Macroeconomics Government Policies

Question 1

Government Policies

Answer 1

Demand side policies:

• Fiscal policies

*

Question 2

Government policies - Fiscal Policy

Answer 2

Fiscal policy - where the government adjusts the economy by changing either government expenditure, taxation or both. [Taxes include both direct taxes and corporate taxes]

Question 3

Expansionary fiscal policy

Answer 3

When the government intervenes in the economy and either decreases taxation, increases government expenditure or both

Question 4

Deflationary/Contractionary fiscal policy

Answer 4

When the government intervenes in the economy and either increases taxation, decreases government expenditure or both

Question 5

Expansionary Fiscal Policy - Sources of Revenue

Answer 5

If the government decides to spend more than it earns in tax revenue (a budget deficit) it needs to be able to fund this spending. There are a variety of sources of revenue.

• Direct and indirect taxation
• Sale of goods and services from state-owned enterprises
• Sale of government assets

They can also adjust their expenditures:

• Current expenditures
• Capital expenditures
• Transfer payments

Question 6

Expansionary Fiscal Policy - Sources of Revenue 2

Question 7

Goals of fiscal policy

Answer 7

• Low and stable inflation
• Low unemployment
• Promote a stable economic environment for long-term growth
• Reduce business cycle fluctuations
• Equitable distribution of income
• External balance
• Close deflationary/recessionary and inflationary gaps

Question 8

Evaluating the Effectiveness of fiscal policy

Answer 8

Constraints on fiscal policy
* Political pressure
* Time lags
* Sustainable debt
* Crowding out (HL)

Strengths of fiscal policy
* Targeting of specific economic sectors
* Government spending effective in deep recession

Automatic Stabilizers (HL)

Strengths and limitations in promoting growth, low unemployment, and low and stable inflation rate