One minute teaching session note by Chan Pik Kwan

A2 Economics: Fiscal Policy and Demand Management

Fiscal policy: refers to policies about taxation, government spending and borrowing.
Objectives of fiscal policy:
1. To improve macroeconomic performance
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Reduce unemployment and inflation rate

Increase economic growth and improve balance of payment

2. To redistribute income and wealth

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Reduce inequality

(tax on the rich and spend on the poor by giving out welfare)

3. To correct market failure

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Provide public goods and merit goods

Discourage the consumption of demerit goods by taxation

Demand management:
Expansionary fiscal policy:
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Used in a recession (-ve output gap)

An increase government spending / a cut in taxation

To increase aggregate demand (AD)

Deflationary fiscal policy

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Used in a boom (+ve output gap)

A decrease government spending / a rise in taxation

To decrease aggregate demand (AD)

Automatic stabiliser:
Definition: expenditures automatically increase when the economy is going into a recession and decrease
when the economy is in a boom
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In a recession, unemployment increases -> social security spending will increase

Government also receives less tax revenue in a recession ( due to lower income and profits)

Overall, government spend more and receive lower revenue -> AD will automatically increase

Hence, reduce the severity of a recession

In a boom: vice versa

Active/discretionary fiscal policy: deliberate manipulation of government ecpenditure and taxes to influence
the economy