Fiscal Policy- Government Spending and Taxation Flashcards
(11 cards)
What is fiscal policy?
A macroeconomic policy using changes in government spending and taxation to influence aggregate demand (AD).
What are the two types of fiscal policy?
Expansionary
Contractionary
What are the aims of expansionary fiscal policy?
Boost economic growth
Reduce unemployment
Increase inflation (if too low)
Redistribute income
What are the aims of contractionary fiscal policy?
Reduce inflation
Lower budget/national debt
Improve current account balance
Redistribute income
Examples of expansionary fiscal policy?
Cut in income tax
Cut in corporation tax
Increase in government spending
What is the fiscal multiplier effect?
An initial increase in AD leads to higher incomes → more spending → further increases in AD.
Can fiscal policy impact LRAS (Long-Run Aggregate Supply)?
Yes, though it’s not the main aim, expansionary fiscal policy can shift LRAS right as a side effect.
How can income tax cuts affect LRAS?
By increasing incentives to work and productivity, potentially raising LRAS.
How can corporation tax cuts affect LRAS?
By increasing business investment, boosting productive capacity and shifting LRAS right.
How can government spending affect LRAS?
Capital spending on infrastructure or education can improve efficiency and shift LRAS right.
What is the primary aim of expansionary fiscal policy?
To boost aggregate demand (AD), not necessarily LRAS, though LRAS may rise as a side effect.
