Fiscal policy

Question 1

Define fiscal policy?

Answer 1

Changes to government spending and taxation in order to influence AD.

Question 2

What is the expansionary fiscal policy to boost AD?

Answer 2

• Boost growth means economic growth will rise
• reduce unemployment-cyclical unemployment will decrease
• increase demand-pull inflation-AD shifts to the right
• Reduce income inequality

Question 3

What is the contractionary fiscal policy to decrease AD?

Answer 3

• Reduce inflation-the economy will cool down-reduce demand-pull inflation
• Reduce budget deficit-reduce government borrowing
• Decrease income inequality-more taxes on the rich
• reduce current account deficit

Question 4

One of the expansionary policies is income tax how will this impact households?

Answer 4

When there’s a cut in income tax means households will have a higher disposable income so their MPC will increase.

Question 5

One of the expansionary policies is corporation tax how will this impact businesses?

Answer 5

A reduction in corporation tax is cut which means businesses will have more retained profits and their MPC to invest will increase.

Question 6

One of the expansionary policies is government how will this impact households?

Answer 6

Government spending will rise on healthcare, education, etc.

Question 7

What else does fiscal policy influence?

Answer 7

GDP

Question 8

What are the automatic stabilizers (fiscal policy tools)

Answer 8

1. Progressive income tax systems

2. Welfare benefits

Question 9

How would a long-run trend rate of growth look like?

Answer 9

• you draw a straight line pointing upwards labelled as Trend growth
• You have a wave line that is labelled actual growth
• the top part of the ‘wave’ would be labelled as BOOM
• the bottom part of the ‘wave’ would be labelled as RECESSION

Question 10

What happens when there’s a boom in the economy?

Answer 10

When incomes would rise-workers be pushed into higher tax bonds, which means the average rate of tax will increase which will slow down consumption. This means government spending on benefits will reduce.

Question 11

What happens when there’s a recession in the economy?

Answer 11

In a recession, economic growth will be negative and workers will move to lower tax bonds so the average rate of tax will go down. This will prevent consumption so government spending on benefits will rise.

Question 12

What is the job of expansionary policy?

Answer 12

to increase AD

Question 13

What are the 3 policies to stimulate AD?

Answer 13

1. Increase growth
2. Reduce unemployment
3. Increase inflation

Question 14

What is the job of contractionary monetary policy?

Answer 14

To decrease AD

Question 15

What are the 4 policies to decrease AD?

Answer 15

1. Reduce inflation
2. Prevent assets
3. Reduce excess debt
4. Reduce current account deficit

Question 16

What are the 5

monetary policies?

Answer 16

1. interest rates will go down
2. saving rates will go down so consumption will rise
3. mortgage rates will decrease so consumption will rise
4. rates on business bans-investments will rise
5. weak exchange rates so exports will rise

Question 17

is monetary policy is a demand-side policy?

Answer 17

yes

Question 18

What will monetary policy cause?

Answer 18

• There would be a boost in LRAS due to investment

- Increase the quantity and quality and improve productive efficiency.

Question 19

what are the cons of expansionary monetary policy?

Answer 19

1. Demand-pull inflation as a trade-off
2. Current account deficit
3. Interest rates have lower bonds
4. Negative impact on savers-interest rates will be low it will have a negative impact on savers their main objective is to spend and borrow.
5. Time lags

Question 20

How effective is this policy?

Answer 20

• size of the output gap (interest rates will promote growth and reduce unemployment)
• consumer confidence-(job prospects) and since interest rates will be lower they will have the incentive to spend and borrow.
• business confidence-they need to make sure their profit margins are increasing in the long run so they will incentivize them to borrow and spend.
• Banks-willingness to lend money
• size of the rate cut-Disposable income and mortgage payment-boost consumption
• Interest rates are not effective, the gov will have to use alternative methods uses quantitative easing.