Short questions
Question 1
With reference to public expenditure and using suitable examles, distinguish between current, capital and transfer expenditure.
Question 2
A government can fund public spending through taxation and/or borrowing. Discuss the possible consequences of its decisions.
Question 3
When a government's budget deficit increases, this may lead to a worsening of the trade deficit. Explain why this might be the case.
Question 4
Explain two reasons why there may need to be controls on the growth of government spending.
Question 5
Explain why some economists consider crowding out to be important.
Question 6
Define the terms 'national income multiplier' and 'investment accelerator'.
Question 7
In a closed economy with no government sector, an increase in injections of $100 million causes the equilibrium level of national income to rise by $500 million. Calculate the marginal propensity to consume.
Question 8
An open economy with a government sector is in equilibrium. Assume the following:
- Marginal propensity to save = 0.4
- Marginal propensity to tax = 0.2
- Marginal propensity to import = 0.2
Showing your method of working, calculate:
(a) the value of the multiplier
(b) by how much the equilibrium level of national income would fall, if injections in the economy are reduced by $60m.
Question 9
Explain why increasing government expenditure is likely to have a larger multiplier effect than an equivalent reduction in taxation.
Question 10
Government expenditure represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect on the economy.