2.6.2 Fiscal policy

• Fiscal policy is the use of government spending and taxation to influence aggregate demand and achieve macroeconomic objectives such as economic growth, price stability (controlling inflation), and full employment
• Indirect taxes are imposed on goods and services
• Match the tax type with its description:

  Direct Taxes ↔️ Levied on income, profits, and wealth

  Indirect Taxes ↔️ Imposed on goods and services
• What are the two key tools of fiscal policy?

  Government spending and taxation
• Increases in government spending can boost aggregate demand
• Higher taxes can reduce disposable income and decrease economic activity.
• What is the impact of increased government spending on economic growth?

  Stimulates economic growth
• Contractionary fiscal policy aims to reduce inflation
• Effective use of government spending can create positive multiplier effects.
• Expansionary fiscal policy involves reducing taxes or increasing government spending
• What is the primary goal of contractionary fiscal policy?

  Reduce aggregate demand
• Match the fiscal policy tool with its description:

  Government Spending ↔️ Public sector investments and expenditures

  Taxation ↔️ Adjusting tax rates and policies
• Order the steps involved in the multiplier effect of government spending:

  1️⃣ Increased government spending

  2️⃣ Higher employment and income

  3️⃣ Increased consumer spending

  4️⃣ Greater aggregate demand

  5️⃣ Higher economic output
• Changes in tax rates directly affect disposable income and consumer spending.
• Expansionary fiscal policy reduces tax rates to increase disposable income
• What are the two main actions taken in expansionary fiscal policy?

  Increase spending or reduce taxes
• What are the two tools of expansionary fiscal policy?

  Government spending and taxes
• Contractionary fiscal policy aims to reduce aggregate demand.
• What are the two primary macroeconomic objectives influenced by fiscal policy?

  Economic growth and stability
• $\text{Fiscal Policy} =$$\text{Government Spending} +$$\text{Taxation}$ This formula shows that fiscal policy is the sum of government spending and taxation.
• What are three examples of areas where government spending can be allocated?

  Infrastructure, wages, social security
• Taxation influences aggregate demand by affecting disposable income.
• Lowering income tax by 5% increases disposable income and boosts aggregate demand.
• Match the fiscal policy type with its description:

  Expansionary ↔️ Increases government spending or reduces taxes

  Contractionary ↔️ Decreases government spending or increases taxes
• What is a limitation of fiscal policy related to implementation lags?

  Reduces policy effectiveness
• The crowding out effect occurs when government spending reduces private sector investment.
• Increased investment in healthcare may lead to higher taxes for funding.
• What is the goal of fiscal policy?

  Achieve macroeconomic objectives
• Increased investment in healthcare may lead to higher taxes for funding.
• Better infrastructure and teacher training in education may require higher tax rates.
• What is fiscal policy?

  Government spending and taxation
• Fiscal policy influences aggregate demand to achieve macroeconomic objectives.
• Expansionary fiscal policy boosts aggregate demand by increasing government spending or reducing taxes.
• Contractionary fiscal policy reduces aggregate demand by decreasing government spending or increasing taxes.
• What are the two main tools of fiscal policy?

  Government spending and taxation
• Direct taxes affect disposable income, while indirect taxes influence consumer prices.
• Government spending stimulates aggregate demand and boosts economic growth.
• Effective government spending can create positive multiplier effects.
• How does taxation influence aggregate demand?

  Manages disposable income
• A reduction in tax rates increases disposable income, leading to higher consumer spending.