4.5 The state and the macroeconomy

Question 1

Define current expenditure

Answer 1

purchase of goods and services such as teachers salaries (day to day recurring expenditure)

Question 2

Define capital expenditure

Answer 2

purchase/investment of goods used to make other goods or provide a service e.g. HS2

Question 3

Define transfer payments

Answer 3

payments with no expectation of anything in return e.g. welfare and pensions

Question 4

What type of expenditure can governments borrow to finance?

Answer 4

Capital

Question 5

Name 4 purposes of public spending

Answer 5

Provide public and merit goods

Manage economic cycle (bust)

Reduce effect of market failure

Increase international competitiveness

Question 6

Name 3 things the effectiveness of government spending can depend on

Answer 6

Opportunity cost

Multiplier effect

Effectiveness in reducing market failure

Question 7

Name 5 things the amount of public spending depends on

Answer 7

Tax revenue

Demand for public services

Demographics

State of economy (recession/boom)

Fiscal policy (interventionist gov?)

Debt interest

Question 8

Why is there a change in the components of public spending? (3)

Answer 8

Aging population

Increase in school age

External shock e.g COVID

Question 9

Define resource crowding out

Answer 9

when government producing goods and services, crowds out private sector producing goods and services

Question 10

Define financial crowding out

Answer 10

when government borrowing (bonds), crowds out the ability of private sector firms to sell bonds/raise finance

Question 11

Name 3 reasons for tax

Answer 11

Pay for goods and services

Correct market failure

Redistribution

Question 12

Define direct tax

Answer 12

Tax where the burden cannot be passed on

Question 13

Define indirect tax

Answer 13

Burden can be passed on to another party

Question 14

What does the laffer curve show

Answer 14

Relationship between tax and tax revenue - increases, then decreases as people move abroad/avoid paying if tax is too high

Question 15

Define automatic stabiliser

Answer 15

Government spending items that bring economy back into equilibrium without extra action

Question 16

Define discretionary fiscal policy

Answer 16

When the government intentionally makes changes to spending rather than it happening automatically

Question 17

Define fiscal deficit

Answer 17

When a government spends more than it receives that year

Question 18

Define national debt

Answer 18

Sum of all the government debts built up over many years

Question 19

Define structural deficit

Answer 19

A deficit that persists even if the economy is at full employment

Question 20

Define cyclical unemployment

Answer 20

The deficit that exists due to the stage in the economic cycle

Question 21

Name 4 external shocks

Answer 21

Financial crisis

Coronavirus

War in Ukraine and sanctions

Rise in protectionism and deglobalisation

Question 22

Name 3 macroeconomic policies used to respond to external shocks

Answer 22

Change in gov spending

Change in tax

Monetary policy e.g QE

Question 23

Name 3 measures used to control global companies

Answer 23

Close tax loopholes

Fines

Control over profit (so less can be repatriated)

Question 24

Name 3 problems for policymakers when creating policy

Answer 24

Inaccurate information

Risk and uncertainty

Inability to control external shocks

Question 25

Define transfer pricing and why it is bad

Answer 25

pricing transactions between companies in the same groups - allocate profit to countries with lower tax rates

Used as a way to avoid paying tax

Question 26

Define the crowding out effect

Answer 26

increased government spending ultimately decreases private sector spending. This is due to the higher cost of loans and reduced income that can result when the government increases taxes