Fiscal policy

Question 1

What is Fiscal policy

Answer 1

Influencing level of economic activity by manipulating government spending and/or tax rates (to change tax revenue received)

Question 2

Fiscal policy notes

Answer 2

-Mostly a demand side policy (except if tax affects firms then SRAS)
-G=T: balanced budget
-G>T: Budget deficit, shows how much G has to borrow (caused by decreased producer taxes, increased G)
-G<T: Budget surplus (caused by increased income taxes

Question 3

Government spending

Answer 3

Money spent on public services

Question 4

Expansionary fiscal policy chain of reasoning

Answer 4

Increased G>Increased AD>Increased RNO>Increased GDP>Increased EG

Decreased income tax>Increased C> Increased AD>Increased RNO>Increased GDP>Increased EG

Question 5

How does fiscal policy used to increased AD (Expansionary policy)

Answer 5

-Increased G or Decreased T
-Creates a deficit: adds to national debt
-Reflationary fiscal policy
-Used during recession to increase AD
-Increases EG, decreases inflation and unemployment

Question 6

Contractional fiscal policy chain of reasoning

Answer 6

Decreased G>Decreased AD>Decreased RNO>Decreased GDP>Decreased EG

Increased Income tax>Decreased C>Decreased AD>Decreased RNO>Decreased GDP>Decreased EG

Question 7

How fiscal policy is used to decreased AD (Contractionary policy)

Answer 7

-Decreased G or Increased T
-Aim is to reduce budget deficit, lead to budget surplus
-Deflationary fiscal policy
-Used in a boom
-Lowers demand pull inflation and economic growth and increases cyclical unemployment

Question 8

National debt

Answer 8

Amount of money owed by a country’s government from borrow from mainly financial markets who lend credit. The more borrowed, the higher deficit. The UK has a large amount of national debt.