What is contractionary fiscal policy?

Contractionary fiscal policy cuts government spending or raises taxation in order to reduce aggregate demand.

Explain how a cut in income tax raises aggregate demand.

Households keep more of their earnings, so disposable income and consumption rise, and the multiplier spreads that extra spending through the economy.

How does direct taxation differ from indirect taxation?

Direct taxes are levied on income, profit or wealth and paid to the government by the person liable, whereas indirect taxes are levied on spending and collected by the seller.

Name two direct and two indirect taxes used in the UK.

Income tax and corporation tax are direct taxes; value added tax and fuel duty are indirect taxes.

Edexcel A-Level Economics B 9EB0

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Introduction to Macroeconomic Policy

Fiscal policy

3 things to know
Papers 2 and 3

Overview

Fiscal policy, expansionary and contractionary, how an income tax cut raises aggregate demand, direct and indirect taxes in the UK, budget deficits against the national debt, automatic stabilisers against discretionary policy, crowding out, corporation tax and supply, time lags, infrastructure spending, and constraints from rising debt.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What is fiscal policy, and how do its two directions work?

Key term

What is fiscal policy?

Key term

What is expansionary fiscal policy?

Questions from this subtopic

Each one with the model answer underneath.

1
What is fiscal policy?
Model answer
Fiscal policy is the use of government spending and taxation to influence the level of aggregate demand and economic activity.
2
What is expansionary fiscal policy?
Model answer
Expansionary fiscal policy raises government spending or cuts taxation in order to increase aggregate demand.
3
What is contractionary fiscal policy?
Model answer
Contractionary fiscal policy cuts government spending or raises taxation in order to reduce aggregate demand.
4
Explain how a cut in income tax raises aggregate demand.
Model answer
Households keep more of their earnings, so disposable income and consumption rise, and the multiplier spreads that extra spending through the economy.
5
How does direct taxation differ from indirect taxation?
Model answer
Direct taxes are levied on income, profit or wealth and paid to the government by the person liable, whereas indirect taxes are levied on spending and collected by the seller.
6
Name two direct and two indirect taxes used in the UK.
Model answer
Income tax and corporation tax are direct taxes; value added tax and fuel duty are indirect taxes.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

Introducing the Market

The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

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