Fiscal Policy

Definition - Decisions made by the government on its expenditure, taxation and borrowing to influence the economy, usually to stabilise output at Y-Bar.

Analysis - Expansionary Fiscal Policy is when the gap between G and T widens in order to increase Aggregate Demand. G is a component of AD and decreasing T causes C and I to increase.

Contractionary Fiscal Policy is when the gap between G and T closes in order to decrease Aggregate Demand

Automatic Stabilisers - Effects by which government expenditure adjusts to offset the effects of recession and boom without the need for active intervention. If G > T because of a recession which means that welfare payments are high and income tax is low then a cyclical defecit…