Fiscal Policy

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Fiscal Policy

Fiscal Policy is an attempt to influence AD and economic activity through the use of taxation and government spending.

Government Spending comprises of about 40% of AD and includes:

  • capital spending
  • current spending
  • transfer payments

Fiscal Policy can be divided into:

  • Discretionary fiscal policy:- deliberate decisions made by the government to increase/decrease taxation and governement spending
  • Automatic stabilisers:- changes that come about due to the economic cycle, for example in a recession government spending will increase as there is higher unemployment and therefore more unemployment benefits.

Examples of Fiscal Policy

Expansionary Fiscal Policy:

  • Cut in income tax will lead to a boost in people's disposable income, increase consumption(depending on the marginal propensity to consume) and…


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