Monetary, Fiscal And Supply Side Policies

Question 1

Wha does Loose fiscal policy involve

Answer 1

Boosting aggregate demand (AD right) by increasing government spending or lowering taxes
More likely to involve the government having a budget deficit

Question 2

What does tight fiscal policy involve

Answer 2

Reducing aggregate demand (AD left) by reducing government spending or increasing taxes.
It’s likely to involve a government having a budget surplus

Question 3

When is loose fiscal policy most likely to be used? And what might this influence?

Answer 3

During a recession or when there’s a negative output gap.

It will increase economic growth and reduce unemployment
But…
Increase inflation and worsen currant account of the balance of payments, as income increases more is spent on imports

Question 4

Wha is tight fiscal policy most like to be used? And what may change?

Answer 4

During a boom or when Theres a positive output gap.

Reduces price levels and improve the currant account of BOP because as income falls less is spent on imports
But…
Reduce economic growth and increase unemployment