Q. Fiscal Policy to achieve Growth.
Intro: Define Fiscal/Economic Growth
Reduce Income Tax (AD/AS Diagram- increase AD and RO)
X Confidence level
Reduction in Corporation Tax- more retained Profit- AD
and AS both increase due to rise in investment- GROWTH
X what if interest rate or VAT is high. Tax is a leakage- lower tax
means more net injection- faster circular flow- higher GDP due
to positive multiplier effect.
Raise Government spending, e.g. subsidies to firms: Firstly
G is a component of AD. Due to lower COP more I- AD and
As both increase- GROWTH
X Budget Deficit, opportunity cost. Also, it is an injection. Faster
circular flow- higher GDP due to positive multiplier effect.
In conclusion: Fiscal policy is very effective as it increase AD in
the SR and works as SSPs in the LR and provide more incentives
to work and shift LRAS to the right.
Q. Monetary Policy to achieve Price Stability
Intro: Monetary Policy/Price Stability
If demand pull inflation- raise the interest rate-lower C
X 18-24 months’ time lag, type of loan (fixed or variable)
Intro: Define Fiscal/Economic Growth
Reduce Income Tax (AD/AS Diagram- increase AD and RO)
X Confidence level
Reduction in Corporation Tax- more retained Profit- AD
and AS both increase due to rise in investment- GROWTH
X what if interest rate or VAT is high. Tax is a leakage- lower tax
means more net injection- faster circular flow- higher GDP due
to positive multiplier effect.
Raise Government spending, e.g. subsidies to firms: Firstly
G is a component of AD. Due to lower COP more I- AD and
As both increase- GROWTH
X Budget Deficit, opportunity cost. Also, it is an injection. Faster
circular flow- higher GDP due to positive multiplier effect.
In conclusion: Fiscal policy is very effective as it increase AD in
the SR and works as SSPs in the LR and provide more incentives
to work and shift LRAS to the right.
Q. Monetary Policy to achieve Price Stability
Intro: Monetary Policy/Price Stability
If demand pull inflation- raise the interest rate-lower C
X 18-24 months’ time lag, type of loan (fixed or variable)
