Fiscal policy and demand management
- Created by: Stewie Griffin
- Created on: 15-10-13 09:02
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- Fiscal policy and demand management
- Objectives of fiscal policy
- To improve macroeconomic performance
- To achieve a more desirable distribution of income and wealth
- To correct market failure such as the provision of merit goods and discouraging consumption of demerit goods
- Automatic stabilisers
- Automatic stabilisers are expenditures which automatically increases when the economy is going into a recession and decreases whene the economy is in a boom
- Eg In a boom government spending automatically decreases as less people claiming benefits
- Eg In a recession government spending automatcially increases on benefits
- Active/ discretionary fiscal policy
- The deliberate manipulation of government expenditure and taxes to influence the economy
- Problems of active fiscal policy in a recession
- Governemnt spending increases and taxes reduce
- This leads to a governemnt deficit leading to borrowing
- Which in turn crowds out the private sector, leading to no overall ipact except private sector smaller and public sector bigger
- Problems of active fiscal policy in a recession
- Government spending reduces and taxes increase
- This may ease inflationary pressure but half built governemnt projects will have to be left
- Lose votes if it is a lead up to election
- Objectives of fiscal policy
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