4. Government and the macroeconomy

Question 1

On which levels does the government act

Answer 1

Locally, Nationally and Internationally

Question 2

Local government

Answer 2

An organisation that has the authority to implement policies within its local geographical area.

Authority to take on public activities, collect taxes and implement a local budget.

Local budgets are taken out of texes collected, toll charges and often, financial grants from the national government.

Question 3

Government’s role at the national level

Answer 3

As an employer - Employs people for public sector + increases productivity of it’s employees by providing training + pension schemes.

As a producer - Provides public services such as roads, healthcare etc.

As a consumer - Demands certain goods to be able to provide public + merit goods.

Question 4

Government’s role at an international level

Answer 4

• Ability to form trading blocs
• Placing trade restrictions such as tariffs and quotas.

Question 5

Macroeconomic aims of the government

Answer 5

Trade - Balance of payments
Inflation - Low and stable (+/-2%)
Growth - Strong, Sustained, Sustainable
Emplyments - Full employment/ Low unemployment
Redistribution of income - Progressive tax system
Sustainability - Keep all TIGER at a stable level

TIGER

Question 6

Aggregate demand

Answer 6

Total amount of demand in an economy.

C + I + G + (X - M)

C - Consumption
I - Investment by firms on capital goods
G - Government spending
X - Exports
M - Imports

Question 7

Aggregate Supply

Answer 7

Total amount of goods / services porduced in an economy over a period of time at a given price level.

Question 8

Balance of payments

Answer 8

A record of all money flowing into and out of a country from trade during a specific period of time.

Question 9

Progressive taxation

Answer 9

A type of taxation levied on firms and individuals. As income increases, the percentage of tax also increases.

Aims to redistribute income in a country.

Question 10

Increased economic growth can lead to….

Answer 10

Increased price inflation
Increase pollution + depletion of natural resources.

Question 11

Increased employment can lead to….

Answer 11

Increased price inflation

Decresaed balance of payments (Increased demand for imports)

Question 12

Decreased price inflation can lead to….

Answer 12

Increased unemployment

Question 13

Government budget

Answer 13

A financial plan of how much tax revenue will be collected and where it will be spent over a period of time (usually one year).

Question 14

Budget defecit

Answer 14

When government expenditure is greater than government revenue.

Question 15

Budget surplus

Answer 15

When government revenue is greater than government expenditure.

Question 16

Reasons for government spending

Answer 16

• Providing essential services
• Providing welfare programs, scholarships, free education etc… (redistribution of income)
• To correct market failures

Question 17

Direct tax

Answer 17

A type of tax directly paid to the government by the taxpayer. It is a percentage levied on a person’s income and wealth, and on profits of businesses.

Question 18

Personal income tax

Answer 18

Tax levied on personal incomes, that is, on salaries, wages, interest, rent and dividends.

Direct tax

Question 19

Corporate income tax

Answer 19

Tax levied on the profits of businesses and firms.

Direct tax

Question 20

Wealth tax

Answer 20

Tax levied on the total value of personal assets. It is a tax on the profit made by selling an asset at a higher price than the original price at which it was bought.

Direct tax

Question 21

Capital gains tax

Answer 21

Tax levied on money earned from investments, such as buying private property or buying shares.

Direct tax

Question 22

Inheritance tax

Answer 22

Tax levied on the transfer of wealth and income, such as money, property or wealth passed on to another person.

Direct tax

Question 23

Windfall tax

Answer 23

Tax levied on individuals and firms when they earn an unexpected amount of money, such as winning a lottery or a firm gaining from a takeover bid.

Direct tax

Question 24

Payroll tax

Answer 24

Tax levied on employers and employees. Payroll taxes are taxes on individual earnings but are paid by the employers.

Direct tax

Question 25

Indirect tax

Answer 25

Taxes imposed by the government on spending to buy goods and services.

Question 26

Sales tax

Answer 26

A consumption tax imposed by the government on the sale of goods and services. Indirect tax

Question 27

Excise tax

Answer 27

Tax levied mostly on the production of demerit goods such as alcohol, cigarettes, petrol and soft drinks. Indirect tax

Question 28

Customs duty (tariffs)

Answer 28

Tax levied on imports of goods and services into the country. Indirect tax

Question 29

Carbon tax

Answer 29

Tax levied on producers who emit more than a set percentage of carbon during production. These taxes are also levied on manufacturers of vehicles. Indirect tax

Question 30

Stamp duty

Answer 30

A type of progressive tax paid on the sale of a property. Indirect tax

Question 31

Regressive tax system

Answer 31

A system where the proportion of income tax decreases as income increases. This means that as someone’s income or profits increase, they will have to pay a lower proportion (percentage) of their income or profit as tax.

Question 32

Proportional tax system

Answer 32

A system where the proportion of income deducted as tax stays the same whatever the income level of the individual or the profits of a business.

Question 33

Qualities of good tax

Answer 33

Certainty - Easy to calculate tax rate Equitable - Should be fair based on ability to pay Economical - Cost of collecting tax should be lower than revenue generated by it. Convenience - Should be easy to pay Efficiency - Performance of the economy should increase with the implementation of taxes. Flexibility - Taxes should be flexible following changes in the economic activity in the economy.

