2281 · 4.3
Fiscal policy flashcards
Revision flashcards for Cambridge 2281 Fiscal policy (syllabus 4.3). Flip, recall, then mark a real past-paper question.
Card
What is fiscal policy?
Use of government spending (G) and taxation (T) to influence aggregate demand and achieve macroeconomic objectives.
Card
Expansionary vs contractionary fiscal policy?
Expansionary: ↑G or ↓T to boost AD (recession). Contractionary: ↓G or ↑T to reduce AD (inflationary boom).
Card
Government spending multiplier?
k = 1 ÷ (1 − MPC). A $1 increase in G causes a $k increase in national income.
Card
Tax multiplier (simplified)?
k_tax = −MPC ÷ (1 − MPC). A tax cut boosts disposable income and AD, but the effect is smaller than an equal G increase.
Card
What are automatic stabilisers?
Built-in fiscal mechanisms that stabilise AD without new legislation — progressive tax (revenue falls in recession) and unemployment benefits (spending rises).
Card
What is crowding out?
Higher G financed by borrowing raises interest rates, reducing private investment — partially offsetting the fiscal stimulus.
Card
What is the difference between a budget deficit and the national debt?
A budget deficit is a shortfall in a single year where Government Spending > Tax Revenue. The national debt is the cumulative total of all past government borrowing that has not been repaid.
Card
Explain 'crowding out'.
A situation where increased government borrowing to finance a budget deficit drives up interest rates, which in turn reduces (crowds out) private investment and consumption, weakening the effect of expansionary fiscal policy.
Card
Why might a tax cut have a smaller multiplier effect than an equivalent increase in government spending?
Because a portion of the tax cut will be saved by households (a leakage), whereas all of an increase in government spending is a direct injection into the circular flow of income.