Fiscal Policy
Fiscal policy: Changes to Government Spending and Taxation in
order to Influence AD.
Expansionary Fiscal Policy: Changes to G and T to BOOST AD
1) Boost Growth
- If growth is sluggish/economy is in recession
- boost to growth necessary to get the economy out of recession.
2) Reduce Cyclical Unemployment
In a Recession - If AD shifts to the right - more goods and services
produced in the economy - labor is derived from demand - employment
rises - unemployment falls.
3) Increase Demand Pull Inflation
In Theory - If AD shifts to the right - more demand pull inflation - to get
inflation up to target.
In Reality - it is not government's job to control inflation its BOE’s
4) Redistribute Income
To reduce income inequality
- Increased Gov Spending on Welfare Benefits
- Reduction on Tax rates
- Reduction in Regressive Taxation.
Examples of Expansionary Fiscal Policy:
All policies aim to BOOST AD - As shown on Diagram.
Multiplier: Increase AD = Higher incomes = More Consumption = Ad rises
again.
, 1) Reduction In Income Tax
Government cuts income tax:
- Cut in income tax for those on higher tax brackets
- Cut in income tax for those in lower Tax brackets
- Widening of tax free allowance
Increases Disposable incomes - increase marginal propensity to consume -
Increase AD.
2) Reduction In Corporation Tax
Lower tax on business profits - increase retained profit for businesses - can
be used in investment - increases marginal propensity to invest - increase
investment - Increase AD.
3) Reduction In Regressive Tax systems
E.g Reduction in Vat
Reduction in burden on poor - increase disposable incomes for poor - as
poor have high mpc - increase consumption - AD rises.
4) Increase in Government Spending
Increased government spending (Healthcare, Education, Infrastructure,
Public Sector Wages)
Increase G - Boost AD
Expansionary Fiscal Policy and LRAS (Side Effects):
Fiscal policy: Changes to Government Spending and Taxation in
order to Influence AD.
Expansionary Fiscal Policy: Changes to G and T to BOOST AD
1) Boost Growth
- If growth is sluggish/economy is in recession
- boost to growth necessary to get the economy out of recession.
2) Reduce Cyclical Unemployment
In a Recession - If AD shifts to the right - more goods and services
produced in the economy - labor is derived from demand - employment
rises - unemployment falls.
3) Increase Demand Pull Inflation
In Theory - If AD shifts to the right - more demand pull inflation - to get
inflation up to target.
In Reality - it is not government's job to control inflation its BOE’s
4) Redistribute Income
To reduce income inequality
- Increased Gov Spending on Welfare Benefits
- Reduction on Tax rates
- Reduction in Regressive Taxation.
Examples of Expansionary Fiscal Policy:
All policies aim to BOOST AD - As shown on Diagram.
Multiplier: Increase AD = Higher incomes = More Consumption = Ad rises
again.
, 1) Reduction In Income Tax
Government cuts income tax:
- Cut in income tax for those on higher tax brackets
- Cut in income tax for those in lower Tax brackets
- Widening of tax free allowance
Increases Disposable incomes - increase marginal propensity to consume -
Increase AD.
2) Reduction In Corporation Tax
Lower tax on business profits - increase retained profit for businesses - can
be used in investment - increases marginal propensity to invest - increase
investment - Increase AD.
3) Reduction In Regressive Tax systems
E.g Reduction in Vat
Reduction in burden on poor - increase disposable incomes for poor - as
poor have high mpc - increase consumption - AD rises.
4) Increase in Government Spending
Increased government spending (Healthcare, Education, Infrastructure,
Public Sector Wages)
Increase G - Boost AD
Expansionary Fiscal Policy and LRAS (Side Effects):
