Fiscal and monetary policy

Question 1

Fiscal policy

Answer 1

Changes in government and taxation to influence aggregate demand

Question 2

Why does the government impose taxes

Answer 2

Provide revenues for government spending for public services, infustructure, etc
Manage macroeconomic performance
Redistribute income
Correct market failure

Question 3

Why do governments spend money

Answer 3

Influence level of aggregate demand
Correct market failure and improve AC
Reduce inequality

Question 4

Examples of taxes

Answer 4

Income, corporation, VAT

Question 5

Cons of expansionary fiscal policy

Answer 5

Trade of with macroeconomic objectives e.g. inflation and national debt
Too many government loans can result in interest rates rising - reducing ability for private sector to invest

Question 6

How does low consumer confidence influence expansionary policies

Answer 6

Even though through tax breaks provided to consumer e.g. income tax reductions, consumers may be unwilling to spend due to low job security in times of recessions

Question 7

How does the effectiveness of policies demand on the size of the multiplier

Answer 7

The greater the size of the multiplier, the less the government needs to inject to see results