fiscal policy

Question 1

what is fiscal policy and what it includes

Answer 1

-changes to government spending and taxation influence AD
-tax, gov spending, gov borrowing

Question 2

different types of fiscal policy and why

Answer 2

-expansionary (rise in AD): boost growth, reduce inflation, increase inflation, redistribute income
-contractionary policy (decrease AD):
reduce inflation
-reduce budget deficit
-redistribute income (tax)
-reduce current account deficit

Question 3

expansionary fiscal policy examples and LRAS

Answer 3

AD
-reduce income tax- rise in disposable income
-reduce corporation tax - increase investment
-increase gov spending - boost g (add multiplier effect)

LRAS (side effect)
-income tax: incentive to join and work harder (keep more)
-corporation: investment in productive capacity
-government spending: productivity and health, reduction of welfare benefits

Question 4

problems with expansionary fiscal policy

Answer 4

-demand-pull inflation
-current account deficit
-worsening gov finances (cuts, higher tax)
-crowding out - private sector
-x- inefficiency: wasteful
-time lags:

Question 5

evaluation of expansionary fiscal policy

Answer 5

-size of output gap: effectiveness (small, less likely)
-size of multiplier
-consumer/business confidence
-state of finances
-lr returns to gov
-laffer curve: income tax cut may lead to higher tax revenue (incentive) tax rate (x) and tax revenue and is negative parabola