Th2.6: Fiscal Policy

Question 1

What are the two ways the government can increase AD through fiscal policy?

Answer 1

rising income tax

rising government spending

Question 2

Rise in income tax

Answer 2

a rise in income tax will cause a fall in disposable income, leading to a reduction in consumption and thus decrease AD

Question 3

Rise in government spending

Answer 3

increase AD since it’s one component

Question 4

Alternatively, what will a rise in income tax do?

Answer 4

decrease a firm’s post-tax profits, leading to a reduction in investment and thus decreasing AD