2.6 Fiscal policy Flashcards
What is fiscal policy
a tool the government uses to control aggregate demand by altering taxation and or government spending, it is a demand side policy
What type of policy Is fiscal policy
demand side policy
What two major components does fiscal policy control
taxation and government spending
What is expsnationary or inflationary fiscal policy
increases aggregate demand and closes the inflationary gap
What is contractionary or deflationary fiscal policy
decreases aggregate demand and closes the recessionary gap
What happens during expansionary fiscal policiy
government spending goes up
taxation goes down
What happens during contractionary fiscal policy
Government spending goes down
Taxes increase
What are different sources of government revenue
Taxes : direct indirect income wealth VAT toll corporation capital gains
Stamp duty
State owned enterprises
Privatisaiton
Types of government expenditure
Healthcare Education Military Infrastructure Debt Subsidies Job seekers allowance Housing
What are the three types of government spending
- transfer payments - welfare payments
- current government spending g- regular spending on public goods and services eg doctors salary
- capital expenditure - investment on infrastructure eg new hospitals
What is a budget surplus
when the government receives more revenue than it spends
What is a budget deficit
the government spends more money than it receives
What is government debt
the amount of debt the government has
What are goals of fiscal policy
low and stable inflation low unemployment long term growth reducing business cycle fluctuations equitable distribution of income external balance
Using a diagram, explain how the government can use fiscal policy to alter the level of AD in an economy. (10 marks)
plan
