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17 Cards in this Set

  • Front
  • Back

What does fiscal policy involve?

Governement changing the level of taxation and government spending to influence aggregate demand and level of economic activity

What is AD

The total level of planned expenditure in the economy:

AD = C+G+I+(X-M)

What is the purpose of fiscal policy? (3)

- Stimulate economic growth in a period of recession

- keep inflation low (gov target of 2%)

- stabilise economic growth, avoiding boom bust cycle

What is fiscal policy used in conjunction with?

Monetary policy

Which of the two policies is preferred to stabilise the economy?

monetary policy

What does expansionary/loose fiscal policy involve?

Increasing G spending, spending and cutting taxes

Cutting taxes increases spending cos people have more disposable income.

Why does expansionary fiscal policy worsen budget deficit?

Because governments will need to increase borrowing

What does deflationary/tight fiscal policy involve?

tightening the budget

Decrease AD by cutting spending and increasing taxes

higher taxation will reduce consumer spending and tight fiscal policy will improve the budget deficit

tight fiscal policy will improve the budget deficit


In 2009 the UK gov implemented expansionary fiscal policy in response to a global recession

cut VAT = Boost consumer spending, rise in borrowing

In 2010, the new coalition gov argued that the deficit is too high and implemented contactionary fiscal policy to reduce borrowing

These austerity measures caused lower economic growth in 2011 and 2012


What is fiscal stance?

refers to if the government is increasing or decreasing AD

What is fine tuning?

maintaining a steady rate of economic growth through the use of fiscal policy

BUT this is hard to achieve precisely

What are automatic fiscal stabilisers (and examples)

When the economy is growing, people will pay more taxes (VAT + income tax) and the government will spend less because there are fewer benefits claimants

increased tax and decreased government spending will therefore act as a check on AD

In a recession the opposite will happen with tax revenue falling and government spending increasing (on benefits for example) - this will increase AD

what are discretionary fiscal stabilisers? and example

a deliberate attempt by the government to fix AD

e.g. in a boom, taxes will rise to stop inflation

What is the multiplier effect?

an increase in injections causes an even bigger final increase in GDP

What are criticisms of the fiscal policy? (5)

- the government may have poor information about the economy and doesnt know what it needs

- TIME LAGS - it takes time for a change in government spending to filter down through the economy and affect AD (it could also then be too late)

- CROWDING OUT - using expansionary fiscal policy threatens to 'crowd out' the private sector because the gov will be borrowing money from the private sector for increased spending which will result in the private sector having lower funds for their own private investments

- INEFFICIENT GOV SPENDING - gov spending could be wasted on inefficient spending projects. it can also be hard to reduce spending as intrest groups put pressure on the government to maintain stimulus spending as permanent

- HIGHER BORROWING COSTS - expansionary fiscal policy can lead to higher bond yeilds, increasing debt replayments

What does the success of the fiscal policy depend on? (4)

- SIZE OF MULTIPLYER - if the multiplier effect is large, chnages in government spending will have a bigger effect on AD

- STATE OF THE ECONOMY - fiscal policy is most effective in a deep recession when monetary policy is insufficient to boost demand. In a liquidity trap, higher gov spending will not cause crowding out as private sector saving has increased

- OTHER FACTORS IN THE ECONOMY - if the government chose to pursue expansionary fiscal policy in a time when intrest rates were high and the whole world is in recession, this would have little effect on boosting demand

- BOND YEILDS - if there is concern about government finances, they may not be able to borrow to finance fiscal policy