4.5 Role of the State in the Macroeconomy (Edexcel A Level Economics A)

Crowding out is when increased government borrowing to fund spending takes funds away from the private sector. This could reduce private investment.

The North/South divide is the regional inequality of opportunity created when government spending is not distributed evenly throughout different areas of a country.

A progressive tax system is one where as income rises a larger proportion of income is paid in tax.

A regressive tax system is one where as income rises a smaller proportion of income is paid in tax.

A proportional tax system is one where the proportion of income paid in tax is constant regardless of income level.

False.

VAT is an example of a regressive tax.

A Laffer curve illustrates the inequality that exists between households in an economy.

Tax rate changes can improve income distribution. A progressive tax system redistributes income higher-income earners to those with a lower income This reduces inequality.

Tax avoidance is legally seeking ways to reduce the tax burden.

Freedom Day calculates how many days in a year it takes UK workers to solely pay their taxes. The day after this date is Freedom Day. In 2019 it was 22nd May and in 2024 it was 10th June before they were finally working for themselves.

A tax rate increase can affect real national output by potentially reducing aggregate demand. This is because firms may have fewer net profits and households may have less disposable income.

A wage-price spiral is when workers ask for salary increases when the purchasing power of their disposable income falls. This can lead to inflation.

Tax increases might affect foreign direct investment (FDI) as a rise in corporation tax relative to other countries may result in less inward FDI.

A marginal tax rate is the rate of tax paid on each additional currency unit of income.

Automatic stabilisers are naturally responsive fiscal changes that occur as the economy moves through the stages of the trade cycle. There is no active government intervention.

Discretionary fiscal policy is a demand-side policy that actively uses government intervention for its spending and taxation policies to influence economic growth.

A fiscal or budget deficit occurs when the level of government spending is greater than its taxation revenue in a financial year.

False.

The national debt is the accumulation of all previous fiscal deficits. A fiscal deficit is for a single year.

A cyclical deficit is caused by downturns in the trade cycle. This is usually the result of a recession.

A structural deficit is present even when an economy may be operating at the full employment level of output. It is unrelated to the trade cycle. This could be caused by the long term effects of an ageing population.

The state of the economy influences fiscal deficits, as taxation revenue often increases in a boom and decreases in a recession. Spending falls during a boom and rises in a recession. A fiscal deficit should fall during a boom.

Stamp duty is an indirect tax from property sales that increases when an economy is growing. The taxation revenue helps to reduce fiscal deficits.

Unforeseen events like COVID-19 can increase fiscal deficits by requiring unexpected government spending. For example, providing financial support to those unable to work during a global pandemic.

Debt servicing is the cost of paying back debt with debt interest. This represents an opportunity cost for government spending.

Inter-generational equity suggests that today's borrowing has to be paid back from tax revenue received from future generations.

Inflation affects national debt by reducing purchasing power. This reduces the burden of the debt. The government pays back lenders with money worth less than when it was originally borrowed.

Globalisation in the context of macroeconomic policies means that economies do not operate in isolation but are highly interdependent.

Austerity is used to reduce fiscal deficits and national debts by increasing taxes and reducing public spending.

Quantitative easing (QE) is when central banks create more money to finance capital expenditure or stimulate the economy.

False.

Countries have different approaches to reducing poverty and inequality. These will be influenced by political ideology and normative economics.

The monetarist view on inflation by Milton Friedman states that inflation is always and everywhere. It is a monetary phenomenon caused by a rapid increase in the money supply relative to output.

Protectionism refers to government policies that restrict international trade to support domestic industries.

De-globalisation is a process of decreasing interdependence and integration between countries. The COVID-19 pandemic accelerated this process as countries want to develop more self-reliance in the face of severe shocks.

Transfer pricing is a practice used by transnational corporations to minimise the payment of tax in different countries. It involves artificially inflating or deflating the price of goods/services sold between different parts of the organisation to manipulate profits.

Governments can control global companies through measures such as rigorous employment protection laws and protectionist policies.

A challenge facing policymakers when implementing policies is inaccurate information. Time lags mean data in reality can change quickly.

An external shock is an unexpected event originating outside an economy that can have a significant impact on it.

Transnational corporations are large companies that operate in two or more countries. They often use their power and wealth to secure favourable trading conditions.