EVALUATE THE USE OF FISCAL POLICY TO ENCOURAGE ECONOMIC GROWTH

Question 1

POINT ONE

Answer 1

Fiscal policy is government plans concerning its expenditure, taxation and borrowing

Question 2

POINT TWO

Answer 2

An expansionary fiscal policy involves the government aiming to increase aggregate demand through increasing government expenditure and/or lowering direct and indirect taxes, which is financed by an increase in the size of the budget deficit.

Question 3

POINT THREE

Answer 3

The diagram shows that real output will increase from y0 to y1 therefore economic growth will occur. the price level and employment will also increase

Question 4

POINT 4

Answer 4

Expansionary fiscal policy will also benefit from the multiplier effect. The multiplier effect is the multiple increase in real output associated with an injection into the circular flow. This chain of income and expenditure will cause further economic growth within the economy.

Question 5

POINT 5

Answer 5

However in the UK where there is high marginal rate of tax, high prosperity to import goods caused by the exchange rate being high which causes the price of goods at home to be higher than the price of goods abroad which increases import. The multiplier effect is not as effective.

Question 6

POINT 6

Answer 6

Also the impact of the fiscal policy will depend on the position of the economy on the LRAS. This can be shown in the diagram below

(LRAS DIAGRAM SHOWING ADo on flat and AD1 on curve)

If the economy is at ADo then economic growth will occur however if the economy is already at full employment at AD1 expansionary fiscal policy will only result in an increase in price.