Unit 3.6 - Demand Management: Fiscal Policy
What you need to know and understand:
Key concepts:
Concepts to understand:
- Fiscal policy
- Sources of revenue—direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets
- Expenditures—current expenditures, capital expenditures, transfer payments
- Sources of revenue—direct and indirect taxation, sale of goods and services from state-owned enterprises, sale of government assets
- Goals of fiscal policy
- Low and stable inflation
- Low unemployment
- Promote a stable economic environment for long-term growth
- Reduce business cycle fluctuations
- Equitable distribution of income
- External balance
- Low and stable inflation
- Expansionary and contractionary fiscal policies in order to close deflationary/recessionary and inflationary gaps
- Keynesian multiplier [HL only]
- 1 / 1 − MPC
- 1 / MPS + MPT + MPM
- MPC— marginal propensity to consume
- MPS—marginal propensity to save
- MPT—marginal propensity to tax
- MPM—marginal propensity to import
- 1 / 1 − MPC
- Effectiveness of fiscal policy
- Constraints on fiscal policy, including:
- political pressure
- time lags
- sustainable debt
- crowding out [HL only]
- political pressure
- Strengths of fiscal policy, including:
- targeting of specific economic sectors
- government spending effective in deep recession
- targeting of specific economic sectors
- Automatic stabilizers: progressive taxes, unemployment benefits [HL only]
- Strengths and limitations in promoting growth, low unemployment, and low and stable rate of inflation
- Constraints on fiscal policy, including:
Key concepts:
- Scarcity
- Choice
- Efficiency
- Equity
- Economic well-being
- Sustainability
- Change
- Interdependence
- Intervention
Concepts to understand:
- Government intervention attempts to achieve macroeconomic objectives through a choice of policies.
- Political, economic, social and environmental factors are interdependent and will influence the effectiveness of government policies.