Fiscal Policy

Everything about fiscal policy, and how to apply it to any question. 12-30 markers.

RED - definitions

YELLOW - analysis

PINK - +ve evaluations

BLUE - -ve evaluations

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  • Created by: SophB
  • Created on: 04-04-13 17:22
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  • Fiscal Policy
    • use of TAXES and GOVT. SPENDING to manipulate AD in the economy
    • DEMAND SIDE POLICY
    • BUDGET DEFICIT: GOVT. SPENDING> TAX REV.
      • If govt. spending > tax rev: -AD shifts right>increase in GDP> govt. spending is an injection to circ. flow on income. INJECTIONS> WITHDRAWALS - AD inc.
    • ANALYSIS: CUT IN TAXES: -reduce income tax bill> increase in d.income> create an injection of cons. spending> largest factor of AD> AD shifts right=increase in GDP (expansionary fp)
      • ANALYSIS: RISE IN CORP. TAX: -increase in tax taken from firms>reduce firm profits> reduce business investment> decrease in AD> reduce in GDP (contractionary fp)
    • EVALUATION: 1) (MAG) big impact of AD because of MULTIPLIER EFFECT. -consumers more confident> consumer more> cons. spendinf inc.> largest factor of AD> AD shift right.
      • EVAL: 1) (TIME LAG) decided yearly by chancellor of echeq.>delay in being put in effect means that changes comes months after needed> decrease in consumptions> largest factor of AD> decrease in AD.
        • EVAL: 2) *can lead to GOVT. FAILURE - govt. makes things worse and creates further misallocation of resources. e.g. subsidies to farmers in EU resulted in overproduction.
        • EVAL: 3) can lead to "disincentive effect" increase in inc. tax> less incentive to work hard> prod decreases> investment decreases>AD decreases.
        • EVAL: 4) (LONG RUN) increase in govt. spending can result in increase in BD (GS>T) govt. has to borrow this means: - govt. spending will have to be cut in future - int. payments will hae to paid on high level debt -tax raises will have to be made in future
      • EVAL: 2) helped reach environmental goals. e.g. GREEN TAXES on companies> help reduce carbon emissions> creates sustainable environment>one of the macroeconomic goals.
      • EVAL:
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  • ANALYSIS: CUT IN TAXES: -reduce income tax bill> increase in d.income> create an injection of cons. spending> largest factor of AD> AD shifts right=increase in GDP (expansionary fp)
    • ANALYSIS: RISE IN CORP. TAX: -increase in tax taken from firms>reduce firm profits> reduce business investment> decrease in AD> reduce in GDP (contractionary fp)

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