FISCAL POLICY

Question 1

what are the three areas that change within fiscal policies

Answer 1

1. change in personal/income tax
2. change in corporate tax
3. govt expenditure

Question 2

how does decreasing personal income lead to expansion in the economy

Answer 2

with lower personal tax, HHs now have more disposable income which grants them higher purchasing power to consume goods and services. Hence. consumption expenditure increases

Question 3

how does decreasing corporate tax expand the economy

Answer 3

by decreasing corporate tax, this increase the after tax profit for firms. Profit-motivated firms are now more inclined to invest as their expected rate of return increased rendering previously unprofitable units of investment profitable now. Hence, I expenditure increases

Question 4

how does the govt spend more

Answer 4

1. building of infrastructure like roads and railway stations - increase demand for GAS like cement and labour
2. transfer payments - grants and vouchers like the covid explore SG vouchers that increase the disposable income of HHs
3. provision of public goods

Question 5

explain the multiplier effect

Answer 5

with an increase in AD, at the current general price level, the AD exceeds AS. This leads to an unplanned fall in the inventories of firms which they respond to by increasing production, employing more FOPs such as labour in order to meet planned levels of inventory. Firms will have to pay more factor payments to households to do so, leading to an increase in national income. HHs will spend a portion of the increase in their income on consumption of domestic goods and services meaning that induced consumption will increase. This leads to further increases in production and rounds of spending and re-spending with each round being smaller and smaller due to withdrawals in the form of taxes, savings and imports. The process stops once the initial increase in AD has been completely withdrawn and NY increase mtp from … to …

Question 6

what are the limitations of FP

Answer 6

1. small multiplier effect
2. nature of the economy
3. consumer and business confidence
4. budget deficit
5. crowding out effect