Fiscal Policy

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…