Fiscal Policy

Types of FP
1. Discretionary FP
  1. Expansionary FP
    1. ↑ G / ↓ T
      1. ↑ Disposable Y, ↑ C
      2. ↑ after-tax π, ↑ I
        ↑ EG, ↑ Emp
  2. Contractionary FP
    1. ↓ G / ↑ T
      1. ↓ Disposable Y, ↓ C (including M)
      2. ↓ after-tax π, ↓ I
        ↓ Inflation, ↑ BOT
2. Automatic stabilisers
  1. Already in-built, no deliberate gov action needed
    1. Progressive Y tax structure
      1. eg. Economic boom, ↑ Y, ↑↑↑ Taxes
        Limits ↑ Disp Y, Limits ↑ Cd, Limits ↑ in AD & EG
      2. Redistribute Y
        ↓ Y inequality, > Inclusive EG
    2. Transfer payments (UE benefits)
      1. eg. Recession, ↑ UE, ↑ UE benefits
        Limits ↓ Disp Y, Limits ↓ Cd, Limits ↓ in AD & EG
Manipulating G & T to primarily influence AD, though can also have SS-side effects
Advantages of FP
1. > direct impact so > certain Δ in AD
2. Ability to target certain sectors
  1. eg: Infrastructure, Merit Goods
Limitations of FP
1. Time lags
  1. eg: Recognition & Implementation
    1. By the time effect of EFP take place, economy may be in boom
      1. Cause economy to overheat
2. ↓ / ↑ tax may not ↑ / ↓ spending
  1. Also dependent on economic outlook, csr/biz confidence
3. Inflexibility of G
  1. eg. Construction projects
    1. Ongoing infrastructure projects cannot stop halfway to stop spending
4. Crowding out effect
  1. When gov borrow to fund EFP
    1. ↓ SS for loanable funds, ↑ i/r, ↑ COB
      1. ↓ C & ↓ I, negate effects of EFP
5. Size of k
  1. eg. SG small k size (high MPS & MPM)
    1. Δ in AD will not be significant through k process
6. Nature of economy
  1. eg. SG dependent on Ext DD
    1. Not effective in ↑ AD since EFP only affect Dom DD
7. Conflicts w other macrogoals
  1. eg. EFP to ↑ EG & ↑ Emp
    1. May cause ↑ inflation & ↓ BOT

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Fiscal Policy

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