Fiscal policy

Question 1

What is Fiscal Policy?

Answer 1

Governments using taxation and spending to influence aggregate demand

Question 2

What are the two types of Fiscal Policy?

Answer 2

Expansionary (more demand)

Contractionary (less demand)

Question 3

What happens in expansionary policy?

Answer 3

Taxes decrease and government spending increases
(shift right)

Question 4

What happens in contractionary policy?

Answer 4

Taxes increase and government spending decreases
(shift left)

Question 5

What does the fiscal policy aim to do in macroeconomic terms?

Answer 5

Maintain a low and stable rate of inflation

Maintain low unemployment

Reduce the business cycle fluctuations

Create a stable economic environment for long-term economic growth

Redistribute income so as to ensure more equity

Control the level of exports and imports (net external balance)

Question 6

AD formula

Answer 6

AD = C + I + G + (X - M)

Question 7

What does fiscal policy aim to do in microeconomic terms?

Answer 7

Income tax cuts can influence labour to be more productive

Tax cuts can encourage firms to increase output or be more entrepreneurial

Subsidies can lower costs of production in the industry, leading to higher output

Question 8

How can fiscal policy improve supply-side?

Answer 8

Eg education subsidies can help the poorest households constitute an annual expenditure for the government. However, in the long term, they help to improve human capital, which boosts productivity and output

Question 9

Is fiscal policy short or long-term?

Answer 9

Short-term, but the supply-side impact is long-term

Question 10

What are automatic stabilisers?

Answer 10

Automatic fiscal changes that occur as the economy moves through stages of the business/trade cycle