Fiscal policy Cambridge IGCSE Economics revision
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In plain words
A government is the biggest spender in the economy and takes a large share of everyone's income in tax. By changing how much it spends and how much it taxes, it can speed the whole economy up or slow it down.
Using taxes and government spending in this way is fiscal policy.
4 things to know
- Fiscal policy is the use of government spending and taxation to influence total demand in the economy.
- Expansionary fiscal policy: raise government spending or cut taxes. Total demand rises, so output and employment rise. The risks are higher inflation, more imports and a bigger budget deficit.
- Contractionary fiscal policy: cut government spending or raise taxes. Total demand falls, so inflation falls. The risks are slower growth and higher unemployment.
- Fiscal policy can also redistribute income, through progressive taxes and benefits, and can be aimed at particular goods, such as a tax on fuel to protect the environment.
Tips and tricks
- Start every fiscal policy answer with the effect on total demand. The rest follows from that: up for jobs and growth, down for inflation.
- Fiscal is about tax and government spending. Interest rates belong to monetary policy. Mixing the two up is the commonest mistake in this topic.
It lands in your notebook with its questions as flashcards.
Fiscal policy: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is a fiscal policy measure?
Fiscal policy works through taxes and government spending.
Which fiscal policy would be used to reduce unemployment?
More spending raises total demand, so firms need more workers.
A government raises taxes and cuts its spending. What is the most likely effect?
Both measures take spending out of the economy.
What is a risk of expansionary fiscal policy?
If demand rises faster than output, prices rise.
How can fiscal policy reduce income inequality?
Taking a larger share from the rich and giving support to the poor narrows the gap.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Fiscal policy
Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define fiscal policy.[2]
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The use of government spending and taxation to influence total demand and the level of economic activity.
Explain how a cut in income tax might reduce unemployment.[3]
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Households keep more of their income, so their disposable income rises and they spend more. Firms produce more to meet the higher demand and take on more workers.
Explain how fiscal policy could be used to reduce inflation.[3]
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The government could raise taxes or cut its own spending. That lowers total demand in the economy, so there is less pressure pulling prices up.
Answers: Fiscal policy
- 1. The use of government spending and taxation to influence total demand and the level of economic activity.
- 2. Households keep more of their income, so their disposable income rises and they spend more. Firms produce more to meet the higher demand and take on more workers.
- 3. The government could raise taxes or cut its own spending. That lowers total demand in the economy, so there is less pressure pulling prices up.