Lesson 26 - Fiscal policy and demand management Flashcards
What is a discretionary fiscal policy?
Discretionary refers to politics which are decided, and implemented, by one-off policy changes made by the government.
What is an automatic fiscal policy?
Tax and spending stabilises which slows down a fall in aggregate demand when the economy enters a recession, and restrain aggregate demand when the economy speeds up.
Some economists argue that the government should use fiscal policy to control what?
Aggregate demand
When does a reflationary fiscal stance occur?
When the government is running a budget deficit
When does a deflationary fiscal stance occur?
When the government is running a budget surplus
What is the impact of government spending in a recession?
An increase in aggregate demand
Inflation
What are the limitations of fiscal policy?
Timely
Targeted
Temporary
Why is it difficult to increase government spending quickly?
Timely
It takes a number of years to agree the plans for spending by the government.
Most government spending is not discretionary and cannot be changed easily.
Why is it difficult to target government spending on unemployed people?
Targeted
The unemployed may not have the skills needed to compete the work that the government is paying for, thus meaning the spending does not have a direct impact upon unemployment.
What is the problem with the size of any additional government spending?
Size
The extra government spending is only likely to be a small % of GDP in one year thus meaning it will only have a small impact on overall aggregate demand.
Evaluating fiscal policy - why does its effectiveness depend upon how its financed?
It depends on how government spending is financed. If government spending is financed by higher taxes, then tax rises may counter-balance the higher spending thus meaning there will be no increase in aggregate demand (AD).
