Fiscal Policy Flashcards
What is fiscal policy
• The use of government spending and taxation to
(Fiscal policy can effect both AD and AS)
What does the effectiveness of a fiscal policy depend one
• Time lags : policies take time to put in place
• The state of the economy
• How big is the cut in tax or increase in spending
• The reaction of firms and individuals to the changes
What are the two types of government spending
Current expenditure : money spent on the government’s everyday operations. Things like salaries for government employees vaccinations, medical supplies
Capital expenditure : government money spent on goods classified as investment goods. Linings that will be around for a longtime like roads,
School
What are the effects of a high income tax
• Substitution Effect : Higher tax encourages people to work less because work is less attractive.
• live in another country with a lower income tax rates
What are the two types of fiscal policies
Expansionary fiscal policy : increasing government spending or reducing taxes often used during periods of recession of slow economic growth
Contractionary fiscal policy : this involves deceasing government spending or increasing taxes to slow down an economy that is growing to fast and is at risk of high inflation
