Revision 3 - Fiscal policy

What is fiscal policy?

Fiscal policy refers to government changes in spending or tax levels to influence the economy.

What does fine tuning of fiscal policy aim to achieve?

Fine tuning aims to stabilize the economy in the short run, nudging it back toward full employment (GDP) after a shock.

What are the two main types of fiscal policy?

The two main types are expansionary fiscal policy and contractionary fiscal policy.

What is expansionary fiscal policy?

Expansionary fiscal policy involves increasing government spending or decreasing taxes to boost demand during a recession.

What is contractionary fiscal policy?

Contractionary fiscal policy involves decreasing government spending or increasing taxes to cool down inflation during a boom.

What is recognition lag in monetary policy?

Recognition lag is the time it takes to realize that a recession or inflation is happening.

What is decision lag in fiscal policy?

Decision lag refers to the delays caused by political debates and approvals before action can be taken.

What is implementation lag?

Implementation lag is the time taken for money to hit the economy and have an effect.

What is budget deficit?

A budget deficit occurs when government spending exceeds revenue in a given year.

What is national debt?

National debt is the total of all past deficits minus surpluses.

Why is running deficits during a recession often seen as necessary?

Running deficits in a recession is seen as normal and often necessary to stimulate the economy.

What are potential consequences of large national debt?

Large national debt can lead to higher interest payments, loss of confidence in government bonds, and pressure to raise taxes or cut spending later.

What is austerity?

Austerity refers to policies aimed at reducing budget deficits through spending cuts and tax increases.

Why might countries implement austerity measures?

Countries may implement austerity measures to address debt crises, comply with EU restrictions, or to increase private sector confidence.