 1

What are transfer payments ?

Answer 1

A payment of money for which no goods and services are exchanged.

Question 2

What makes up the biggest proportion of government spending ?

Answer 2

Social production ( welfare )
Health
Education
Debt interest ( for governments )

Question 3

What are the sources of government revenue ?

Answer 3

Tax revenue : from VAT, council tax, business rates.
Borrowing : from the Bank of England, overseas banks.

Question 4

What are the three main areas of government spending ?

Answer 4

1. Transfer payments - aka Welfare spending
2. Recurring ( Current ) payments - payments that are not one offs - ie maintaining Public services.
   3.Capital ( investment ) payments - i.e infrusture and general addition to an economies stock.

Question 5

What is the difference between capital and current spending ?

Answer 5

Current spending is day to day spending on maintaining public services whilst capital spending is usually one of payments on construction or defence schemes.

Question 6

Describe patterns of Government spending at times of economic growth.

Answer 6

In general governments expenditure goes down ;
- less spending on unemployment and welfare payments.
- Less spending on the NHS / state schools —> more people can afford to go private.
- Less spending needed on the police ( less likely instances of crime ).

Question 7

What are the five parts of the trade / economic cycle ?

Answer 7

Recession
Slump
Growth
Boom
Recession

Question 8

What are key dates in economic history ?

Answer 8

• The Great Depression 1929 ( America )
• Financial crash of 2008/09
• Covid pandemic 2020/21

Question 9

What is fiscal policy ?

Answer 9

Involves the use of government spending, taxation, and government borrowing to affect the level and growth of AD in the economy, output and jobs.

Question 10

What is the multiplier effect ?

Answer 10

When an initial change in AD can have a greater final impact on the level of equilibrium.
( an initial injection into our economy leads to greater / further economic growth ).

Question 11

What is fiscal stimulus ?

Answer 11

This refers to the government spending or tax cuts that are designed to boost economic activity, stimulate demand in the economy.

Question 12

What is the aim of fiscal stimulus ?

Answer 12

The goal is to increase employment, wages and consumption which can help to offset negative effects of a recession or sluggish economic growth.

Question 13

What is fiscal austerity ?

Answer 13

Fiscal austerity is a policy approach that involves reducing government spending and/or increasing taxes in order to reduce budget deficits and debt. The goal of fiscal austerity is to improve the financial health of a government by reducing its reliance on borrowing and stabilizing its debt-to-GDP ratio.

Question 14

What are the two types of fiscal policy ?

Answer 14

Expansionary ( loose ) fiscal policy
Contractionary ( tight ) fiscal policy

Question 15

What is loose fiscal policy ?

Answer 15

Involves spending or cutting taxes to prevent or end a recession or depression
( to stimulate economic activity ) —> often leading to a budget deficient.

Question 16

What is tight fiscal policy ?

Answer 16

involves reducing gov spending or and increasing taxes to rein in an overheating economy or control inflation ( growing economy –> high prices ) cutting government spending / raising taxes can take money out of the economy, meaning there will be a reduction in consumer spending and business investment —-> leading to a decrease in aggregate demand .