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…