Fiscal and monetary policy

Question 1

what are the two types of Fiscal policy and purpose?

Answer 1

Expansionary/ reflationary/ loose
purpose: SHORT RUN economic growth, lower CYCLICAL unemployment, better living standards by having (Budget deficit)

Contractionary/ deflationary/ tight
purpose: lowers DEMAND PULL inflation

Question 2

What does fiscal policy involve?

Answer 2

Manipulation of government spending and taxation.

Question 3

examples of Government spending?

Answer 3

Public goods- Education, NHS, Street lights, subsidies, infrastructure

Question 4

why/ how does Expansionary and contractionary fiscal policy achieve aims?

Answer 4

Expansionary - As Government in budget deficit, less tax/ tax revenue to gov. More disposable consumer income - more consumption, more business investment (less tax, more profit opportunity) - economic growth -increase in AD, more AD more demand there for more jobs needed.

Contractionary - Budget surplus, more taxation than Government spending, government have more tax revenue, less consumer disposable income, less consumerism, decreasing AD, lowering inflation,

can be used to return exceeding output/GDP to optimum

Question 5

why may fiscal policy be used

Answer 5

• left to itself economy may have low economic growth, high unemployment, volatile business cycles.

-lack of AD may cause businesses to invest to little and cause unemployment

• once full (~95%) employment is achieved fiscal can be used to stabilise economy and prevent inflation