4.5.1 Public expenditure Quiz: Pearson Edexcel Economics A, Unit 4

The 20 questions

1. Which of the following is a capital expenditure by government?

   • Paying the state pension to retired people who receive it as a transfer of income
   • Paying salaries to teachers and nurses for their work during the current financial year
   • Paying jobseeker's allowance to unemployed people who claim it during a period without work
   • Building a new motorway or hospital that will provide services over many years

2. Which of the following is a current expenditure by government?

   • Wages paid to public sector workers and spending on medicines used within the year
   • A grant to a private company that is not linked to the purchase of any goods or services by government
   • Spending on a new railway line that will be used for several decades by passengers
   • A payment of child benefit to families, which is a transfer of income from government to households

3. Which of the following is a transfer payment?

   • Salaries paid to civil servants for administering the tax system during the current financial year
   • Spending on a new fleet of police vehicles that will be used by officers for many years to come
   • Payment to a consultant for a report on the design of a new transport network for the government
   • The state pension paid to retired people, which transfers income without a good or service being produced in return

4. Which of these is a reason why public expenditure as a share of GDP may change over time?

   • A fall in the number of elderly people, which always raises the share of GDP spent on pensions each year
   • A rise in the level of private sector investment, which always reduces the share of public spending in GDP
   • An ageing population, which raises spending on pensions and healthcare relative to the size of the economy
   • A constant population with no change in age structure, which keeps health and pension costs unchanged

5. Government spending is £900bn and GDP is £2,000bn. What is public expenditure as a share of GDP?

   • 22 per cent, since 2,000 / 900 is approximately 2.2 and the share is the reciprocal of that figure
   • 200 per cent, since the share of spending in GDP is always twice the ratio of GDP to government spending
   • 90 per cent, since 900 divided by 10 gives the proportion of GDP spent on public services in the country
   • 45 per cent, since 900 / 2,000 = 0.45

6. A high level of public expenditure as a share of GDP can affect productivity and growth. Which argument is most consistent with a positive effect?

   • Spending on transfer payments always reduces the productivity of workers because it lowers the number of hours they work
   • Spending on current goods only raises inflation and has no effect on the productive capacity of the economy
   • Spending on infrastructure and education can raise productivity and the economy's long-run growth potential
   • Spending of any type always reduces growth because all government activity is inefficient by definition

7. Which is an example of crowding out associated with high public expenditure?

   • Government borrowing raising interest rates, which reduces private investment and private sector spending
   • Government borrowing reducing interest rates to zero, which encourages all private investment in the economy
   • A fall in government borrowing that lowers the cost of finance for every private firm in the economy
   • Government spending on defence that raises the number of private sector jobs in the same period

8. Why might high public expenditure as a share of GDP be associated with high levels of taxation?

   • Spending must be financed, so a high level of spending usually requires higher tax revenue or more borrowing
   • High public spending and taxation are unrelated, since spending is always financed by printing money without tax
   • High public spending automatically removes the need for any tax, since the state owns all productive assets
   • High public spending always reduces tax revenue, because the government then has less money to collect in taxes

9. Which of these is a way in which public expenditure can affect equality?

   • Spending on defence always reduces inequality, because every household is protected equally from external threats
   • Spending on public services always widens inequality, because the richest households always receive the most benefits
   • Spending on targeted benefits and public services can narrow income and opportunity gaps for low-income households
   • Spending has no effect on equality, since income distribution is set entirely by the market and not by government

10. Which is an effect of a higher public expenditure share on living standards?

    • Living standards always fall, since public spending always reduces the income of every household in the economy
    • Better public services such as health and education may raise living standards, though this depends on efficiency
    • Living standards are unaffected, since public services are not part of the household's real income in any way
    • Living standards always rise, because public spending always guarantees that every citizen earns more income

11. A government moves from spending £400bn to £500bn with GDP of £2,000bn in both years. By how many percentage points does public spending as a share of GDP change?

    • It rises by 25 percentage points, from 20 per cent to 45 per cent of GDP
    • It rises by 5 percentage points, from 20 per cent to 25 per cent of GDP
    • It rises by 100 percentage points, since spending doubles from £400bn to £500bn in the period
    • It is unchanged, since GDP is the same in both years and so the share cannot change at all

12. Which of these items would count as public expenditure on health, rather than a transfer?

    • A state pension paid to a retired person who has made contributions over their working life to the system
    • A payment of disability benefit to an individual who is unable to work and receives support as income
    • Child benefit paid to a family to help with the costs of raising children in the country
    • Government spending on hospital equipment and staff pay for providing healthcare services in the year

13. Which is the best example of capital expenditure on education?

    • Providing student loans to households for tuition fees, recorded as a transfer payment to students
    • Constructing a new university building that will be used by students for decades
    • Paying the salaries of lecturers who teach students during the current academic year
    • Buying stationery and textbooks that will be used up within the current financial year

14. Why do transfer payments tend to rise sharply in a recession?

    • Transfer payments are fixed by law and never change with the state of the economy in any year
    • Unemployment benefits rise as more people become eligible for them when jobs are lost
    • Transfer payments fall in a recession, since fewer people are eligible for benefits when output is low
    • Transfer payments rise only because the central bank lowers its interest rate during downturns each year

15. Which is an example of a change in the composition of public expenditure over time?

    • A shift from spending on infrastructure towards spending on health and social care
    • A rise in the proportion of spending on the same single service for every year of the period
    • A fall in total public spending to zero, with all services provided by private firms in the economy
    • A constant share of spending on each service in every year, with no change in any part of the budget

16. Public expenditure is £350bn and GDP is £1,000bn. What is public expenditure as a share of GDP?

    • 2.9 per cent, since 1,000 / 350 is about 2.9 and that gives the share of spending in GDP
    • 35 per cent, since 350 / 1,000 = 0.35
    • 65 per cent, since 1,000 minus 350 gives the share of GDP that is not spent by government
    • 350 per cent, since public spending is always equal to the number of pounds of GDP in every year

17. Which is a limitation of comparing public spending as a share of GDP across countries?

    • Public spending shares ignore all government activity, so they are never useful for comparing countries at all
    • Public spending shares always show the level of economic growth in each country, so no limitation arises
    • Public spending as a share of GDP is always recorded in the same way in every country, so comparisons are exact
    • Differences in tax systems and the quality of spending mean that shares do not show how well money is used

18. How can high spending on debt interest affect a country's long-run growth prospects?

    • Debt interest always raises the level of education and health in the country by funding public services directly
    • Debt interest has no effect on the budget, since interest is always paid from the central bank's reserves each year
    • Debt interest raises the productive capacity of the economy directly, since lenders invest the payments in new factories
    • Interest payments do not build productive assets, so they add little to the economy's long-run growth potential

19. Why is crowding out more likely when the economy is already at full employment?

    • Resources are already in use, so extra government borrowing bids up interest rates and displaces private investment
    • Full employment means that the government never borrows, so crowding out can only occur in recessions in the economy
    • Full employment means that interest rates fall to zero, which removes any effect of government borrowing on investment
    • Full employment means that government spending is always fully funded by private saving, so no crowding out occurs

20. Which public spending is most likely to be classed as current expenditure?

    • A new fleet of hospital ambulances that will be used by paramedics for more than a decade
    • A new railway line that will carry passengers and freight for many decades after it is completed
    • A school building programme that will provide classrooms to pupils for several generations to come
    • Electricity, stationery and office supplies used by government departments during the year

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