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🧠 Flashcards – Economic Functions of Government &

Macroeconomics

🟦 Set 1: Role of Government in Economy

🔹 FRONT (Question) 🔹 BACK (Answer)
What is the primary goal of the To promote the general welfare of society.
government in an economy?

How has the role of government changed It has grown larger in size and scope.
in market economies over time?

Give examples of how governments Raise money, spend money, consume goods,
operate in an economy. borrow, employ people, protect property rights.

What do governments provide in addition Institutions, rules, regulations, and policies.

to goods and services?

Why are some goods/services provided Because markets may fail to provide them fairly
exclusively by government? or efficiently.

Give an example of unregulated matters (Open-ended: E.g., black markets, pollution

despite government rules. loopholes, etc.)

🟦 Set 2: Macroeconomic Goals

🔹 FRONT (Question) 🔹 BACK (Answer)
What are the 3 main 1. Economic Growth, 2. High Employment, 3. Stable
macroeconomic goals? Prices
What indicates economic When real GDP grows faster than population growth.
growth?

Why is high employment It ensures higher income, output, and avoids social harm
important? from unemployment.

What is the impact of Loss of output and lower income, affects wellbeing of all.
unemployment on society?

What is inflation? A rise in prices that reduces real income and purchasing
power.

Who is affected most by Lower-income families.

inflation?

What is deflation and its impact? A fall in prices; it signals economic downturn and may
lead to recession and unemployment.

🟦 Set 3: Government's Economic Intervention

🔹 FRONT (Question) 🔹 BACK (Answer)
Does the government expect the economy to No, it intervenes to guide it.
run automatically?

Why does government intervene in the To improve wellbeing of individuals and

economy? households.

What is the ultimate purpose of government To ensure better economic performance

economic activities? and quality of life.

📘 Bonus Flashcard – Big Idea

🔹 FRONT 🔹 BACK
What is the central theme of Government plays an active role in ensuring growth,
government's economic stability, employment, and general welfare in
function? market-based economies.
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🧠 Flashcards: The Role of Government in an Economic

System

🟦 Set 1: Basics of Economic System

🔹 FRONT (Question) 🔹 BACK (Answer)
Why do we need an economic Because wants are unlimited and resources are
system? limited. It helps decide what, how, and for whom to
produce.

What are the basic economic Scarcity of resources vs unlimited wants.

problems faced by every society?

What are the main questions an What to produce, how to produce, for whom to
economic system must answer? produce, and how to grow.

What are the three types of Capitalism, Socialism, and Mixed Economy.
economic systems?

🟦 Set 2: Economic Systems

🔹 FRONT 🔹 BACK
What is Capitalism? An economic system where resource allocation is done mostly by
markets with little government intervention.

What is Socialism? An economic system where the government controls major resource
allocation and production.

What is a Mixed A system combining elements of both market (private sector) and
Economy? government control.
🟦 Set 3: Adam Smith’s Views
🔹 FRONT 🔹 BACK
What was Adam Smith's view on He supported minimal but well-defined
government’s role? government roles.

What are the three key government roles (a) National defence, (b) Justice system, (c)
according to Adam Smith? Public institutions (e.g., roads, bridges).

🟦 Set 4: Government's Expanding Role

🔹 FRONT 🔹 BACK
Why did the government's role Due to the Great Depression and the need for
increase after 1930s? economic stabilization.

What new functions were added to Economic functions like public finance, income
traditional state roles? redistribution, stabilization.

🟦 Set 5: Richard Musgrave’s 3 Functions of Government

🔹 FRONT 🔹 BACK
Who proposed the three-branch Richard Musgrave in The Theory of Public
taxonomy of government functions? Finance (1959).

What are Musgrave’s three economic (a) Resource allocation, (b) Income
functions of government? redistribution, (c) Macroeconomic stabilization.

What is the goal of the allocation To correct inefficiency in resource use.

function?

What is the goal of redistribution To ensure fairness in income and wealth

function? distribution.

