Fiscal Policy

27 flashcards · Economics · by Addaneye

1. What is fiscal policy?

   The use of government spending and taxation to influence the economy

2. What is expansionary fiscal policy?

   When the government reduces tax and increases government spending, expanding the economy but worsening the budget deficit

3. What is contractionary fiscal policy?

   When the government increases tax and reduces government spending, contracting the economy but improving the budget deficit

4. Examples of fiscal policy

   Changing income tax Changing benefits Corporation tax Healthcare and education spending VAT Infrastructure spending

5. Pros of decreasing income tax (expansionary fiscal policy)

   Higher disposable income >> increase in consumption >>increase in AD Increase in consumption >> increase in profits for firms >>increase in investment >> increase in AD Increase in profits for firms >> increase in VAT and corporation tax >> increase in government spending >> increase in AD As firms expand >> increase in derived demand for labour >> increase in incomes >> increase in consumption >> further increase in AD

6. Cons of decreasing income tax (expansionary fiscal policy)

   decrease in government revenue >> decrease in government spending >> decrease in AD

7. Pros of increasing income tax (contractionary fiscal policy)

   decrease in consumption >> lower price level >> help control inflation helps government balance its budgets

8. Cons of increase income tax (contractionary fiscal policy)

   decrease in consumption >> decrease in AD >> decrease in real GDP increase in tax avoidance and evasion >> lower income tax

9. Pros of increasing benefits (expansionary fiscal policy)

   increase in consumption >> increase in AD >> further increase in AD due to the multiplier effect >> increases economic growth and decreases income inequality

10. Cons of increasing benefits (expansionary fiscal policy)

    Benefits trap >> increase in benefits >> decreased incentive to work >> workers are better off staying unemployed and claiming benefits than working and earning an income >> increase in unemployment

11. Pros of decreasing benefits (contractionary fiscal policy)

    Decrease in budget deficit Escape the benefits trap >> decrease unemployment rate

12. Cons of decreasing benefits (contractionary fiscal policy)

    decrease in consumption >> decrease in AD >> further decrease in AD due to downward multiplier effect Decrease in economic growth Increase in income inequality

13. What is corporation tax?

    Tax on profits made by firms

14. Pros of an increase in corporation tax (contractionary fiscal policy)

    Increase in government tax revenue >> improved budget Increase in government tax revenue >> increase in government spending >> increase in AD

15. Cons of increasing corporation tax (contractionary fiscal policy)

    Less profits for firms >> less investment in capital >> capital will depreciate >> decrease in productivity LRAS

16. Pros of decreasing corporation tax (expansionary fiscal policy)

    Decrease in costs for firms >> increase in SRAS Increase in profits for firms >> increase in LRAS

17. Cons of decreasing corporation tax (expansionary fiscal policy)

    Decreased tax revenue >> decrease in government spending >> decrease in AD >> decrease in economic growth >> decrease in benefits >> worsening inequality Worse budget deficit Extra profits from lowered corporation may be kept by owners as there's no guarantee they'll use it for investment

18. Pros of increased spending on healthcare and education (expansionary fiscal policy)

    Increase in government spending >> increase in AD Increase in government spending on healthcare >> reduced illness and longer life span >> increase in productivity >> rightward shift of LRAS

19. Cons of increased spending on healthcare and education (expansionary fiscal policy)

    Worsened budget deficit Spending could go towards bureaucracy and useless degrees

20. Pros of decreased spending on healthcare and education (contractionary fiscal policy)

    Improved budget Decreased university subsidies >> more people going directly into the workforce >> increase in labour supply >> fall in wages >> decrease in costs for firms >> outward shift in SRAS

21. Cons of decreased spending on healthcare and education (contractionary fiscal policy)

    Reduction in spending on healthcare and education >> less productive workers >> inward shift in LRAS

22. Pros of increasing VAT (contractionary fiscal policy)

    increase government tax revenue >> government borrows less >> decreased budget deficit

23. Cons of increasing VAT (contractionary fiscal policy)

    increase in costs for firms >> shifts SRAS inwards >> reduce economic growth & cost push inflation

24. Pros of decreasing VAT (expansionary fiscal policy)

    firms pay less to government >> decrease costs >> outwards shift of SRAS >> fall in price level >> increasing real GDP and economic growth

25. Cons of decreasing VAT (expansionary fiscal policy)

    less government tax revenue >> worsened budget deficit

26. Pros increased infrastructure spending (expansionary fiscal policy)

    increase in geographical labour mobility >> increase in quantity of labour >> increase in LRAS >> increase in quantity of labour >> increase in consumption >> outward shift of AD >> increasing real GDP

27. What is crowding out?

    As a part of fiscal policy the government might increase spending on education, healthcare and infrastructure >> needs to borrow money and needs land, labour and capital>> increase in demand for borrowed money, land, labour and capital >> increasing interest rates, price of land, wages, price of capital >> increased cost for firms >> crowding them out >> reduced supply >> decreasing real GDP