Fiscal policy

What is fiscal policy?

Government spending from tax revenues and borrowing. It involves changing tax levels to influence AD

What is direct tax?

tax levied on wealth and profit

What is indirect tax?

tax on spending

What is progressive tax?

the marginal rate of tax rises as income rises

What is proportional tax?

all taxpayers pay the same percentage tax

What is regressive tax?

The rate of tax falls as incomes rise

What is expansionary fiscal policy?

To increase AD and run a budget deficit by cutting taxes and increaseing gov spending

Explain expansionary fiscal policy

cutting taxes increases gov spending - increases consumption due to more disposable - increases income and employment - trade deficit - increased borrowing

What is deflationary/contrationary fiscal policy?

to decreases AD and reduce inflation and run a budget surplus tax is increased and government spending is cut so more gov revenue - smaller multiplier - reduced AD - more saving less spending

What is discretionary fiscal policy?

deliberate changes of government spending or tax revenues

What is automatic fiscal policy?

changes occur as a result of changes in the economic cycle, the government does not change its policies

Criticisms of fiscal policy

poor info can lead to poor decisions

time lags

crowding out

gov spending is inefficient

higher borrowing costs

What is crowding out?

government spending decreases private spending

Crowding in

government spending increases private spending

Evaluation of fiscal policy

Depends on the size of the multiplier

Depends on the state of the economy - most effective in deep recession