role of the state in the macroeconomy

Question 1

public goods

Answer 1

goods which would be under provided and under consumed because: they are non excludable and non rivalrous

Question 2

external benefits

Answer 2

benefits to third parties who are not part of the transaction between a consumer and a producer

Question 3

external costs

Answer 3

costs to third parties who are not part of the transaction between a consumer and producer

Question 4

public expenditure

Answer 4

relates to expenditure by central governments, local authorities and public sector organisations

Question 5

public expenditure: capital expenditure

Answer 5

long term investment expenditure on capital projects such as HS2, new school etc.

Question 6

public expenditure: current expenditure

Answer 6

relates to the governments day to day expenditure on goods and services such as wages

Question 7

public expenditure: transfer payments

Answer 7

payments made by the state to individuals without there being an exchange of goods or services. used to redistribute income. eg state pension

Question 8

factors impacting the size of public expenditure

Answer 8

the level of GDP, demand for public services, size and age distribution of the population, the rate of inflation, state of economy, political priorities

Question 9

social protection, health and education has high gov expenditure because:

Answer 9

ageing population, increased number of children school age, increased expenditure on tax credits, increased payments for housing benefits as a result of rising rents

Question 10

significance of different levels of public spending as a proportion of GDP: productivity and growth

Answer 10

if expenditure high, then productivity and growth may be low, because of the absence of a profit motive and competition in the public sector

Question 11

significance of different levels of public spending as a proportion of GDP: living standards

Answer 11

impact depends on the composition of public expenditure. eg proportion spent on transfer payments and on health relative to the amount spent on defence

Question 12

significance of different levels of public spending as a proportion of GDP: crowding out

Answer 12

structural deficits imply that the size of the public sector is increasing, which could cause resource or financial crowding out

Question 13

significance of different levels of public spending as a proportion of GDP: level of taxation

Answer 13

if public expenditure is high then its likely that taxation will be also high

Question 14

significance of different levels of public spending as a proportion of GDP: equality

Answer 14

high public spending, greater equality, however some countries have high public spending and high inequality

Question 15

progressive taxation

Answer 15

taxes which the proportion of income paid in tax rises as income increases

Question 16

proportional taxes

Answer 16

taxes which the proportion of income paid in tax remains constant as income increases

Question 17

regressive taxes

Answer 17

taxes which the proportion of income paid in tax falls as income increases

Question 18

direct taxes

Answer 18

taxes on income and wealth, income tax, corporation tax, capital gains tax

Question 19

indirect taxes

Answer 19

taxes on expenditure, VAT, excise duties, tariffs

Question 20

effects of changes in direct tax rates: incentives to work if tax high

Answer 20

those unemployed less willing to take jobs, working currently working less willing to do overtime

Question 21

effects of changes in direct tax rates: tax revenues if tax high

Answer 21

tax revenues will initially rise, but eventually fall as people do tax avoidance, there are disincentives to work, and there are a rising number in tax exiles(shown by the Laffer curve)

Question 22

effects of changes in direct tax rates: income distribution

Answer 22

increase in income tax will make the tax system more progressive, so income distribution more equitable

Question 23

Effects of change in direct tax: real output and employment

Answer 23

Higher rates of income tax would cause a fall in disposable income, fall in consumption and a fall in AD. The disincentive effects of higher rates of income tax might also cause a fall in AS. Consequently, there would be a fall in real output and employment.

Question 24

Effects of change in direct tax: the price level

Answer 24

The fall in AD following higher income tax rates would cause a fall in price level. This may be partially offset by any fall in AS but the impact of the leftward Shift in the AD curve is likely to be more significant

Question 25

Effects of change in direct tax: the trade balance

Answer 25

Increase in come tax would reduce disposable income. So there would be a fall in consumption, resulting in a decrease in imports. Consequently, there should be an improvement in the trade balance

Question 26

Effects of change in direct tax: FDI flows

Answer 26

Increase in direct taxes is likely to deter inward FDI. Further an increase in income tax rates is also likely deter it because disposable income would fall, causing a decrease in comsumption

Question 27

Effects of change in indirect tax: incentives to work

Answer 27

An increase in VAT rate might cause an incentive to work Moore because workers will try to maintain living standards by working harder

Question 28

Effects of change in indirect tax: tax revenues

Answer 28

If VAT increases, then tax revenues will almost certainly increase as VAT is on most goods and services

Question 29

Effects of change in indirect tax: income distribution

Answer 29

An increase in VAT would cause income distrust union to be less even, as its broadly regressive

Question 30

Effects of change in indirect tax: real output and employment

Answer 30

Fall in real income if VAT higher, which would cause a fall in consumption and a fall in AD, leading to a reduction in output and employment. For businesses, the higher VAT rate would raise costs, so causing a fall in AS, which would lead to a reduction in output and employment

Question 31

Effects of change in indirect tax: the price level

Answer 31

Increased indirect taxes will increase price level in short run. However, taxes are leakages from circular flow, so higher indirect tax will cause a decrease in AD and therefore fall in the price level in the longer term

Question 32

Measures to reduce fiscal deficits and national debt

Answer 32

Government could: reduce public expenditure, increase taxes, implement policies to increase economic growth

Question 33

Measures to reduce poverty and inequality

Answer 33

Improve quality of education and training for the poor, make tax system more progressive, higher inheritance taxes, measures to reduce unemployment, introduce minimum wage

Question 34

Changes in interest rates and the supply of money

Answer 34

QE designed to make it easier and cheaper for businesses to borrow money, but may cause inflation. Central banks make decision about changing interest rates

Question 35

Measures to increase international competitiveness

Answer 35

Policies to eliminate a BofP deficit on current account, subsidies, lower prices of raw materials

Question 36

Use of macroeconomic policies to respond to external shocks to the global economy and examples of external shocks

Answer 36

External shocks take many forms e.g. sudden change in oil prices, financial crisis, contagious disease. What’s used depends on what the shock is

Question 37

regulation of transfer pricing

Answer 37

Difficult for governments to control price, although attempts are being made to seek international agreement to ensure that global companies pay a fair amount of tax in each of the countries in which they operate

Question 38

limits to government ability to control global companies

Answer 38

Have a monopoly on technological or intellectual property, threaten to withdraw investment, be ‘footloose’ ie they can move easily from one country to another in search of lowest wage costs

Question 39

Problems facing policy makers when applying policies: inaccurate information

Answer 39

Forecasts are inaccurate (eg for future rate of inflation) Estimates of last data for a variety of indicators are frequently revised significantly in subsequent years (GDP and BofP account)

Question 40

Problems facing policy makers when applying policies: risks and uncertainties

Answer 40

Risk is present when future events occur with measurable probability , uncertainty is present when the likelihood of future events is indefinite or incalculable . Can be eliminated or insured against

Question 41

Problems facing policy makers when applying policies: inability to control external costs

Answer 41

Most of the external shocks are difficult to predict and, consequently, to allow for when applying policies. Therefore policies being followed may no longer be appropriate