Fiscal policy

Question 1

What is the purpose of fiscal policy

Answer 1

Stimulate economics growth
Keep inflation low
Avoid a boom and burst economic cycle

Question 2

What is fiscal policy often used in conjunction with

Answer 2

Monetary policy

Question 3

Describe expansionary fiscal policy

Answer 3

Involves increasing AD
Means more spending and lower taxes
Worsens the government’s budget deficit

Question 4

Describe deflationary fiscal policy

Answer 4

Involves decreasing AD
Means either higher taxes or lower spending
Causes an improvement in the budget deficit

Question 5

what type of fiscal policy might the government use to respond to a recession

Answer 5

expansionary - with the goal of making money flow around the economy again

Question 6

what type of fiscal policy might the government use to respond to a high deficit

Answer 6

deflationary

Question 7

Why is fine tuning hard to achieve using fiscal policy

Answer 7

Time lags—it takes the economy time to respond to policy changes
Political costs – rasing taxes will be unpopular
Difficulty of forecasting—getting accurate data is difficult and predicting the future data is even harder

Question 8

What are the criticisms of fiscal policy

Answer 8

The government may have poor information about the state of the economy
Time lags
Crowding out—expansionary policy may not increase AD because the government has to borrow from the private sector
Government spending is inefficient
Costs of borrowing are higher

Question 9

What does the effectiveness of fiscal policy rely on

Answer 9

The size of the multiplier effect
The state of the economy—more effective during a recession
Other economic factors - if in a global recession may be insufficient
Bond yields - government may be unable to borrow money