Macroeconomics Government Policies

Question 1

Government policies

Answer 1

Demand side
* fiscal policies
* monetary policies

Question 2

Fiscal Policy

Answer 2

where the government adjusts the economy by changing either government expenditure, taxation or both [taces include both direct 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
AD shits to the right!

insert diagram

Question 4

deflationary/contractionary fiscal policy

Answer 4

when the government intervenes in the economy and either increases taxation, decreases government expenditure or both
AS shifts to the left!

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 just adjust their expenditures:
* current expenditures
* capital expenditures
* transfer payments

Question 6

expansionary fiscal policy - sources of revenue 2

Answer 6

printing money - not a popular choice as this will most likely lead to inflation
borrowing from overseas - government borrows from international sources
borrowing domestically (open market operations) - government buys and sells bonds in the market
* government bonds: a security in which investors pay a premium today, earn interest over a period of say, five years, after which the original premium is paid

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

constraings 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