Expansionary Fiscal Policy

What is fiscal policy?

Fiscal policy is the use of government spending (G) and taxation (T) to influence aggregate demand (AD)

Does government spending increase or decrease in expansionary fiscal policy?

Increase

Do taxes increase or decrease in expansionary fiscal policy

Decrease

When is expansionary fiscal policy used?

During a recession

How did the UK government use expansionary fiscal policy during COVID?

• Furlough scheme

• Increased NHS spending

• Business grants

What was the UK government’s aim using expansionary fiscal policy during COVID?

To boost AD during a recession

How can you illustrate expansionary fiscal policy?

AD/AS diagram

Evaluation of expansionary fiscal policy

• Time lags

• Crowding out if government borrowing raises interest rates

• Risk of budget deficits and rising national debt

Benefits of expansionary fiscal policy?

• Direct impact on AD

• Effective during deep recessions

• Can target specific groups/sectors

• Which objectives are targeted in expansionary fiscal policy?

• Economic growth

• Low unemployment

• Price stability

Transmission mechanism of expansionary fiscal policy

G increases / T decreases

AD increases

Real GDP increases

Cyclical unemployment decreases

Evaluation of UK’s use of expansionary fiscal policy

Led to higher national debt and possible future inflation