Fiscal and Supply Side policies

• What does fiscal policy involve?

  Government spending and taxation to influence demand
• What is the purpose of expansionary fiscal policy?

  To generate further economic growth
• What are examples of expansionary fiscal policies?

  Reducing taxes or increasing government spending
• What is the goal of contractionary fiscal policy?

  To slow down economic growth or reduce inflation
• How is fiscal policy usually presented?

  Through the Government Budget annually
• What does a balanced budget mean?

  Government revenue equals government expenditure
• What does a budget deficit indicate?

  Government revenue is less than expenditure
• How is a budget deficit financed?

  Through public sector borrowing
• What happens to public debt when there is a budget deficit?

  It increases due to borrowing
• What are the macroeconomic impacts of fiscal policy?

  Helps achieve macroeconomic objectives
• What are some macroeconomic objectives of fiscal policy?

  Low inflation, low unemployment, stable growth
• How does fiscal policy influence aggregate demand (AD)?

  Changes to fiscal policy affect components of AD
• What is the formula for aggregate demand (AD)?

  AD = C + I + G + (X - M)
• What is the effect of expansionary fiscal policy on AD?

  It aims to shift AD to the right
• What happens to real GDP during expansionary fiscal policy?

  Real GDP increases from Y1 to Y2
• What is the initial economic condition before expansionary fiscal policy?

  There is a recessionary gap
• What is the impact of lowering taxes on investment and consumption?

  It causes both to increase
• What is the effect of decreasing corporation tax?

  Firms' net profits increase
• How does increasing unemployment benefits affect consumption?

  It increases household income and consumption
• What is the impact of contractionary fiscal policy on AD?

  It aims to shift AD to the left
• What happens to real GDP during contractionary fiscal policy?

  Real GDP decreases from YFE to Y1
• What is the effect of increasing income tax on households?

  Households pay more tax and consumption reduces
• What is the impact of freezing public sector workers' pay?

  Wages stagnate or reduce, consumption decreases
• What is the effect of cutting government spending on the economy?

  Less demand leads to decreased output and AD
• How can fiscal policy improve productive potential?

  Through education subsidies that enhance human capital
• What is the role of government spending in economic activity?

  It is an injection that increases activity
• What are automatic stabilizers?

  Automatic fiscal changes during business cycle stages

  
• What happens to tax revenue during a recession?

  It decreases due to lower incomes
• What is the effect of higher unemployment benefits during a recession?

  It increases consumption and GDP
• What happens to tax revenue during a boom?

  It increases due to higher incomes
• What is the impact of fewer unemployment benefits during a boom?

  It decreases household consumption
• What are the main sources of government revenue?

  Taxation, sale of goods/services, asset sales
• What are direct taxes?

  Taxes imposed on income and profits
• What are examples of indirect taxes?

  Value Added Tax and excise duties
• What are current expenditures?

  Daily payments required to run the government
• What are capital expenditures?

  Investments in infrastructure and capital equipment
• What are transfer payments?

  Payments made without exchange of goods/services
• Why do governments levy taxes?

  To fund expenditure and correct market failure
• What is a progressive tax system?

  Higher income leads to higher tax rates

  
• What is a regressive tax system?

  Higher income leads to lower tax rates