Fiscal Policy

Question 1

What are the 3 objectives of Fiscal Policy?

Answer 1

1) To improve macroeconomic performance
2) Achieve a better distribution of income.
3) Correct market failure at a microeconomic level.

Question 2

What is Demand Management?

Answer 2

This is where fiscal policy is used to manipulate the level of aggregate demand in an economy.

Question 3

What are Automatic/Built-in stabilisers?

Answer 3

Mechanisms which reduce the impact of changes in the economy on national income.

Government spending and taxation are both automatic stabilisers because when the economy goes into a recession and u employment starts to rise, social security and benefits both rise and so the fall in AD is less.

Question 4

What are the limitations to fiscal policy?

Answer 4

1) Conflicting policy objectives - fiscal policy can only manipulate one variable at a time.
2) Time Lags
3) Inadequacy of economic data - statistics are often unreliable.
4) Inadequacy of economic knowledge -we assume we know exactly how the economy works but we don’t really.
5) National Debt - spending on fiscal policy often adds lots to the amount we borrow thus increasing national debt.