What is the goal of stabilization function? To maintain price stability, full employment, and
economic growth.

Which of Musgrave’s functions are Allocation and Redistribution.

microeconomic?

Which of Musgrave’s functions is Stabilization.

macroeconomic?
🟦 Set 6: National Budget Role
🔹 FRONT 🔹 BACK
How does the national budget relate to It reflects economic policies and is a key tool for
government’s role? performing economic functions.

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🧠 Flashcards: The Allocation Function of Government

🟦 Set 1: Basic Concepts of Resource Allocation
🔹 FRONT 🔹 BACK
What is resource allocation? It refers to how resources (factors of production) are
assigned to various uses in the economy.

Why is resource allocation Because resources are limited and wants are
important? unlimited, making efficient use is critical.

What is economic efficiency? A situation where resources are allocated to

maximize benefit and minimize waste.
What characterizes private sector Allocation is driven by supply, demand, price
resource allocation? mechanism, consumer sovereignty, and profit motive.

How does the government allocate Through budgeting – its revenue and expenditure
resources? activities.

Who determines resource allocation Both market forces and government (mixed
in real-world economies? economy).

🟦 Set 2: Market Failures – Why Government Must Intervene

🔹 FRONT 🔹 BACK
What is market failure? When markets fail to efficiently allocate resources, leading to
under/overproduction.

What is allocative Using limited resources to produce the goods and services most
efficiency? valued by society.

What are the main 1. Imperfect competition 2. Public goods 3. Incomplete markets 4.
causes of market Common property overuse 5. Externalities 6. Factor immobility 7.
failure? Imperfect information 8. Income/wealth inequality

Give an example of Pollution – it affects third parties not involved in the transaction.
externality.
What happens in Misallocation of resources – too much demerit goods, too little
absence of government merit goods.
intervention?

🟦 Set 3: Government’s Allocation Function – Goals & Instruments

🔹 FRONT 🔹 BACK
What is the purpose of the To improve economic performance and correct market failures
government’s allocation through spending and taxation.
function?

What are some allocation (a) What/who will be taxed (b) Revenue spending areas (c)
decisions made in Division of total resources (d) Mix of public/merit goods (e)
budgeting? Level of public sector involvement (f) Private to public resource
shift

Name 3 instruments used 1. Direct production 2. Price mechanism (taxes/subsidies) 3.

by government to influence Legislation/force
allocation.

How does tax policy Higher taxes on harmful goods reduce demand; tax
influence allocation? cuts/subsidies boost desired goods.

Give an example of legal Ban on single-use plastics redirects resources away from their
control on resource production.
allocation.
What is the role of Prevents monopoly/anti-competitive practices and promotes
Competition Act in fair resource distribution.
resource allocation?

🟦 Set 4: Examples of Government Allocation in Action

🔹 FRONT 🔹 BACK
Why is the government needed to Because markets underproduce merit goods like
provide merit goods? education and healthcare.

What are demerit goods? Goods harmful to society (e.g. alcohol, tobacco) that
government controls through policy.

How does the government support By establishing property rights and maintaining
contract enforcement? courts/law enforcement.

How does government complement By correcting failures, not replacing markets – they
markets? work together in a mixed economy.

🟦 Set 5: Summary Flashcards

🔹 FRONT 🔹 BACK
What justifies the government's allocative Market failure and the need to ensure fair and
role? efficient use of resources.
 What is the difference between private and Private uses price signals; public uses taxes,
public allocation? subsidies, and laws.

What happens if too many demerit goods Public health and social welfare are harmed –
are produced? government intervenes.

What is a real-world example of allocative Free or subsidized public education or

correction by government? banning certain polluting industries.

