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Fiscal policy (Gov revenue (Consists of all funds that flow towards the…
Fiscal policy
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Gov revenue
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The sale of g's and s's: The gov provide many free of charge however, some provided with charge are electricity, water, transportation etc.
The sale of gov owned enterprise or property: Privatisation involves the transfer of gov ownership to private individuals.
Gov expenditure:
Current: The spending on day-to-day items that are recurring and used up = wages or salaries; subsidies; supplies etc.
Transfer payments: Payments by the gov to vulnerable groups - unemployment benefits, pensions etc.
Capital: Spending on public investment = schools, hospitals, roads, airports etc.
Gov budget
Budget deficit: Gov revenues < gov expenditure throughout the year. This is compensated by gov borrowing from the bank.
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Gov budget: A plan in which all gov revenue and expenditures for a year are set. If these qual each other by the end of the year, the budget is balanced. If not it becomes a budget deficit or surplus
Overtime the gov accumulation of Deficits - Surplus = Public debt/Gov debt. Either way, if the gov runs a budget deficit, the overall debt will become LARGER. If the gov runs a budget surplus, the overall debt will become SMALLER.
Role of the policy
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- Level of gov spending (G)
- Level of consumption spending (C) influenced if the gov changes taxes = changing disposable income
- Level of investment spending (I) influenced if the gov changes taxes on business profits.
Automatic stabilisers
Unemployment benefits
In a recessionary gap: As RGDP/incomes :arrow_down:, incomes taxes to the gov :arrow_down: A LOT more = disposable income to :arrow_down: less = consumers have more income to spend ==> AD falls less than it would without a progressive tax system.
In an inflationary gap: As RGDP/incomes :arrow_up:, income taxes :arrow_up: faster = disposable income rise less = consumers have less income to spend ==> AD increases less than it would without the progressive tax system.
Progressive income taxes
In a recessionary gap: As unemployment :arrow_up:, gov spending on unemployment benefits automatically :arrow_up: = partially compensating for the loss of income/spending of the unemployed (due to a decrease in overall money they had compensated) ==> AD falls less than it would without unemployment benefits
In an inflationary gap: As unemployment :arrow_down: gov spending on unemployment benefits also :arrow_down: = partially reduces the increases in income and spending of the now employed (as they're not receiving the same benefits as before) ==> AD increases less than it would without the unemployment benefits.
Factors that automatically, without any gov action, work towards stabilising the economy by reducing short-term fluctuations of the business cycle
Evaluation
Advantages
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Ability to target sectors of the economy: e.g. build schools or hospitals thus, education and healthcare
Direct impact of gov spending on AD: ensures policy makers of the effect on the economy whereas, changes in taxation are less direct and less ensured.
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Disadvantages
Time lags: Delays in decision-making, implementation and impact
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Inability to deal with supply causes of instability: If there is stagflation, fiscal policy cannot deal. The expansionary policy could help with a recession but make inflation worse. The contractionary policy could help with inflation but make the recession worse.
Tax cuts are less effective in a recession: Than increases in gov spending as part of the increase in after-tax income is saved not spent and worsens if consumer confidence is low.
Impact on growth
Indirect effect on potential output:
- By maintaining low rate of inflation and unemployment, fiscal policy promotes private investment of the production of research development, capital goods, technological improvements etc. Hence economic growth and potential output.
Direct effect on potential output:
- Gov spending on physical capital and R&D increases infrastructure and creates new tech = increase in potential output.
- Gov spending on human capital increases the quality of the labour force = increase in potential output.
- Gov provision of incentives to invest = higher after-tax profits = increase in private investment + R&D = increase in potential output