4.5 Role of the State in the Macroeconomy

Question 1

Current Expenditure

Answer 1

Spending on goods and services for current use to directly satisfy collective needs of members of the community
E.g. Civil Service, Police, Drugs in health care

Question 2

Capital Expenditure

Answer 2

Government spending on goods and services intended to create future benefits
E.g. Construction of new infrastructure, Extra defence equipment

Question 3

Transfer Payments

Answer 3

Spending that does not involve transactions of goods and services but instead represent transfers of money
E.g. Pensions, unemployment benefits

Question 4

Why is Government Expenditure needed?

Answer 4

Provide a socially efficient level of public and merit goods and overcome market failure
To provide a safety net system of welfare benefits
To provide necessary infrastructure
As a means of managing the level of growth of AD to meet macroeconomic objectives

Question 5

Impact of falling Gov spending

Answer 5

Productivity- fall in capital or current spending will lower productivity
Growth- fall in AD
Living standards- absence of gov spending means the poorest lose benefits
Crowding out- more demand to be met and provided by private sector
Levels of Taxation- Lower gov spending will lead to lower taxation as gov aims to reduce budget deficit

Question 6

Key roles of taxation

Answer 6

Finance key areas of gov spending
Alter the distribution of income and wealth
Provide a welfare state safety net for families
Managing the macro economic cycle
Improve countries competitiveness
Tackle market failures through intervention

Question 7

Direct Taxation

Answer 7

Income tax, Inheritance tax, National insurance tax, Corporation tax

Question 8

Indirect Tax

Answer 8

Duties, Import tax, VAT

Question 9

Impact of Tax: Progressive

Answer 9

Progressive- as people earn more, they get taxed more

Question 10

Impact of Tax: Regressive tax

Answer 10

Regressive- The rate of tax falls as incomes rise

Question 11

Impact of Tax: Proportional

Answer 11

Proportional- Marginal rate of tax is constant

Question 12

Impact of direct tax cuts and increase in indirect tax

Answer 12

Indirect taxes do not discourage saving and investment
Lower direct taxes leads to more jobs, investment and increased productivity
FDI is higher with lower corporation tax
Increased VAT leads to price increases
Lower direct tax increases incentives and leads to more inequality

Question 13

The laffer curve

Answer 13

A relationship between economic activity and the rate of taxation which suggest an optimum tax rate which maximises total revenue

Total revenue
Tax rate

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Question 14

National Debt

Answer 14

The debt that has been built up over many years by the gov

Question 15

Budget deficit

Answer 15

Difference between the gov everyday expenses and its revenues per year.

Question 16

Discretionary Fiscal Policy

Answer 16

The gov make changes to tax rates and or levels of gov spending through decisions made by the treasury when setting the budget

Question 17

Automatic Fiscal Policy

Answer 17

Occur where in a recession a gov automatically spends more because there are more claiming unemployment benefits

Question 18

Causes of fiscal Deficits

Answer 18

Politics- tax cuts to increase public support
Cyclical factors- during a recession, taxation can drop rapidly while gov spending can increase
Interest payments- high total debt can result in high interest payments which must be taken from current taxes

Question 19

Causes of fiscal surplus

Answer 19

Strong tax revenues from high employment etc
Strong economic growth when direct and indirect tax revenues grow whilst welfare spending drops

Question 20

Impact of fiscal deficits

Answer 20

Higher taxes- in order to pay off debt future taxes need to be higher
Crowding out- taking investment from private sector
Higher interest rates- increased borrowing by gov with increased interest
Currency crisis- foreign investors less willing and poor currency value