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
- Reduce unemployment and inflation rate
- Increase economic growth and improve balance of payment

2. To redistribute income and wealth
- Reduce inequality
- (tax on the rich and spend on the poor by giving out welfare)

3. To correct market failure
- Provide public goods and merit goods
- Discourage the consumption of demerit goods by taxation

Demand management:
Expansionary fiscal policy:
- Used in a recession (-ve output gap)
- An increase government spending / a cut in taxation
- To increase aggregate demand (AD)
Deflationary fiscal policy
- 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
- 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