Fiscal Policy Definition:
Fiscal policy occurs when the government uses government spending or taxation to change the amount of aggregate demand (AD) and national income (GDP) in the economy.
Fiscal Policy Examples & Explanation:
Fiscal policy is a type of demand-side policy, as it helps the government achieves its macroeconomic objectives by changing AD. For example, during the coronavirus pandemic in the UK, the government spent more by providing business grants, and reduced taxes for UK businesses. This increases AD in the economy as government spending (G) is part of AD (AD = C + I + G + X – M). Note that this will trigger the multiplier effect and also raise the price level (causing inflation). Hence, fiscal policy is often used to address a cyclical recession caused by a downturn in the business/economic cycle. On the other hand, an increase in taxation can be used to tackle inflationary pressure by decreasing AD, causing a withdrawal from the circular flow of income.
Fiscal Policy Revision Notes with Diagram
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The left video explains fiscal policy, the right evaluates the advantages and disadvantages of the policy.
Fiscal Policy Multiple Choice & Essay Questions (A-Level)
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Fiscal Policy in the News
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