GOVERNMENT IN THE ECONOMY

SAMPLE QUESTION:

State and explain how a government budget could be affected by each of the following developments:

• A fall in interest rates

• A fall in taxation rates

• A rise in subsidies

Sample answer:

A fall in interest rates:

• Government current expenditure would decrease, as interest repayments on national debt would decrease.

• Government current revenue would increase, as lower interest rates mean people and businesses will borrow more, spend more and therefore there is more tax revenue for the government.

A fall in taxation rates:

• Government current revenue could increase, as there may be an increase in purchasing of certain commodities due to lower direct and indirect taxes, increasing the amount of tax revenue generated – but the final effect depends on the price elasticity of demand for the commodity.

An increase in subsidies:

• Government current expenditure increases because the State will have to increase its expenditure to fund the subsidies (e.g. subsidised childcare).

• Government current revenue may increase, depending on the commodity being subsidised (e.g. subsidised childcare may encourage more parents to work, meaning greater revenue for the Government through income taxes).

“State three developments/factors that could affect a government budget and explain how each would affect it” ✱ Note: similarly, be prepared to answer this question without being given the list of factors in the question, for example: