Which policies can the UK government use? Fiscal policy. Understand what is meant by fiscal policy Understand meaning of balanced budget, budget surplus and deficit. Evaluate effects of fiscal budget.

Key terms Fiscal policy Balanced Budget Budget deficit Budget surplus Multiplier effect.

Remember macro-economic objectives Price stability Maintaining full employment Economic Growth Balancing exports and imports

What is fiscal policy and how does it work? Fiscal policy is a policy that uses governments budget to achieve its objectives. It can be used to affect particular markets in economy in order to achieve macro-objectives. It works by aiming to either expand/reflate or contract/deflate the economy.

Revert to 3 diagrams. 1. Budget Deficit. Unemployed not enough demand. Government wishes to maintain balance between demand and supply. Here with FP, decrease tax and increase government spending. How does Government increase spending, where does it get its money?

Through Bonds and Bills. Here sells a Bond for £50.00 and interest given say 10%. Every year get £5.00 interest and then after 5 years you get your £50 back.

2. This is a balanced budget. Happy with this equilibrium. Important to understand here that economics is not and exact science so with FP we never quite know the exact amount required to increase/decrease taxation and spending and so known as ‘ Stop – Go’.

3. Budget Surplus. Inflation as much more demand then supply, driving up prices. Government needs to increase tax to minimise disposable income and decrease spending.

Multiplier effect If 1 job created in King street, means wages are paid to this person and then spent. Wages being spent = income for the shop. £100 wages – He may spend £90 in shop Shop then spends £80 next door. That shop then spends £70 next door Etc From that £100, £300 has been spent.

Multiplier effect We can make two statements that people have one of the following: 1. MPC – Marginal propensity to consume Or 2. MPS – Marginal propensity to save. We can say that : MPC + MPS = 1 So that the MPC = .8 And the MPS = .2 Multiplier = 1/MPS – 1/.2 = 5 EG – 100/.2 = 500

Therefore the multiplier effect = 1/MPS or 1/.2 = 5 So should

Evaluating the effects of fiscal policy Fiscal policy can affect the total (aggregate) demand in economy nut what is not certain is how far it can be affected. EG They know there will be multiplier effect but not sure its value. People may save extra disposable or spend them on imports. If raise taxes there is a danger workers may push for wage rises which is inflationary. Information they have maybe out of date when deciding of tax and spending descions.