2.6.2 Demand Side Policies Fiscal Policy Flashcards
(12 cards)
What is fiscal policy?
It’s a macroeconomic policy when there are changes the government spending and taxation in order to influence a change in AD
Why do governments use expansionary fiscal policy?
They use it to boost growth if economy sluggish
Which is unemployment that is cyclical
Increase demand pull inflation
Re-distribute income by lowering inequality
Why do governments use contractionary fiscal policy?
Reduce inflation and cooldown economy
Reduce budget deficit and national debt
Redistribute income by increase taxes for rich
Reduce current account deficit as decreased income less sucking in of imports
How can expansionary fiscal policy increase AD?
Reduction income tax for low or high income
Reduction in corporation tax increased retain profit
Increase in government spending which boosts ad
Reduction in regressive tax more income for poor
How can expansionary fiscal policy lead to multiplier effect?
As A.D. increases income goes up and spending which keeps continuing leading to an even bigger increase in AD
How can expansionary fiscal policy lead to increased LRAS?
Reduction in income tax makes people more productive and incentivise inactive
Reduction in corporation tax leads to increase investment and L RAS
Increase in government spending more infrastructure will lead to increased productive efficiency including better education
What are the pros of expansionary fiscal policy?
High growth increased LRAS and low unemployment
Government spending increase can benefit education, healthcare, infrastructure and public services
Crowding in can occur as private sector investment may increase to tap into demand
Redistribute income by lowering inequality with low taxes and increased welfare and low regressive tax
What are the cons of expansionary physical policy?
When trying to reach a target trade-off occur if it goes above like demand pull inflation and current account deficit
It can worsen government finances as budget deficit leads to increase national debt
Crowding out affect may occur if government spending is heavily borrowed reduced private sector investment
Time lags as tax cuts take time to feed into economy infrastructure may take time to build
X inefficiency could occur as gov spending could be wasteful
What are some evaluation points for expansionary fiscal policy?
Depends on size of output gap if negative output gas more than expansionary policy less likely to increase growthand would increase inflation
It depends on size of multiplayer if it’s big then there’s less of a need of expansionary policy as multiply will do rest of work and less impact on government finances
Depends on consumer and business confidence
Depends on government finances if not stable they can’t afford the policy
Long run return leads to long run growth
What are the pros of contractionary fiscal policy?
Increase confidence in government finances as it reduces deficits and national debt and better credit scores
Flexibility with fiscal policy if debt and deficit are low they have fiscal headroom to do more policies and prepare for future crisis
Low inflation and current current deficit
Redistribute income
What are the cons of contractionary fiscal policy?
If policy used strongly then demand side shock may occur eating to lower growth and higher unemployment and go into deep recession for demand
Micro and macro impacts of high tax and low government spending
Long run returns of higher government spending low taxes ignored as long run increased productive potential
Incentives distorted due to high taxes needs to unwillingness to work less incentive to invest
Risk of income inequality due benefit cuts and regressive tax taxation
What are some evaluative points on contractionary fiscal policy?
The need of it is it necessary to run a budget surplus
Could debt rise impacting GDP? Policy may worsen government debt if shocks occur and strength of policy.
Depends on the stage of economic cycle when economy is in a policy will be worthwhile and then cool down economy and improve finances
