Fiscal & Monetary Policy, Multiplier Effect

Question 1

Fiscal Policy Meaning

Answer 1

Use of gov. spending and/or taxation to influence both the pattern of economic activity the level of aggregate demand, output and employment

Question 2

Injections into the CFI

Answer 2

Gov. spending (G), Investment (I), Exports (X)

Question 3

Withdrawals from the CFI

Answer 3

Savings, Taxes, Imports (M)

Question 4

Three main tools of Fiscal Policy

Answer 4

Taxes, Government Spending, Government Borrowing

Question 5

When is a fiscal expansionary policy most effective

Answer 5

When there’s a significant negative output gap/high spare capacity, when supported by monetary policy, size of multiplier effect

Question 6

Gov. spending: capital expenditure

Answer 6

Examples: infrastructure, new equipment for NHS, extra defence equipment, flood defence schemes
Impacts: AD (+ multiplier effect), LRAS, SRAS (lower CoP), adds to economy’s capital stock

Question 7

Gov. spending: Current expenditure

Answer 7

Examples: drugs used in health care, army logistics supplies, road maintenance, salaries of NHS employees
Impacts: AD

Question 8

Gov spending: Transfer (welfare) payments

Answer 8

Examples: Universal credit, pensions, social care, welfare benefits
Impacts: Consumption (=> AD (not part of G)), no multiplier effect

Question 9

Direct Tax + examples

Answer 9

Taxes on income
Examples: income tax, corporation tax, capital gains tax

Question 10

Indirect Taxes + examples

Answer 10

Taxes on G&S
Examples: VAT, Excise duties

Question 11

Multiplier effect equations

Answer 11

k = ∆Y/∆J (change in income/change in injection), k = 1/1-mpc (marginal propensity to consume), k = 1/mpw (marginal propensity to withdraw)

Question 12

Quantitative easing (other channels through which it affects AD)

Answer 12

XR - more supply of currency, devaluation, so exports more competitive, XN increases, however can lead to imported inflation. Asset prices - high supply of money, price assets