Fiscal Policy

Question 1

FP : achieving EG

Answer 1

• reducing taxation’s gives firms incentive to produce & reduces costs ~ increase in supply
• increase spending ~ higher aggregate demand ~ increase firm output ~ GDP rise
• more money in economy ~ high inflation lvl
• more demand ~ higher imports ~ worse BoP
• lower taxing, more spending ~ deficit & debt

Question 2

FP : maintaining full employment

Answer 2

• lower tax ~ incentive to work ~ real wage rate increase
• firms get profit increase as corp tax falls ~ reinvest
• increase spending ~ demand ~ peeps work to keep up~ lower unemployment ~ less spent on benefits ~ improve deficit
• lower tax, more spending ~ more money in economy ~ inflation