Macroeconomic Policy Revision - Fiscal Policy

Just some notes I made at school. Sorry about how scrappy the last diagram looks - I couldn't find it anywhere on the internet so had to make half of it in Paint... :P I think these notes are fairly comprehensive but please say something if you think of anything that could be added.

Hope they help!


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  • Created on: 02-04-15 17:04
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Macroeconomic Policy Revision Notes - Fiscal Policy
Definition: Control of the economy via the use of taxation and government spending
Fiscal policy is split into two categories: Expansionary Policy, and Contractionary Policy
Expansionary Fiscal Policy:(Increased government spending, decreased taxation - Increases
1) Increased government spending on current
(eg. teacher salaries) and capital (eg. roads)
leads to an increase in income and therefore an
increase in AD
2) Decreased taxation increases a household's
disposable income and therefore increases
consumption. Since consumption is by far the
largest component of AD (accounts for two thirds
of all AD in an economy), AD is likely to increase
by a large amount.
Contractionary Fiscal Policy: (Decreased government spending, increased taxation -
Decreases AD)
1) Decreased government spending reduces
incomes therefore consumption is reduced and
since consumption is a component of AD, AD
reduces. Government spending itself is a
component of AD therefore, if government
spending decreases, so to does AD.
2) An increase in taxation reduces a household's
disposable income and therefore reduces
consumption as they have less money to spend.
Since consumption is a component of AD, AD
falls too.

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Drawbacks of Fiscal Policy:
1) Time Lags: - Fiscal policy changes are only officially made once per year as part of the
budget, so changes may come too late to deal with problems such as rising unemployment and
demand-pull inflation due to the cyclical nature of the economic cycle.…read more


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