Topic 2.1 - Introduction to the national economy

Question 1

Define interest rates

Answer 1

The cost of borrowing money and the reward for saving money

Question 2

A rise in interest rates will mean…

Answer 2

you need to pay more money when borrowing but get more in return for saving

Question 3

A fall in interest rates will mean…

Answer 3

You do not need to pay as much money for borrowing but get less when saving

Question 4

Who sets the base rate in the UK

Answer 4

The Bank of England

Question 5

Factors that influence the different rates of interest

Answer 5

Inflation
Bank of England
Demand of money
Supply of money

Question 6

What happens if there is high demand for money

Answer 6

Interest rates rise

Question 7

What happens if there is high supply of money

Answer 7

Interest rates may fall

Question 7

Impact on consumers if interest rates rise

Answer 7

People will save more
People are less likely to take out loans
People will spend less

Question 8

Impact on consumers if interest rates fall

Answer 8

People will save less
People are more likely to take out loans
Money in investments will increase
Consumers are likely to spend more money

Question 9

Impact on producers if interest rates rise

Answer 9

Producers will save more
Less likely to take out loans
Less likely to invest, take out funds or spend money

Question 10

Impact on producers if interest rates fall

Answer 10

Producers are likely to save less
More likely to take out loans
Likely they will invest, take out funds and spend money

Question 11

Name the main sources of UK government revenue in order of average proportion of the UK revenue

Answer 11

1. Income tax
2. VAT
3. National Insurance Contributions
4. Other non-taxes
5. Other taxes
6. Excise duties
7. Corporation tax
8. Council tax
9. Business rates

Question 12

Name the main sources of UK government spending in order of average proportion of the UK spending

Answer 12

1. Social protection
2. Health
3. Education
4. Industry, agriculture and employment
5. Defence
6. Other
7. Transport
8. Debt Interest
9. Public order and safety
10. Personal social services
11. Housing and environment

Question 13

Define direct tax

Answer 13

Taxes based on income. They are paid directly by the bearer to the tax authorities. e.g. Income tax, it is paid directly from salaries

Question 14

Define indirect tax

Answer 14

Taxes on spending. They are paid to the tax authorities, not directly by the bearer but by the supplier of goods and services. e.g. VAT

Question 15

Define progressive tax

Answer 15

Tax paid increases as an individual’s income increases.

Question 16

Define regressive tax

Answer 16

Taxes which take a greater proportion of income from lower income earners and that someone with a higher income pays lower proportion of their income in tax.