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Macroeconomics 1 – The domestic economy

Fiscal and monetary policy options

6.1 Fiscal policy options

 Fiscal policy refers to a government’s taxation (T) and spending (G) plans

 Usually understood within the context of demand side policies (aka Keynesian
economics)

 Balanced budget (G = T)

– Usual aim in the medium to long-term

 Budget deficit (G > T)

– Net injection, so should boost economic growth and increase AD

– Expansionary policy – will help close “deflationary gap”

– Will need financing – e.g. PSNB

– May “crowd out” private expenditure

 Budget surplus (G < T)

– Net withdrawal, so should reduce inflation and decrease AD

– Contractionary policy – will help close “inflationary gap”

– Can help to repay borrowed funds

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