Fiscal policy is the use of government spending and taxation to influence aggregate demand and achieve macroeconomic objectives such as economic growth, price stability (controlling inflation), and full employment
Indirect taxes are imposed on goods and services
Match the tax type with its description:
Direct Taxes ↔️ Levied on income, profits, and wealth
Indirect Taxes ↔️ Imposed on goods and services
What are the two key tools of fiscal policy?
Government spending and taxation
Increases in government spending can boost aggregate demand
Higher taxes can reduce disposable income and decrease economic activity.
What is the impact of increased government spending on economic growth?
Stimulates economic growth
Contractionary fiscal policy aims to reduce inflation
Effective use of government spending can create positive multiplier effects.
Expansionary fiscal policy involves reducing taxes or increasing government spending
What is the primary goal of contractionary fiscal policy?
Reduce aggregate demand
Match the fiscal policy tool with its description:
Government Spending ↔️ Public sector investments and expenditures
Taxation ↔️ Adjusting tax rates and policies
Order the steps involved in the multiplier effect of government spending:
1️⃣ Increased government spending
2️⃣ Higher employment and income
3️⃣ Increased consumer spending
4️⃣ Greater aggregate demand
5️⃣ Higher economic output
Changes in tax rates directly affect disposable income and consumer spending.
Expansionary fiscal policy reduces tax rates to increase disposable income
What are the two main actions taken in expansionary fiscal policy?
Increase spending or reduce taxes
What are the two tools of expansionary fiscal policy?
Government spending and taxes
Contractionary fiscal policy aims to reduce aggregate demand.
What are the two primary macroeconomic objectives influenced by fiscal policy?
Economic growth and stability
Fiscal Policy=Government Spending+Taxation This formula shows that fiscal policy is the sum of government spending and taxation.
What are three examples of areas where government spending can be allocated?
Infrastructure, wages, social security
Taxation influences aggregate demand by affecting disposable income.
Lowering income tax by 5% increases disposable income and boosts aggregate demand.
Match the fiscal policy type with its description:
Expansionary ↔️ Increases government spending or reduces taxes
Contractionary ↔️ Decreases government spending or increases taxes
What is a limitation of fiscal policy related to implementation lags?
Reduces policy effectiveness
The crowding out effect occurs when government spending reduces private sector investment.
Increased investment in healthcare may lead to higher taxes for funding.
What is the goal of fiscal policy?
Achieve macroeconomic objectives
Increased investment in healthcare may lead to higher taxes for funding.
Better infrastructure and teacher training in education may require higher tax rates.
What is fiscal policy?
Government spending and taxation
Fiscal policy influences aggregate demand to achieve macroeconomic objectives.
Expansionary fiscal policy boosts aggregate demand by increasing government spending or reducing taxes.
Contractionary fiscal policy reduces aggregate demand by decreasing government spending or increasing taxes.
What are the two main tools of fiscal policy?
Government spending and taxation
Direct taxes affect disposable income, while indirect taxes influence consumer prices.
Government spending stimulates aggregate demand and boosts economic growth.
Effective government spending can create positive multiplier effects.
How does taxation influence aggregate demand?
Manages disposable income
A reduction in tax rates increases disposable income, leading to higher consumer spending.