Fiscal Policy | The Curious Economist

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What is the crowding-out effect?

When government borrowing increases interest rates, reducing private sector investment.

What are the main constraints on fiscal policy?

Political pressure, time lags, sustainable debt limits, and crowding out (HL only).

What is fiscal policy?

The use of government revenue collection (taxation) and expenditure to influence the economy.

What role does fiscal policy play in reducing business cycle fluctuations?

Expansionary policy is used during recessions, and contractionary policy is used during inflationary periods to stabilize the economy.

How can fiscal policy reduce unemployment?

By increasing aggregate demand through higher government spending or tax cuts during recessions.

What is contractionary fiscal policy?

A decrease in government spending or an increase in taxes to reduce aggregate demand and close an inflationary gap.

How can fiscal policy help achieve low and stable inflation?

By reducing aggregate demand through higher taxes or lower government spending in times of inflation.

What is expansionary fiscal policy?

An increase in government spending or a decrease in taxes to boost aggregate demand and close a deflationary gap.

Why does fiscal policy face time lags?

Because changes in taxation and spending require political approval and time to take effect in the economy.

What are the types of government expenditures?

Current expenditures, capital expenditures, and transfer payments.

How does fiscal policy promote long-term growth?

By investing in infrastructure, education, and healthcare to improve productive capacity.

How can fiscal policy target specific sectors?

By increasing spending or providing subsidies to industries like education, health, or renewable energy.

What are automatic stabilizers in fiscal policy?

Mechanisms like progressive taxes and unemployment benefits that automatically counteract economic fluctuations.

What are the main sources of government revenue?

Direct and indirect taxation, sale of goods and services from state-owned enterprises, and sale of government assets.

What is the primary goal of fiscal policy?

To manage demand in the economy in order to achieve macroeconomic objectives such as growth, low unemployment, and stable inflation.

What does 'external balance' mean in fiscal policy?

A sustainable balance of imports and exports, preventing unsustainable current account deficits.

What is one strength of fiscal policy in deep recessions?

Government spending can directly increase aggregate demand when private sector demand is weak.

How does fiscal policy contribute to equity?

Through progressive taxation and transfer payments, redistributing income to reduce inequality.

What is a limitation of fiscal policy compared to monetary policy?

It often has longer time lags and can increase public debt if overused.

What are the strengths of fiscal policy compared to monetary policy?

It can target specific sectors and is more effective during severe recessions.

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