Fiscal Policy Flashcards
Define fiscal policy
The manipulation of G & T by the gov. to effect the macroeconomics
What types of expenditure can the gov. do (4)
Current expenditure (NHS salaries) Capital expenditure (new hospitals, roads built) Transfer payments (benefits) The objectives of public expenditure (e.g. defence, health, education)
Sources of gov. revenue (2)
Direct tax (income) Indirect tac (consumption)
What is expansionary fiscal policy
Gov. run a budget deficit to increase spending into the economy, to create economic growth (increase AD)
What are examples of expansionary fiscal policy?
New hospital built = jobs, income etc
Increasing benefits = more consumption
increased salaries for state teachers = higher income, more consumer spending
What is contractionary fiscal policy
In order to contract the economy the gov. will run a budget surplus to take money out of the economy
Examples of contractionary fiscal policy
Decreased spending on the NHS
Increase in tax
Reduced wages for teachers
How does contractionary fiscal policy effect the AS/AD curve
AD curve shifts leftward
increase in (X-M) since reduced wages leads to reduced spending on impports
How does expansionary fiscal policy effect the AS/AD curve
AD curve shifts rightwards, output gap reduces
How will the increase in G be effected by the multiplier
Gov. spending is an injection into the circular flow, as there is more money being pumped in, there will be more C and I etc, so even more growth
How will the increase in T be effected by the multiplier
Taxing is a withdrawal from the circular flow, so as money is taken out, there will be less C and I so the take away with have a bigger impact
What is discretionary fiscal policy
Deliberately changing G & T
What are automatic stabilisers
Some forms of G&T change automatically without the gov. - T increases during a boom (higher income tax etc) , G increases during a recession (unemployment benefits etc)
How will expansionary fiscal policy effect the gov’s budget
Budget deficit
How will contractionary fiscal policy effect the gov’s budget
Budget surplus
How does the elasticity of the LRAS curve effect the impact of fiscal policy
if the LRAS is inelastic (vertical), then a shift of AD will have little/no effect on output
What are the negatives of fiscal policy (3)
- Crowding out
- Political constraints
- Impact on budget
What is resource crowding out?
When increased spending on the public sector leads to a lack of resources for the private sector
What are the political constraints on fiscal policy
contractionary fiscal policy is very unpopular so politicians are reluctant to do it even if it would be beneficial
What is the Neo-Classical critique of fiscal policy
Since the LRAS curve is perfectly inelastic (vertical), any shift of AD will not have an impact on output
What are the positives of fiscal policy
- Effectiveness in a deep recession
- Ability to be targeted
- Ability to improve the supply side
How does fiscal policy have the ability to be targeted
The gov. can target regions, sectors, wage levels, age
How can fiscal policy improve supply side
Increased investment in economy + I from firms, will lead to a rightward shift of LRAS
