Fiscal Policy - Gov Spending + Taxation

Cards (20)

  • Expansionary fiscal policy aims to boost aggregate demand, leading to higher economic growth, reduced unemployment, and potential demand-pull inflation
  • In reality, controlling inflation is not the government's job, but expansionary fiscal policy can be used to redistribute income and reduce income inequality
  • Fiscal policy
    A macroeconomic policy that involves changes to government spending and taxation to influence aggregate demand in the economy
  • Contractionary fiscal policy

    • Changes to government spending and taxation that aim to reduce aggregate demand
  • Expansionary fiscal policy
    • Changes to government spending and taxation that aim to boost aggregate demand
  • In theory, expansionary fiscal policy can help increase economic growth, reduce unemployment, and increase demand-pull inflation
  • The multiplier effect is a concept where an increase in aggregate demand leads to higher incomes, more spending, and a cycle of increased spending and income, resulting in even higher economic growth
  • Contractionary fiscal policy aims to reduce aggregate demand to cool down an overheating economy, reduce inflation, reduce budget deficit, control government finances, and redistribute income
  • Reduction in regressive taxation
    Increases disposable income for the poor more than the rich, boosting consumption and AD
  • Reduction in income tax incentivizes workers to be more productive

    Increases productivity of labor, boosting LRAS
  • Expansionary fiscal policy can boost long-run aggregate supply (LRAS)

    Side effect of certain policies boosting the productive potential of the economy
  • More spending leads to more ad and more incomes
    Creates a virtuous cycle of spending and income, resulting in an even higher increase in AD and economic growth
  • Government spending on education, health, and infrastructure boosts productivity of labor and capital
    Increases LRAS and potentially boosts quantity of capital
  • Primary focus of expansionary fiscal policy is to boost aggregate demand
  • Reduction in corporation tax boosts investment
    Boosts LRAS via increase in quantity and quality of capital and improvement in productive efficiency
  • Government spending on healthcare, education, infrastructure, and public sector wages
    Boosts G in the aggregate demand equation and AD
  • Cutting income tax increases disposable income
    Increases marginal propensity to consume, boosting consumption in the aggregate demand equation and AD
  • Reduction in income tax incentivizes inactive population to become active
    Increases quantity of labor and boosts LRAS
  • Multiplier linked to expansionary fiscal policies
    Focus on tax policies, such as cutting income tax for higher income brackets, reducing income tax rates for lower income brackets, widening tax-free allowance, or tax bands
  • Reduction in corporation tax
    Increases retained profit for businesses, leading to increased investment and boosting AD