2.2.4 Government expenditure (G) Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Government expenditure (G) is best defined as:

   • spending by the government on goods and services, excluding transfer payments such as benefits and pensions
   • spending by the government on goods, services and transfer payments combined, including benefits and public sector purchases
   • spending by the government on imports of goods and services from abroad, including foreign-made equipment for public projects
   • the total tax revenue collected by government in a year, including income tax, VAT, corporation tax and receipts from firms

2. Which of the following is included in government expenditure (G) in national income accounts?

   • spending on hospitals, schools and the salaries of public sector workers
   • interest payments on previously issued government bonds, which are recorded as government purchases of financial services in the year
   • state pension payments made to retired households, which are recorded as government purchases of retirement services each year
   • unemployment benefit paid to people out of work, which is recorded in government spending on goods and services in the national accounts

3. The main influence on government expenditure that operates automatically is:

   • the level of consumer confidence, since public sector pay is set by households
   • the exchange rate, since spending on imports rises when sterling is strong
   • the trade cycle, since spending on unemployment benefits rises in a recession
   • the rate of inflation, since spending falls when prices rise

4. Discretionary fiscal policy involves:

   • deliberate changes to government spending and taxation decided by policy-makers
   • automatic changes in welfare spending during the trade cycle
   • changes in the money supply set by the Bank of England, which are used to alter interest rates and the level of spending in the economy
   • changes in the exchange rate caused by capital flows, which alter the sterling cost of imports and exports without any government decision

5. An expansionary fiscal policy would most likely involve:

   • an increase in government spending or a cut in taxation
   • a rise in interest rates to reduce government borrowing
   • a fall in government spending to reduce the budget deficit
   • a rise in income tax and a cut in government spending

6. If the government increases spending by 10 billion and the multiplier is 2, the effect on national income is approximately:

   • 100 billion
   • 10 billion
   • 20 billion
   • 5 billion

7. Which is a key difference between government spending on capital projects and current spending?

   • Current spending creates long-lived assets, while capital spending covers day-to-day running costs
   • Capital spending creates or improves long-lived assets, while current spending covers day-to-day running costs
   • Capital spending is always financed by taxation, while current spending is always borrowed
   • Current spending is never included in government expenditure in national accounts

8. Which statement about the effect of a rise in government spending on the budget balance is most accurate?

   • It reduces the budget deficit in every case because spending is public
   • It has no effect on the budget balance since spending is not taxed
   • It tends to worsen the budget balance unless it is matched by higher tax revenue
   • It always improves the budget balance by increasing tax revenue immediately

9. Which of these is the most likely effect of a recession on government finances?

   • tax revenues rise because unemployed workers pay more income tax
   • tax revenues fall and welfare spending rises, widening the budget deficit
   • welfare spending falls because more people are working
   • the budget deficit narrows because government debt interest is cut

10. Which factor is the main reason for the growth of government spending in an ageing population?

    • a fall in the number of people receiving state pensions each year
    • lower interest payments because older populations borrow less from the state
    • higher spending on pensions and health care as the number of older people rises
    • lower spending on health care because older people use fewer services

11. Government spending on infrastructure can increase long-run growth because it:

    • raises the productive capacity of the economy by improving transport, energy and communications
    • reduces aggregate supply because it is financed by higher prices, which raise firms' costs and lower the output they are willing to produce
    • reduces the economy's productive capacity by diverting private investment, so public projects crowd out firms' plans to build new capacity
    • increases consumption only in the short run with no long-term effects

12. An expansionary fiscal stance is most likely to be constrained by:

    • a fall in the price level that reduces the real cost of debt
    • a rising level of government debt and concerns about the sustainability of borrowing
    • falling interest rates that make borrowing cheaper for the state, so the government can always finance additional spending without limit
    • a surplus in the current account of the balance of payments

13. A rise in government spending on imported goods, all else equal, will:

    • increase AD by the value of spending but partly leak abroad through imports, so the net effect on domestic output is smaller
    • reduce AD because imports are a withdrawal from the economy in every case, so extra government spending on imports lowers total demand
    • have no effect on AD because government spending is always domestic, so imported goods bought by the state are never counted in AD
    • increase domestic output by the full amount, since imports are not affected by spending and extra demand is met by UK firms

14. Which is the best explanation of why government spending is treated as a component of AD?

    • Government purchases of goods and services are injections of demand into the economy, adding to domestic output
    • Government spending equals taxation in every year, so it cancels out in AD
    • Government spending is a withdrawal from the circular flow, reducing AD
    • Government spending is part of consumption, so it is not counted separately, because public services are paid for out of household income

15. A government wants to reduce a budget deficit without cutting spending. Which change would most directly achieve this?

    • a rise in transfer payments to households, which increases disposable income and so raises tax receipts from the spending that follows
    • a fall in tax revenues from income tax and VAT, which reduces the deficit because the government then has less spending to finance
    • a cut in the rate of interest paid on government debt
    • an increase in taxes that raises revenue from income, spending or profits

16. What is the main difference between government spending on goods and services and transfer payments?

    • Transfers redistribute income and do not directly purchase current output, so they are excluded from G
    • Transfers are always larger than spending on goods, so they are measured separately
    • Both are excluded from national income accounts for accuracy
    • Transfers buy current output and so are included in G, while spending on goods does not

17. Which of the following is an example of a transfer payment?

    • salaries paid to nurses working in NHS hospitals
    • payments to private contractors building a school
    • child benefit paid to families with children
    • spending on building a new motorway

18. Government spending on goods and services is 300 billion and transfer payments are 150 billion. What is G in national income accounts?

    • 450 billion
    • 150 billion
    • -150 billion
    • 300 billion

19. Which feature best describes automatic stabilisers?

    • deliberate cuts in government spending announced in the annual budget
    • fixed rules requiring the government to balance its budget each year
    • changes in interest rates set by the Monetary Policy Committee, which alter borrowing costs for households and firms throughout the economy
    • tax and welfare changes that occur without new government decisions as incomes and employment change

20. Which is a key limitation of fiscal policy?

    • it can only be implemented by the central bank rather than the government, because only monetary authorities can change taxes
    • it always works immediately with no political constraints or delays, so governments can change spending as soon as a problem appears
    • time lags in recognising problems, deciding policy and seeing its effects can reduce its effectiveness
    • it has no effect on aggregate demand in any circumstances, because changes in taxes and spending are offset by private spending

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