Fiscal policy

• Two sides of Fiscal policy

  Deamnd side policy and Monetary policy
• Fiscal policy 


  When the governemnt uses tax and governemnt spending to influence an economy
• Categories of government spending

  Current spendings: Day to do spendings

  Capital spendings: Spending on bussinesses (investment)

  Transfer payments: Money paid out of the country (debts)
• Expansinary fiscal policy

  Increasing levels of Government spending more than tax revenue in order to stimulate AD
• Contractionary fiscal policy

  Increasing levels of tax more than government spendings in order to contract AD
• Discretionary fiscal policy


  Deliberate changes in direct and indirect taxation and governemnt spendings aimed at influencing one or more components of AD
• Cutting Income tax

  It would lead to greater disposable incomes and more spendings which increase bussiness profit and result in increased invenstemnt and expansion. This would demand greater labour and therfore result in more workers having incomes
• Cutting government revenue evaluation

  It would result in less tax reveune from higher earners and lead to less governemnt spending which would contract AD
• Increasing income tax

  It would lead to greater tax revenue from higher earners and would decrease consumption due to less disposable incomes. (Inflation is also reduced as price level decreases.) There would be a downwards multpiler effect as a decrease in consumption leads to less profit and investment, resulting in contractions in firms and layoffs
• Increasing income tax evaluation

  Income tax revenue may not actually increase. people may not work as hard to earn money, they may also formualte stratergys to avoid the tax or even move out of the country
• Interest rate

  The cost of borrowing or the reward for saving