Topic 8 - Macroeconomic policies

Question 1

Fiscal policy

Answer 1

decisions made by the government on its expenditure, taxation and borrowing

Question 2

current expenditure/ government consumption expenditure

Answer 2

spending on the day to day running of the public services e.g. spending on teacher’s pay, the pourchase of text books, the purchase of medicines and the pay of those in the armed forces.

Question 3

capital expenditure

Answer 3

the total spending on social infrastructure and includes spending on new hospitals, new schools and roads.

Question 4

transfer payments

Answer 4

payments to pensioners, the unemployed and subisdies to producers. They are designed to increase the income of vulnerable groups and in the latter case, may also be used to increase the output of particular goods and services.

Question 5

debt interest payments

Answer 5

payments made to holders of government debt, for example, interest paid to holders of national savings certificates. In 2024 the UK payed £105 billion in debt interest payments.

Question 6

direct taxes

Answer 6

tax levied directly on the income and wealth of an individual or organisation e.g. income tax, corporation tax and national insurance contributions. The inland revenue collects these.

Question 7

indirect taxes

Answer 7

tax levied on the expenditure on goods and services e.g. VAT (20%). Collected by the Department of Customs and Excise.

Question 8

progressive taxes

Answer 8

a progressive tax takes a higher percentage of an individual’s income as income rises, such as income tax. Progressive taxes decrease inequality as the tax burden is placed on higher income groups.

Question 9

regressive taxes

Answer 9

a regressive tax takes a lower percentage of an individuals income as incomes rise, such as VAT. Regressive taxes increase inequality.

Question 10

National insurance contributions (NICs)

Answer 10

insurance that you pay into to protect yourself during old-age and unemployment

Question 11

budget deficit/ fiscal deficit

Answer 11

when government expenditure exceeds government revenue

Question 12

budget surplus/fiscal surplus

Answer 12

when government revenue exceeds government expenditure

Question 13

crowding out

Answer 13

a process by which an increase in government expenditure crowds out private sector activity by raising the cost of borrowing

Question 14

automatic stabilisers

Answer 14

effects by which government expenditure and government revenue adjust automatically to offset the effects of a recession and boom.

Question 15

discretionary fiscal policy

Answer 15

involves deliberate changes in government expenditure and taxation to influence aggregate demand.

Question 16

Golden Rule

Answer 16

the golden rule states that over the business cycle the government will only borrow to invest and not to fund current government expenditure

Question 17

sustainable investment rule

Answer 17

requires government net debt as a percentage of GDP to be held over the business cycle at a stable and prudent level e.g. around 40% of GDP.

Question 18

balanced budget

Answer 18

when government expenditure equals government revenue

Question 19

national debt

Answer 19

also known as net debt it is the accumulation of all of the price budget deficits.

UK national debt = £2.8 trillion (96% of GDP)

Question 20

Public sector net cash requirement (PSNCR)

Answer 20

the difference between government expenditure and government revenue