Economic Performance & fiscal policy

Question 1

Economic recovery

Answer 1

when short run economic growth takes place after a recession.

Question 2

Trend growth rate

Answer 2

the annual average percentage increase in the productive capacity of the economy.

Question 3

Frictional unemployment

Answer 3

unemployment that is usually short term and occurs when a worker switches between jobs. Also known as transitional unemployment.

Question 4

Geographical immobility of labour

Answer 4

when workers are unwilling or unable to move from one area to another in search of work.

Question 5

Occupational immobility of labour

Answer 5

when workers are unwilling or unable to move from one type of job to another because different skills may be needed

Question 6

Structural unemployment

Answer 6

caused by a mismatch of skills between the unemployed and available jobs. Structural unemployed is caused by changes in the economy, such as deindustrialisation, which leaves some unemployed workers unable to find work in new industries with different skill requirements.

Question 7

Cyclical unemployment

Answer 7

unemployment caused by a lack of adequate demand in the economy and occurs when the economy goes into a recession depression.

Question 8

Seasonal unemployment

Answer 8

unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period.

Question 9

Demand-pull inflation

Answer 9

a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right beyond the LRAS curve.

Question 10

Cost-push inflation

Answer 10

a rising price level caused by increase in the costs of production, shown by a shift of the SRAS curve to the left.

Question 11

Current account deficit

Answer 11

export less than imports’.

Question 12

Current account surplus

Answer 12

‘export greater than imports’.

Question 13

Define fiscal policy

Answer 13

The use of taxation, public spending and the government’s budgetary position to meet macroeconomic objectives.

Question 14

What is the difference between budget deficit and surplus

Answer 14

Budget deficit: G>T

Budget surplus: G

Question 15

What is an expansionary fiscal policy

Answer 15

Involves boosting aggregate demand by increased government spending
Likely to involve budget deficit as G>T
Used during a recession or with a negative output gap

Question 16

effect of expansionary fiscal policy on macroeconomic objectives

Answer 16

Increases economic growth but with inflationary pressure
Decreases unemployment
Current account may worsen (M>X) because as incomes rise, more is spent on imports

Question 17

What is contractionary fiscal policy

Answer 17

Involves decreasing AD through decreased government spending

Likely to involve budget surplus as G

Question 18

effect of contractionary fiscal policy on macroeconomic objectives

Answer 18

May lead to increased unemployment and an improved current account (X>M) because as incomes fall, less is spent on imports
Price levels may fall and may prevent economic growth

Question 19

What are the 3 sections of government spending

Answer 19

• Transfer Payments
• Current spending
• capital spending

Question 20

what are transfer payments

Answer 20

Transfer payments are welfare payments made to benefit the recipients such as job seekers allowance and state pensions

Question 21

what is current spending

Answer 21

Current spending is everyday spending on state provided goods and services such as education and healthcare

Question 22

what is capital spending

Answer 22

Spending on infrastructure such as buildings, roads and hospitals

Question 23

reasons for government spending

Answer 23

• Redistribute income and wealth
• To correct for market failure (e.g subsidies)
• Promote economic growth by stimulating
  aggregate demand

Question 24

What is direct taxation and give examples

Answer 24

Direct taxes are taxes levied on income and profits of a person or firm

• Income tax
• Capital gains tax
• Corporate tax

Question 25

What is indirect taxation

Answer 25

Indirect taxes - taxes levied on goods and services

• VAT
• Fuel Excise
• Tobacco tax