ESSENTIAL Role of state in macroeconomy

Question 1

Total government spending

Answer 1

Current + Capital expenditure

Question 2

Capital expenditure

Answer 2

Spending on investment goods (items that are consumed over a period of time longer than a year)
Motorways, schools, hospitals, street lighting, etc.

Question 3

Current expenditure

Answer 3

Spending on goods and services that are consumed in a short period of time
Wages, heating, road grit

Question 4

Transfer payments

Answer 4

Payments by government for which there is no corresponding output
Welfare

Question 5

Reason for government spending?

Answer 5

Market failure

Question 6

Microeconomic market failure reasons for gov spending

Answer 6

Spending on public goods
Spending on goods with positive externalities / methods which reduce the negative impact of negative externalities

Question 7

Microeconomic market failure reasons for gov spending

Answer 7

Economic cycle
Inequality

Question 8

Reasons for different sizes of gov spending?

Answer 8

Level of GDP: LEDCS may not have as much funding for spending due to low GDP compared to MEDCs
Demand for public services: high demand = high spending, from e.g. ageing population, increasing population size
Trade cycle
Debt (interest payments)
Inflation (preventing spending falling in real terms)
Free market vs interventionist market

Question 9

Budget deficit reduction

Answer 9

Reduce government spending
Increase tax rates