Policy Instruments - Fiscal policy

Question 1

What is discretionary fiscal policy?

Answer 1

Put in place with deliberate legislation (eg. reduction of taxes)

Question 2

What is automatic fiscal policy?

Answer 2

In place without deliberate legislation (when people loose jobs unemployment spending automatically rises)

Question 3

Through what effect does Government spending lead to a more than proportionate increase in growth?

Answer 3

The multipler effect

Question 4

List some main arguements against excessive spending.

Answer 4

Crowding out effect - increase Gov spending leads to lower private sector spending.
The government may not be efficient at providing goods and services (knowledge gaps).
Can cause debt.
Can cause demand-pull inflation.

Question 5

What are Adam Smiths 4 canons of taxation?

Answer 5

Raise revenue to finance spending.
Manage AD to help meet objectives.
Change distribution of income and wealth.
To correct market failure and environmental targets.