Fiscal policy

Question 1

What is fiscal policy?

Answer 1

Fiscal policy is the implication of the federal government in the manipulation and adjustments in the government’s revenue and expenditure to achieve macro policy objectives.

Question 2

What are 3 types of fiscal policy?

Answer 2

Discretionary, Contractionary and Expansionary.

Question 3

Give definition of Discretionary fiscal policy

Answer 3

Discretionary fical policy is deliberate action made by the federal government in the manipulation of government spending and taxation (G and T), to help stimulate consumer spending hence assist in influencing Aggregate demand.

Question 4

Give definition of Contractionary Fiscal Policy

Answer 4

In a peak or high economic level the federal government uses discretionary policy, which leads to contractionary fiscal policy to dampened high economic activity.

Question 5

Give definition of Expansionary Fiscal Policy

Answer 5

In a trough the federal government uses discretionary fiscal policy which leads to expansionary policy in which is the increase in government spending such as increase in welfare payments and allocating more funds to infrastructures.

Question 6

Give definition of Automatic Stabilizers

Answer 6

Economonic devices that regulate or stabilize the cyclical fluctuations in the economic activity of an economy. This device does not require government interventions and can be complemented by discretionary policy.

Question 7

What is the functions of the budget

Answer 7

Allocative, Redistribution and stabilization

Question 8

define and give examples of Allocative function.

Answer 8

Provision of funds for Government expenditures - G1 and G2,
G1 - Current expenditure (day to day costs such as wages for employees).
G2 - Capital (Infrastructures funds towards school and buildings).

Question 9

Definition and Example of redistribution function

Answer 9

Manipulation of expenditures and revenues in attempt to change the distribution of income.
There is two methods to achieve this, Progressive tax and Welfare payments..

Question 10

Advantages of Fiscal policy

Answer 10

• Short Effect lag, which is the immediate impact caused by stimulated spending.
• Flexibility, it can be manipulated to target specific sectors.

Question 11

Disadvantages of Fiscal Policy

Answer 11

Time lags - decision lag, implementation lag, effect lag.
Political bias - fiscal policy can be used to gain votes spending might be steered towards politically uncertain constituencies rather than areas with pressing economic needs.

Question 12

Give definition of Budget surplus

Answer 12

This occurs when the overall revenue of the government exceeds greater than the government expenditures, hence T>G.

Question 13

Give definition of Budget deficit

Answer 13

This occurs when the overall expenditure of the government exceeds greater than the government revenue hence G>T.