Fiscal policy and demand management

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  • Fiscal policy and demand management
    • Objectives of fiscal policy
      • To improve macroeconomic performance
      • To achieve a more desirable distribution of income and wealth
      • To correct market failure such as the provision of merit goods and discouraging consumption of demerit goods
    • Automatic stabilisers
      • Automatic stabilisers are expenditures which automatically increases when the economy is going into a recession and decreases whene the economy is in a boom
      • Eg In a boom government spending automatically   decreases as less people claiming benefits
      • Eg In a recession government spending automatcially increases on benefits
    • Active/ discretionary fiscal policy
      • The deliberate manipulation of government expenditure and taxes to influence the economy
    • Problems of active fiscal policy in a recession
      • Governemnt spending increases and taxes reduce
      • This leads to a governemnt deficit leading to borrowing
      • Which in turn crowds out the private sector, leading to no overall ipact except private sector smaller and public sector bigger
    • Problems of active fiscal policy in a recession
      • Government spending reduces and taxes increase
      • This may ease inflationary  pressure but half built governemnt projects will have to be left
      • Lose votes if it is a lead up to election


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