What is fiscal policy
Fiscal policy: part of the govt economic policy aimed at achieving its economic objectives through the use of the fiscal instruments of taxation, public spending & the budget deficit or surplus.
Keynesian fiscal policy: also called demand-side fiscal policy. It is generally associated with managing the level of AD in order to expand or contract the economy.
Fiscal policy- Keynesian
Expansionary fiscal policy:
To increase AD in the economy, the govt would increase government spending or cut taxes. The resulting increase in the budget deficit injected demand into the circular flow of income.
Contractionary fiscal policy:
This involved the opposite. Cutting govt spending or increasing taxation which would reduce the budget deficit- moving govt finances into surplus. Contractionary took demand out of the economy.
Free market or supply side fiscal policy
◾️ Supply side fiscal policy: aims to shift the LRAS curve to the right.
◾️ in supply side fiscal policy taxes are not cut to increase AD but to increase incentives to work harder, be entrepreneurial, to take risks & invest
Microeconomic elements of fiscal policy
♥️ Fiscal policy is used in micro & macro.
♥️ supply side fiscal policy focuses on incentives & disincentives that result respectively from low & high tax rates.
Micro level- on the govt spending side of microeconomic fiscal policy, changes to the benefit system are made to alter the labour or leisure choice in favour of working rather than choosing voluntary unemployment.
Macro level- fiscal policy affects the level of economic activity.