Fiscal Policy

Fiscal Policy: taxes, types of policies, automatic stabilisers, discretionary policy. 

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  • Fiscal Policy
    • Fiscal Stance
      • Neutral - gov spending and tax has no effect on AD.
      • Reflationary - boosts AD by increasing gov spending and decreasing tax
      • Deflationary - reduces AD by increasing tax and lowering gov spending.
    • Automatic Stabilizers
      • Some of a gov's fiscal policy will automatically react to changes in the economy.
      • E.g. a recession will make more people unemployed, so the gov will need to pay out more in benefits (JSA).
        • But this will create a budget deficit.
      • E.g. in a boom, tax increases and gov spending decreases as more people have jobs.
        • This creates a budget surplus.
    • Discretionary Policy
      • Gov's deliberately change their level of spending and tax.
      • E.g. during a recession the gov might choose to spend more and cut taxes to stimulate AD.
    • Taxes
      • Regressive Tax - a person's tax falls (as a percentage of their income) as their income rises.
        • Used by a gov to encourage supply side growth.
        • Gives the incentive to work harder to earn more income - but may create inequality.
      • Progressive Tax - a person's tax rises (as a percentage of their income) as their income rises.
        • Often used to redistribute income and reduce poverty. A gov can use the tax rev from a wealthy person and redistribute it to those on a low income.
      • Proportional Tax - everyone pays the same amount of tax regardless of income level.
        • Can achieve horizontal equity - people  who have similar incomes and ability to pay taxes should pay the same amount of tax.
        • It is argued that this reduces the incentive to evade and avoid paying this tax and increases the incentive to work in order to earn more and have a higher disposable income.

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