Fiscal Policy Flashcards
What is fiscal policy
Fiscal policy refers to the actions taken by the government that influence the timing, magnitude and structure of government current revenue and expenditure
Expansionary fiscal policy
For example, of there was a downturn in the economy and the government were trying to achieve the economic aim of full employment it could pursue an expansionary fiscal policy. This would mean that the government could stimulate economic activity by:
Increasing government expenditure (e.g. social welfare, child benefit)
Reducing taxes on labour - in order to increase disposable incomes and therefore demand in the economy (PAYE)
By using fiscal policy in this way, the government would increase aggregate demand and therefore employment.
Expansionary policy and CBD
If the government were pursuing an expansionary fiscal policy, this would usually require the government to run a current budget deficit as it has to inject more money into the economy than it withdraws. The CBD would be funded through increased government borrowing which is limited by NTMA (National Treasury Management Agency)
Contractionary fiscal policy
If there were significant inflationary pressures with capacity constraints emerging during a period of rapid economic growth, it may be necessary to implement a contractionary fiscal policy. To slow down economic growth, the government would:
Decrease government spending and attempt to run a current budget surplus
Increase taxes on labour in order to reduce disposable incomes and reduce aggregate demand in the economy.
Both measures would help slow down the rapid economic growth by withdrawing money from the economy
What is fiscal neutrality
Fiscal neutrality is followed by the government when current revenue and current spending are equal, i.e. the government injects into the economy an equal amount than it withdraws. Demand in the economy is neither stimulated nor decreased in this situation.
