Fiscal Policy

• What is fiscal policy primarily concerned with?

  Changes to government spending and taxation
• What is the main goal of fiscal policy?

  To influence aggregate demand in the economy
• What type of macroeconomic policy is fiscal policy?

  Demand-side macroeconomic policy
• What is expansionary fiscal policy aimed at doing?

  Boosting aggregate demand
• What is contractionary fiscal policy intended to achieve?

  Reducing aggregate demand
• Why might a government use expansionary fiscal policy?

  To increase economic growth during a recession
• How does expansionary fiscal policy affect unemployment?

  It can reduce cyclical unemployment
• What is demand-pull inflation?

  Inflation caused by increased aggregate demand
• How can expansionary fiscal policy help with income inequality?

  Through government spending on welfare benefits
• What is a primary reason for contractionary fiscal policy?

  To cool down an overheating economy
• How does contractionary fiscal policy relate to the budget deficit?

  It aims to reduce the budget deficit
• What is one way contractionary fiscal policy can reduce the current account deficit?

  By lowering aggregate demand and imports
• What is the multiplier effect in fiscal policy?

  Increased AD leads to higher incomes and spending
• How does cutting corporation tax affect investment?

  It increases retained profits for businesses
• What is regressive taxation?

  Taxes that take a larger percentage from low incomes
• How can government spending on education affect the economy?

  It can boost productivity of labor
• What is the primary focus of expansionary fiscal policy?

  To boost aggregate demand
• What are the effects of expansionary fiscal policy on the economy?

  • Higher economic growth
  • Reduction in unemployment
  • Increased demand-pull inflation
  • Multiplier effect leading to further AD increase
• What are the links between fiscal policy and long-run aggregate supply (LRAS)?

  • Expansionary fiscal policy can increase LRAS as a side effect
  • Tax cuts can incentivize labor force participation
  • Investment boosts quality and quantity of capital
  • Government spending on education and infrastructure enhances productivity
• What are the potential pros and cons of contractionary fiscal policy?

  Pros:

  • Reduces budget deficit
  • Controls inflation

  
  

  Cons:

  • May increase unemployment
  • Can slow economic growth
• What are the main types of fiscal policy?

  • Expansionary fiscal policy
  • Contractionary fiscal policy
• What are the reasons for using contractionary fiscal policy?

  • Cool down an overheating economy
  • Reduce budget deficit
  • Redistribute income through higher taxes
  • Reduce current account deficit