Government objectives

Question 1

Inflation

Answer 1

The price increase of goods and services over time

Question 2

Unemployment

Answer 2

The percentage of the population that are capable of working but unable to find a job

Question 3

GDP

Answer 3

The value of all the goods and services produced by a country in a year

Question 4

Low inflation

Answer 4

When inflation is low, people enjoy better standards of living as they can afford to pay for goods and services.

It is easier for companies to set up new ventures and expand meaning all sectors of the economy benefit

Question 5

Low unemployment

Answer 5

Improved economic growth
People have better standards of living
The government spends less money on benefits so they can use that money for other things (e.g infrastructure)
More tax income

Question 6

Growth

Answer 6

• Positive outlook for new businesses
• Existing businesses grow and make profits
• Growth measured by a rise in GDP until it reaches max
• Falling unemployment as there are more jobs since businesses are doing well
• Raised standards of living as more people are employed

Question 7

Boom

Answer 7

• Business investments and profits are at their highest levels
• Most sectors of the economy are performing at their best
• High levels of demand for goods and services causes prices to rise (inflation)
• Lowest employment rates and increased wages

Question 8

Recession

Answer 8

• Business confidence falls leading to less investment in new and existing businesses
• Decline in economic activity until it reaches a minimum
• Falling demand leads to falling profits
• Unemployment rises as businesses are not doing well and have to cut costs

Question 9

Slump

Answer 9

• Very low business confidence with very little investment in new and existing businesses
• Low production of goods and services -businesses close down
• Low demand for goods and services
• high unemployment
• Inflation is at its lowest

Question 10

Tax

Answer 10

A charge/fee paid to the gov. on income, goods and services

Question 11

Direct tax

Answer 11

Income tax. Tax charged on personal income.

Tax on the profit made by a business.

Question 12

Indirect tax

Answer 12

Tax charged on the price of goods and services. which is added to the price of goods and services before they are bought
VAT

Question 13

Disposable income

Answer 13

The amount of income left for individuals after taxes have been paid

Question 14

Income tax

Answer 14

The amount of income tax charged depends on the amount of income.

The higher the income tax rate, the smaller the disposable income of individuals.

If the economy is in recession, the government may decide to invest in certain sectors in order to encourage growth.

Question 14

Effects on increased income tax on consumers

Answer 14

A reduced disposable income means that consumers spend less money on goods and services.

Question 15

Effects on increased income tax on businesses

Answer 15

• Less demand for goods and services. This leads to decreased sales for businesses
• Employees may not be as motivated to work as hard, affecting production

Question 16

Businesses responses to increased tax rates

Answer 16

Businesses focus on cost reduction so that they can offer competitive pricing to attract customers

Firms reduce production levels

Businesses may decide to provide more fringe benefits to compensate and improve motivation

Question 17

Corporation tax

Answer 17

The tax paid by businesses on the profits they make.

The higher the corporation tax, the smaller the profit after tax available to businesses.

If a country is in a recession and the governments objective is to encourage economic growth, it could lower the corporation tax rate.

Question 18

Affects of increased corporation tax on shareholders

Answer 18

Shareholders will receive fewer dividends

Question 19

Effects of increased corporation tax on businesses

Answer 19

A smaller profit after tax is available for businesses, so businesses cannot grow as much

Increased interest rates will discourage existing and new shareholders from investing in a business

Question 20

Businesses response to increased corporation tax

Answer 20

Businesses may rethink their growth strategy. They may relocate their operations in a foreign country with a lower corporation tax rate

A smaller profit after tax may lead to corporations increasing prices to meet their costs

Businesses may have to look at other ways of obtaining funds

Question 21

VAT

Answer 21

VAT is added to the prices of some goods and services we buy

makes those goods and services more expensive and harder to buy

the government does not put VAT on essential items.

Question 22

Increased VAT effect on consumers

Answer 22

Goods and services become more expensive

Demand for goods and services fall

Question 23

Increased VAT effect on businesses

Answer 23

Businesses make fewer sales

Question 24

Businesses response to increased VAT

Answer 24

Less production due to less demand

Businesses will have to become more competitive in price

Question 25

Import tariffs

Answer 25

Governments raise money by charging import tariffs or customs duty on goods that are imported from other countries.

This helps control the number of imports so that local businesses should do not incur loss of sales.

Import tariffs may increase the cots of local businesses that rely on imported raw materials for making their goods.

The duty is calculated as a percentage of the value of goods being imported.

Question 26

Effect of increase tariffs on consumers

Answer 26

• Imported goods or goods using imported raw material become more expensive

Question 27

Effect of increase tariffs on businesses

Answer 27

Lower sales for businesses selling imported goods

Increased cost of imported raw material may lead to higher cost of production

Local firms may benefit as demand for their product increases

Question 28

Business response to increased tarrifs

Answer 28

Businesses mat decide to use local material which may be cheaper but quality may suffer as a result

Local firms may set up more branches and expand

Question 29

Monetary policy

Answer 29

How a country’s government or central bank controls how much money there is in circulation. The government or central bank uses interest rates to maintain economic growth and keep inflation low.

Question 30

Interest rates

Answer 30

The money that an individual or an organization can gain when they deposit money in a bank

The cost of borrowing money from a bank

Expressed as a percentage

Question 31

Effect of increased interest rates on consumers

Answer 31

• Cost of borrowing increases so people borrow less

- More incentive to save so they will spend less

Question 32

Effect of increased interest rates on businesses

Answer 32

Credit/cost of borrowing is more expensive

People spending less, so business sales drop

Question 33

business response to increased interest rates

Answer 33

Firms may delay or conceal their plants to expand as the cost of borrowing money is high.