FISCAL AND MONETARY

Question 1

What is Fiscal Policy?

Answer 1

• Manipulation of Government Spending and Taxation in order to influence the Economy
• Can be Expansionary or Contractionary

Question 2

Examples of Expansionary Fiscal Policy

Answer 2

• Decreased Income Tax
• Increased Gov’t Spending on Benefits
• Decreased Corporation Tax
• Increased Gov’t Spending on Healthcare and Education

Question 3

Impact of Decreased Income Tax + Evaluation

Answer 3

• More ‘Take Home’ Pay for workers
• Allows for Increased Consumption - AD Increase (Right Shift) with Potential multiplier effects
• Increases Economic Growth and Decreases Cyclical Unemployment
• Eval. Less Gov’t Tax Revenue - Less Gov’t Spending on Public Services/Health Care
• Some people may only need a certain wage to maintain lifestyle - they’ll work less hours - SRAS decrease

Question 4

Impact of Increased Government Spending on Benefits

Answer 4

• Increased Consumption from low income households - AD increases
• More Economic Growth and decreased inequality
• Eval. - Too much benefits may lower incentive to work - ‘Benefits Trap’ - Unemployment Increases

Question 5

Impact of Decreased Corporation Tax + Evaluation

Answer 5

• Allows for Increased retained profits - increased investment by firms - AD increases
• Investment into greater capital - increase LRAS
• Eval. - Less Gov’t Tax Revenue so could see less Gov’t Spending
• Depends on how retained profits are used

Question 6

Impact of Increased Government Spending on Healthcare and Education

Answer 6

• Direct Increase in AD as G is in Equation - More Economic Growth and Employment
• Can also increase productive capacity of economy due to more educated and healthy workforce- LRAS
• Eval. - Worsens budget deficit
• Depends on chosen areas being funded

Question 7

Examples of Contractionary Fiscal Policy

Answer 7

• Increased Income Tax
• Decreased Gov’t Spending on Benefits
• Increased Corporation Tax
• Decreased Gov’t Spending on Healthcare and Education

Question 8

Impact of Increased Income Tax

Answer 8

• Less ‘Take Home’ Pay for workers
• Causes Decreased Consumption - AD Decrease (Left Shift) with Potential negative multiplier effects
• Decreases Economic Growth
• Also, decreases Profits for firms which can decrease Tax Revenue for Gov’t and also derived demand for labour and employment level
• Eval. - Can cause Tax Avoidance or people working less due to lower pay incentive
• Can cause brain drain

Question 9

Impact of decreased government spending on benefits

Answer 9

• Decreased consumption from low income households - AD and Economic Growth decrease - Increased income inequality
• Eval. - Budget deficit decreases
• Forces unemployed into work - Decreased Unemployment

Question 10

Monetary Policy