• Created by: TeganLM
  • Created on: 16-04-19 14:02

Keynesian/demand-led fiscal policy

  • believed that an unregulated economy would result in low economic growth and high unemployment
  • inherent instability of the economic cycle
  • lack of AD leads to demand-deficient unemployment
  • government should use fiscal policy to inject demand into the economy and boost growth
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supply-side fiscal policy

  • using fiscal policy to stimulate/manage aggregate demand is ineffective and damaging
  • 'big government' spending eventually leads to inflation (long run Phillips Curve)
  • Keynesianism leads to 'crowding out'
  • Crowding out: as the government sells more debt to finance a budget deficit, it has to keep raising interest rates to encourage people to purchase debt
  • this affects private investment and lowers the level of investment throughout the economy
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deficit and debt rules

introduced in 2010:

1. The deficit rule: balance the government budget by the end of a five year period (i.e. 2015)- has since been extended

2. the debt rule: ensure the national debt is falling as a share of GDP by 2015/16- also extended the time limit

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