Fiscal, demand and supply side policies

Question 1

Benefits of expansionary fiscal policies?

Answer 1

• boost AD so boosts growth
• reduce cyclical unemployment
• increase demand pull inflation
• improve income inequality

Question 2

Benefits on contractionary fiscal policies

Answer 2

• reduce demand pull inflation
• reduce budget deficit
• reduce income inequality
• reduce current account deficit

Question 3

Cons of fiscal policies

Answer 3

• cause demand pull inflation
• can cause current account deficit
• can worsen budget deficit
• causes financial crowding
• lead to X-ineffiicency
• time lag of policies

Question 4

Evaluation of fiscal policies

Answer 4

• size of output gap
• size of M.E
• confidence
• state of budget
• LR returns to government
• laffer curve
• degree and role of automatic stabilisers
• low risk of crowding out

Question 5

Define automatic stabilisers

Answer 5

A fiscal policy tool used to dampen out the effect of the flucuating nature of the economic cycle

Question 6

What two criteria is needed for automatic stabilisers to take into effect

Answer 6

• progressive tax system
• welfare system (benefits via UCS)

Question 7

Explain the use of automatic stabilisers during a boom

Answer 7

During boom, incomes rise, this rises tax brackets of people, increase average rate of tax for governments, reducing the rate of increase of consumption

During boom, less people are unemployed, so less is spent on benefits