C11

Question 1

Summary

Answer 1

Discretionary fiscal policy refers to changes to government expenditure or taxation in response to an identified macroeconomic problem. These measures come in the form of increases or decreases in government spending or tax rates.
The use of fiscal policy to raise aggregate demand is known as expansionary fiscal policy.
The use of fiscal policy to lower aggregate demand is known as contractionary fiscal policy.
Fiscal policy may be used to achieve low unemployment, price stability, and sustainable and inclusive economic growth.
Fiscal policy may also be used to achieve other national aims, e.g. building a caring and inclusive society, transforming our economy and ensuring a fiscally sustainable future.
Factors limiting the effectiveness of fiscal policy are:
Size of the multiplier
Crowding out effect (Methods of financing government expenditure)
Time lags
Accuracy and availability of information
Political acceptability
Policy conflicts