Fiscal policy
Government use of spending and taxation to influence AD.
Fiscal policy
Key definitions
Expansionary fiscal
↑G and/or ↓T → AD right.
Contractionary fiscal
↓G and/or ↑T → AD left.
Direct taxes
Income tax, corporation tax — affect disposable income.
Indirect taxes
VAT — affect prices and SRAS.
Fiscal multiplier
Amplified effect of ΔG on national income.
Crowding out
Higher G → higher interest rates → lower I.
National debt
Stock of government borrowing.
Time lags
Recognition, decision, implementation, impact lags.
Fiscal neutrality
Offsetting changes — no net AD effect.
Key concepts
Evaluate size of multiplier and spare capacity.
New Deal — historical expansionary fiscal example.
Relevant tips
- Diagram backlog: expansionary/contractionary fiscal on AD/AS.