Chapter 10

Question 1

Public finance =

Answer 1

Funds raised by the government through taxation; it represents the government’s budget

Question 2

Public spending and taxation =

Answer 2

An injection and a withdrawal

Question 3

Fiscal policy =

Answer 3

It’s the management of the economy using government spending and taxation

Question 4

3 uses of tax:

Answer 4

1. To allocate resources
   - not smoking campaign (de-merit good)
   - invest in healthcare (merit good)
   - education (public good)
2. Manage the economy, by taking money out of the or adding into the flow
3. To distribute income more evenly (social security payments and unemployment benefits)

Question 5

2 types of tax

Answer 5

1. Direct tax:
   - taxes on income
   - tax on capital gains
2. Indirect taxation
   - is imposed on companies, but the burden lies with another party
   - Ad Valorem taxes (VAT)
   - unit tax
   - excise duties (alcohol, tobacco, vehicles)
   - property tax, linked to the sale or rental of property
   - wealth tax: is a % on an individual’s wealth on an annual basis

Question 6

3 effects of taxation:

Answer 6

• progressive:
  High income earners pay more tax than low income earners
• regressive
  Low income earners pay in % more of their income than high earners
• proportionate
  High and low income earners pay the same % of their income.

Question 7

3 fiscal policy positions:

Answer 7

• Deficit
  When government spending is higher than taxation revenue (net public borrowing)
• Balanced budget:
  When the government spending is equal to taxation revenue.
• Surplus:
  When the taxation revenue is larger than government spending
  Benefit: slows growth, if inflation is high for example
  Downside: result can be increased unemployment and increased personal debt.
  It could mean reduced public expenditure

Question 8

2 types of budget deficit:

Answer 8

1. Cyclical, linked to the trade cycle. Not a problem, as there is no deficit when the economic grows.
2. Structural, a permanent imbalance. Usually long term.
   - ageing population: less tax collection, more public expenditure required
   - resistance to tax rises
   - difficulty to reduce public spending
   - development of the economy

Question 9

What are supply-side policies:

Answer 9

Increase aggregate supply by making the economy more efficient

Question 10

Examples of supply side policies:

Answer 10

• government spending: increase spending on education and healthcare, making people work more efficiently. Or on infrastructure.
• increase competition: leads to suppliers needing to be more efficient as prices fall. Through privatisation or deregulation.
• encourage investment: decrease business taxes, leads to more investment
• improving the effectiveness of labour: increase skills through training or give trade unions more power, increase incentive to hire, decrease benefits, or increase incentive to work, increase minimum wage
• other:
• encourage R&D
• reduce bureaucracy
• introduce regional help where needed

Question 11

Advantages of supply-side policies:

Answer 11

• makes businesses more competitive
• less government influence
• less-likely to cause inflation
• aggregate supply increases, prices fall
• less or no impact on national debt; they often don’t require government spending

Question 12

Disadvantages supply side policies:

Answer 12

• focus on the longer term
• some policies may be unpopular
  (Pe: privatisation)
• can increase uncertainty (decrease social benefits)

Question 13

3 approaches to the government managing the economy:

Answer 13

• monetary policy
• fiscal policy
• supply side policy

Question 14

What issues can affect the effectiveness of government policy:

Answer 14

• the quality and availability of information
• it’s membership of an organisation (EU)
• external events (recession 2007/2008)
• the time it takes for a policy to take effect
• political outcome