FIscal policy policies

Question 1

What is fiscal policy?

Answer 1

It involves government spending and taxation. It can be used to influence the economy as a whole or individual firms and people. So chaning G will affect AD

Question 2

what is fiscal policy and the types?

Answer 2

Expansionary fiscal policy increase the level of AD by either increasing government spending or cutting taxes so gov spending rise. This can increase consumption by increasing disposable income because of tax cuts
-Increase investment by cutting business taxes
- Increase government purchases because government spending itself rises
- Expansionary fiscal policy shift AD rightwards because AD has increased
Contractionary fiscal policy
- This decrease the level of AD by decreasing consumption, investments, gov spending
- Contractionary fiscal policy shifts the AD curve leftwards as AD has fallen.

Question 3

Fiscal policy can have both macro and micro functions

Answer 3

Micro- Gov levy taxes so they can among other things, provide merit goods, provide merit goods (NHS), provide public good, reduce negative externalities and reduce consumption of demerit goods
Macro Gov levy taxes so they can among other things redistribute income and wealth by giving out transfer payments to reduce inequality

Question 4

How fiscal policy influence AD?

Answer 4

• A government can use fiscal policy to deliberately influence AD and so macroeconomic objectives. e.g if a government is in a recession and a negative output gap a governement could use expansionary fiscal policy such as cutting fiscal policy, such as cutting income tax for those on lower incomes
• This would cause AD to rise as this group have a higher marginal propensity to consume
• A government could also spend more money on buildings hospital and schools to increase government spending and so boost AD

Question 5

How fiscal policy influence AS?

Answer 5

• Fiscal policy can also have a supply side impact
• If a government cuts corporation tax firms will have more profits which mean investment rises. This should boost human capital and physical capital so increasing the productive capacity of the economy
• If a government cut income tax it may attract foreign workers to come to the UK to work. This would shift the LRAS to the right.
• Equally if a government spends more on infrastructure it could shift both AD and LRAS to the right.

Question 6

How government spending the pattern of economic activity?

Answer 6

The main categories that make up gov spending on national deference, social security, health programs and interest payments:
National debt refers to the total amount the government has borrowed over time
The budget deficit refer to how much has been borrowed in a particular year
Problems with national debt:
- If the market view the country national debt as unsustainable them demand for the government debt will fall. SO the cost of borrowing will rise
- High repayments on the national debt have a significant opportunity cost. This is the money which could be spend on health,education
- There is also a question of intergenerational fairness: will future generation have to face increased taxes to pay off the debt being built up
Issues to consider with debt: The key measure of national debt as a % of GDP, rather than debt as a raw figure.
- Factors to consider whether this is a concern or not are if the money borrowed gone to the current or capital spending. The latter would contribute more to future economic growth