Fiscal Policy

Question 1

Define fiscal policy

Answer 1

The manipulation of G & T by the gov. to effect the macroeconomics

Question 2

What types of expenditure can the gov. do (4)

Answer 2

Current expenditure (NHS salaries)
Capital expenditure (new hospitals, roads built)
Transfer payments (benefits)
The objectives of public expenditure (e.g. defence, health, education)

Question 3

Sources of gov. revenue (2)

Answer 3

Direct tax (income)
Indirect tac (consumption)

Question 4

What is expansionary fiscal policy

Answer 4

Gov. run a budget deficit to increase spending into the economy, to create economic growth (increase AD)

Question 5

What are examples of expansionary fiscal policy?

Answer 5

New hospital built = jobs, income etc
Increasing benefits = more consumption
increased salaries for state teachers = higher income, more consumer spending

Question 6

What is contractionary fiscal policy

Answer 6

In order to contract the economy the gov. will run a budget surplus to take money out of the economy

Question 7

Examples of contractionary fiscal policy

Answer 7

Decreased spending on the NHS
Increase in tax
Reduced wages for teachers

Question 8

How does contractionary fiscal policy effect the AS/AD curve

Answer 8

AD curve shifts leftward

increase in (X-M) since reduced wages leads to reduced spending on impports

Question 9

How does expansionary fiscal policy effect the AS/AD curve

Answer 9

AD curve shifts rightwards, output gap reduces

Question 10

How will the increase in G be effected by the multiplier

Answer 10

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

Question 11

How will the increase in T be effected by the multiplier

Answer 11

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

Question 12

What is discretionary fiscal policy

Answer 12

Deliberately changing G & T

Question 13

What are automatic stabilisers

Answer 13

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)

Question 14

How will expansionary fiscal policy effect the gov’s budget

Answer 14

Budget deficit

Question 15

How will contractionary fiscal policy effect the gov’s budget

Answer 15

Budget surplus

Question 16

How does the elasticity of the LRAS curve effect the impact of fiscal policy

Answer 16

if the LRAS is inelastic (vertical), then a shift of AD will have little/no effect on output

Question 17

What are the negatives of fiscal policy (3)

Answer 17

• Crowding out
• Political constraints
• Impact on budget

Question 18

What is resource crowding out?

Answer 18

When increased spending on the public sector leads to a lack of resources for the private sector

Question 19

What are the political constraints on fiscal policy

Answer 19

contractionary fiscal policy is very unpopular so politicians are reluctant to do it even if it would be beneficial

Question 20

What is the Neo-Classical critique of fiscal policy

Answer 20

Since the LRAS curve is perfectly inelastic (vertical), any shift of AD will not have an impact on output

Question 21

What are the positives of fiscal policy

Answer 21

• Effectiveness in a deep recession
• Ability to be targeted
• Ability to improve the supply side

Question 22

How does fiscal policy have the ability to be targeted

Answer 22

The gov. can target regions, sectors, wage levels, age

Question 23

How can fiscal policy improve supply side

Answer 23

Increased investment in economy + I from firms, will lead to a rightward shift of LRAS