Fiscal policy
Fiscal policy
- Fiscal policy = government spending and taxation to steer the economy.
- the budget:
- deficit — spending > tax → must borrow (adds to national debt),
- surplus — tax > spending.
- Taxes: direct (on income/profit) vs indirect (on spending).
- By rate: progressive (rate rises), proportional (flat), regressive (rate falls).
Practice
A budget deficit is when government:
A deficit means spending > tax, so the government borrows, adding to the national debt.
Practice
Match each tax type to how its rate behaves as income rises.
Progressive rises, proportional is flat, regressive falls as income rises.
Using it
- expansionary — raise spending / cut taxes → AD up (fights recession).
- contractionary — cut spending / raise taxes → AD down (fights inflation).
- Limits: time lags, large deficits/debt, and crowding out (government borrowing raises interest rates, cutting private investment).
Practice
Expansionary fiscal policy (to fight a recession) involves:
Expansionary fiscal policy raises AD by spending more or taxing less.
You've got it
Key idea
- fiscal policy = spending + taxation; deficit (borrow) vs surplus
- expansionary raises AD (recession); contractionary lowers AD (inflation)
- tax rates: progressive / proportional / regressive; watch out for crowding out