Question

1. Explain the theory of fiscal policy.

2. Discuss the fiscal policy implemented by the UK government in 2018.

Answer 1

1. Fiscal policy is use of government spending levels and tax rates to influence and monitor a nation's economy. When the economy goes through a recession, then government implements expansionary fiscal policy, that is, increases government expenditure and/or, decreases tax rate in order to increase aggregate demand and close the recessionary gap. When the economy goes through an expansion (that is, short run real GDP exceeds potential GDP), then government implements contractionary fiscal policy, i.e. decreases government spending and/or, increases tax rate in order to decrease aggregate demand and bring back the economy to long run full employment output level.