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Economics 3.5 (REVISION SECTIONS (• calculate and analyse how taxes and…
Economics 3.5
REVISION SECTIONS
• calculate and analyse how taxes and government spending can affect markets
as well as the overall economy
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• evaluate the costs, including opportunity cost, and the benefits of fiscal policy
on the economy to achieve economic objectives /
• evaluate economic consequences of measures to redistribute income and
wealth, including progressive taxes
• explain what is meant by a balanced government budget, budget surplus and
budget deficit /
• explain purposes of government spending and sources of government
revenue, including direct taxes and indirect taxes /
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Fiscal Policy
Costs
Conflict of Objectives
When the government uses a mix of expansionary and contractionary fiscal policy, a conflict of objectives can occur. If the national government wants to raise more money to increase its spending and stimulate economic growth, it can issue bonds to the public. Since government bonds offer a range of benefits to buyers, individuals and businesses will buy them heavily.
Inflexibility
There are usually delays in the implementation of fiscal policy, because some proposed measures may have to go through legislative processes. A good demonstration of implementation delays is illustrated by the Great Recession.
Benefits
Budget Deficit Reduction
It will reduce public spending and increase taxes rates to raise more revenue and ultimately lower the budget deficit.
Economic Growth Increase
The various fiscal measures a country employs facilitate expansion of the national economy. For example, when the government reduces tax rates, businesses and individuals will have a greater incentive to invest and steer the economy forward.
Unemployment Reduction
When unemployment is high, the government can employ an expansionary fiscal policy. This involves increasing spending or purchases and lowering taxes.
Fiscal policy can be distinguished from monetary policy, in that fiscal policy deals with taxation and government spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply and interest rates and is often administered by a central bank.
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