📘 Bonus: Keywords for Quick Recall (Use as

Mnemonics)
●​ I PIE CEEEI → Causes of market failure:​

○​ Imperfect competition​

○​ Public goods​

○​ Incomplete markets​

○​ Externalities​

○​ Common property overuse​

○​ Efficiency loss due to factor immobility​

○​ Equity (inequality)​

○​ Imperfect information​

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🧠 Flashcards: The Redistribution Function of the

Government

🟩 Set 1: Basic Concepts & Need for Redistribution

🔹 FRONT 🔹 BACK
What is the redistribution It refers to government actions aimed at reducing
function of the government? inequalities in income and wealth to ensure equity and
social welfare.

Why is redistribution needed Because the benefits of economic growth are not equally
even in a growing economy? shared, leading to income and wealth inequality.

What happens if distribution is It may become highly skewed, benefiting only a few and
left only to the market? neglecting the underprivileged.

What ideology influenced strong Socialist ideology, which emphasized equality and social
redistributive policies? justice.

What key economic question is "For whom should an economy produce goods and
linked to redistribution? services?"

🟩 Set 2: Redistribution via Budget – Two Sides

🔹 FRONT 🔹 BACK
What are the two sides of the budget Expenditure side (public services, subsidies) and
used for redistribution? Revenue side (progressive taxation).

How does expenditure help Through free or subsidized healthcare, education,

redistribution? food, housing, etc., to support the poor.

How does the revenue side promote Via progressive taxation – taxing the rich more and
redistribution? using it to support low-income groups.
🟩 Set 3: Aims & Objectives of Redistribution
🔹 FRONT 🔹 BACK
What are the main aims of (1) Equity in income/output (2) Social welfare (3) Support
redistribution? deprived groups (4) Equality of opportunity (5) Minimum
living standards for all

What is meant by "effective The level of income that determines how goods/services are
demand" in this context? distributed across households.

How does redistribution By ensuring resources reach the deprived, improving overall
impact social welfare? well-being in society.

🟩 Set 4: Examples of Redistributive Measures

🔹 FRONT 🔹 BACK
Give 3 examples of redistributive 1. Progressive taxes on the rich 2. Subsidized food for
fiscal policies. BPL families 3. Employment reservations

What are transfer payments? Direct money transfers or aid-in-kind given to the
needy without expecting goods/services in return.

How does the government help Through pensions, unemployment benefits, disability
specific vulnerable groups? aid, and targeted welfare schemes.

How does government protect By setting minimum wages and minimum support
low-income groups in pricing? prices (MSP) for farmers.

How does the government support By launching special schemes and funds targeted to
backward regions? improve their development.

How does regulation support By controlling harmful product sales to protect

redistribution? consumer health, especially among low-income
groups.

🟩 Set 5: Equity vs Efficiency – The Trade-off

🔹 FRONT 🔹 BACK
What is the efficiency-equity Redistribution may improve fairness (equity) but can
trade-off? reduce incentives to work or invest (efficiency).
Give an example of efficiency High taxes may reduce motivation for entrepreneurship
loss due to redistribution. or savings, lowering productivity.

What is a deadweight loss? The loss of economic efficiency due to distortions like
taxes or subsidies.

How can redistribution be made By balancing equity and efficiency – providing welfare
optimal? without harming growth incentives.

Why should redistribution be To avoid future decline in tax revenue and reduce
carefully designed? negative impacts on economic growth.

🟩 Set 6: Summary & Final Concepts

🔹 FRONT 🔹 BACK
What are the two major Government spending (subsidies, welfare) and taxation
redistribution tools? (especially progressive taxes).

What is the ultimate goal of To achieve a more egalitarian, just, and socially
redistribution? optimal economy.

What principle must guide A balanced trade-off between equity and efficiency to
redistribution policies? minimize harm and maximize social benefit.

🎯 Quick Mnemonics for Recap

●​ EERP – Goals of Redistribution:​

○​ Equity​

○​ Effective demand balance​

○​ Redistribution of wealth​

○​ Provision of basic needs​

●​ TSSUME – Redistribution Examples:​

○​ Taxes (progressive)​
○​ Subsidies​

○​ Support payments (pensions, unemployment)​

○​ Unemployment benefits​

○​ Minimum wage/MSP​

○​ Education/healthcare (free/subsidized)​