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Fiscal Policy

Fiscal, monetary and supplyside policies are vital measures which authorities can
use to achieve their four main macroeconomic objectives: low unemployment,
sustainable growth, low inflation and equilibrium in the balance of payments.
Fiscal policy is the use of government taxation, spending and borrowing to influence
AD.

Objectives of…

Page 2

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A larger budget deficit or a smaller budget surplus will increase injections in the economy
through the circular flow. A budget deficit occurs when government expenditure exceeds tax
revenue, which therefore increases GDP because injections become greater than
withdrawals. This is as long as its expansionary effect is not negated…

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When people's money income rises, dragging them into higher tax brackets. Fiscal drag is
therefore referring to the effect inflation has on average tax rates. If tax allowances are not
increased in line with inflation, and people's incomes increase with inflation then they will be
moved up into higher tax…

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If the government increases their expenditure, they will need to increase taxation. As
consumers and investors pay more tax, they have less money to consume or invest,
illustrated by the Laffer curve.

Distorts signals in the labour market as a resource allocator (increased taxes reduce
disposable income, and cause a…

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3. Keynes argued to move from B to C, this would not require a 140bn stimulus because
of the multiplier effect and the accelerator theory.
4. In the multiplier theory, for every pound that is invested into the system, a greater
amount than a pound would be yield in the…

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If the government announces 500m in civil servant salaries and a 500m increase in
road building, and the multiplier is 2, this should lead to 2bn increase in output in the
Keynes model. However, it will take years to work through. The increase in civil
servant wages may be quick…

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An increase in the national debt ­ keeps expanding as debt is added up
Financing the debt ­ the financing will incur interest, creating a leakage.

Possible benefits of a budget deficit

Can increase AD through demandmanagement policies
Stimulus to grow ­ longterm growth through infrastructure, education, which shifts
LRAS.…

Comments

davidsalter

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This is a 7 page well written summary covering Fiscal policy up to A2 standard. Students should use it to enhance their own notes, create a mind map or just read and learn if they need to.

lastj2106

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this is helpful for a level business aswell!

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