Principles of Macroeconomics – Fiscal Policy (Lecture 10.1)

Principles of Macroeconomics – Fiscal Policy (Lecture 10.1)

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Principles of Macroeconomics – Fiscal Policy (Lecture 10.1) Fiscal Policy is the use of Government Spending and Taxation (the budget) to achieve macroeconomic objectives. Government Macroeconomic objectives Long term: Creates incentives to boost productivity by encouraging increased savings and investment in physical and human capital, and research. Ultimately, resulting in growth in GDP and economic growth. o Looking at ways to achieve higher growth in potential GDP. o This approach can bring problems, such as crowding-out private sector investment. Short term: Reducing fluctuations in economic activity (the business cycle) by demand management through changes to government spending and/or taxation –fine tuning. o Effects AD (thus shifts AD) o Reduces fluctuations of economic activity around real GDP. Stabilising the business Cycle Fiscal policy actions that seek to stabilise the business cycle work by changing aggregate demand. o Discretionary fiscal policy is a policy action that is initiated by an act of Parliament.
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o Automatic fiscal policy is a change in fiscal policy triggered by the state of the economy. Can happen if the economic grows faster (Example: Tax rises automatically when economic growth increases or greater income when higher
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Principles of Macroeconomics – Fiscal Policy (Lecture 10.1)

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