fiscal policy

Question 1

fiscal policy definition

Answer 1

Fiscal policy involves the government changing the levels of taxation and government spending in order to influence aggregate demand (AD) and the level of economic activity

Question 2

aim of fiscal policy

Answer 2

Policies implemented by government to try and manipulate level of AD

To either increase/decrease – gov spending/taxation

Question 3

expansionary fiscal policy definition

Answer 3

An expansionary fiscal policy involves the government aiming to increase aggregate demand – through deliberately increasing real government spending and/or lowering direct and indirect taxes

Question 4

contractionary fiscal policy definition

Answer 4

Contractionary policy is implemented when policy makers use monetary or fiscal policy to constrain aggregate spending in an economy

Question 5

aims of expansionary fiscal policy

Answer 5

• Boosts growth
• Reduces unemployment
• Increase inflation
• Redistributes income

Question 6

aims of contractionary fiscal policy

Answer 6

• Reduce inflation
• Reduce budget deficit/national debt
• Redistribute income
• Reduce current account deficit

Question 7

fiscal policy effects on AD

Answer 7

• Reduction in taxation
• Increase government spending
• Will increase growth
• Expansionary fiscal policy – leads to increase in AD

Question 8

effects on LRAS

Answer 8

• If gov increases spending on education and training - it Improve quality of labour - LRAS shifts right

Question 9

benefits of fiscal policy (3)

Answer 9

• Effects consumption, investment and Gov spending – if tax falls – increase in disposable income – more consumption – increase AD
• Can effect both AD + AS
• Benefit from automatic stabilisers

Question 10

negatives of fiscal policy (6)

Answer 10

• Demand pull inflationary pressure
• Time lag – takes time for effect to show
• Disincentive effects – income tax increase – disincentive for people to work – decrease size labour force
• Some forms of gov spending may be inflexible
• Reactions may not be expected – reduce taxes doesn’t mean increase taxes
• If policies are financed by gov borrowing – how will gov finance – may lead to burden on future generations – adds to national debt – not sustainable

Question 11

what does the fiscal policy effects depend on (4)

Answer 11

• Initial level of economic activity – if already high growth change will not be as large – whereas further from full employment – larger impacts
• Size of multiplier – bigger multiplier the less gov spending – for there to be a large amount of growth
• Length of time lag – less effective short term
• If it offset by other factors – may be expansionary fiscal policy – but contractionary monetary policy at same time – offsets impact