Question 34

Expansionary fiscal policy

Answer 34

Decreasing taxes and increasing government spending to boost total demand in the economy. This policy is mostly introduced at times of recession.

Question 35

Contractionary fiscal policy

Answer 35

Increasing taxes and decreasing government spending to decrease total demand in the economy. This policy is mostly introduced at times of inflation.

Question 36

Monetary policy

Answer 36

Controlling the money supply in an economy by changing interest rates and the amount of currency in circulation.

Question 37

Interest rates

Answer 37

Determines the price of borrowing money or the return from saving money in the bank.

Question 38

Exchange rate

Answer 38

The price of one currency in terms of another.

Question 39

Expansionary monetary policy

Answer 39

A monetary policy tool that influences the level of total demand in the economy by decreasing the rate of interest and increasing the supply of money to expand economic activity.

Question 40

Contractionary monetary policy

Answer 40

A monetary policy tool that influences the level of total demand in the economy by increasing the rate of interest and decreasing the supply of money to contract economic activity.

Question 41

Supply-side policies

Answer 41

Macroeconomic concept that refers to total supply within an economy and the government policies that would affect it. Supply-side policies aim to increase the quality and quantity of the factors of production in the long term. Focuses on improvements in education, trainigh programmes, improving tech + infrastructure etc.

Question 42

Supply-side policy measures

Answer 42

Education + training - Increases labour skills Research and development - Increases production of capital goods + increase potential output in the long run Infrastructure - Well developed infrastructure attracts foreign businesses to invest in the economy Small + medium-sized enterprises - providing low-interest or interest-free loans. Encouraging competition - Privatisation transfers ownership from the public sector the private sector Incentive-related policies - Direct tax cuts acts as incentive for workers + firms to increase their supply.

Question 43

Economic growth

Answer 43

An increase in the amount of goods and services produced in an economy over a period of time (usually one year). Economic growth is a quantitative measure of a country’s output.

Question 44

Gross Domestic Product

Answer 44

The value of the goods and services produced within a country’s borders in one calendar year.

Question 45

Employment

Answer 45

Refers to the use of the factors of production (such as labour) in an economic activity.

Question 46

Unemployment

Answer 46

The number of people in an economy who are actively seeking work but cannot find it, expressed as a percentage of the total labour force.

Question 47

Unemployment rate

Answer 47

The measure of the amount of unemployment in the economy expressed as a percentage. (Number of people unemployed / Total workforce) * 100

Question 48

Frictional unemployment

Answer 48

A type of short-term unemployment when people are between jobs.

Question 49

Seasonal unemployment

Answer 49

A type of unemployment that occurs when the demand for certain skills is based on seasonal changes, when people do specific job types that are only required during certain times of the year.

Question 50

Structural unemployment

Answer 50

Form of unemployment caused by a mismatch between the skills that workers can offer and the skills that employers demand. Due to technological changes in the structure of industries, many skills become obsolete and are no longer in demand.

Question 51

Cyclical unemployment

Answer 51

A type of unemployment that occurs when there is not enough demand in the economy. It is also known as demand-deficient unemployment.

Question 52

Consequences of unemployment (For people, government, firms? etc.)

Answer 52

- Loss of GDP - Loss of tax revenue - Increased cost of unemployment benefits - Loss of income for individuals - Increased crim rates - Increased stress levels - Increased debt, homelessness and family breakdown

Question 53

Inflation

Answer 53

Sustained increase in the general level of prices over a period of time.

Question 54

Deflation

Answer 54

Sustained decrease in the general level of prices over a period of time.

Question 55

Disinflation

Answer 55

A fall in the rate of inflation. It means that prices are still rising in the economy, but at a slower pace than the year before.

Question 56

Hyperinflation

Answer 56

A very high increase in the prices of goods and services. The average level of prices rises more than 50% per month.

Question 57

Consumer price index

Answer 57

The weighted price index of goods and services in the economy over a period of time. It is used to measure the cost of living of an average household.

Question 58

Demand-pull inflation

Answer 58

When inflation is caused due to an increase in total demand in the economy.

Question 59

Cost-push inflation

Answer 59

Occurs when total supply falls due to an increase in the costs of production for firms or the unavailability of factor resources.

Question 60

Imported inflation

Answer 60

A general and sustainable price increase due to an increase in costs of imported products.

Question 61

Consequences of inflation

Answer 61

Greater unertainty - Businesses aren't willing to invest. Extra costs to firms Redistributive effects - inflation will affect low income households more Less saving - Bc of lower interest rates Damage to export competiveness - Foreign prices may be rising less

Question 62

Purchasing power

Answer 62

The value of a sum of money - How much you can buy with a sum of money. Can differ year to year as prices change due to inflation/ deflation.

Question 63

Wage-price spiral

Answer 63

Inflation increases. Workers want higher wages. Wages increase. Companies pass on prices of wages to the consumer Inflation increases again (cost-push) Cycle continues.