1. Macroeconomic Policy Instruments Tools to achieve macroeconomic objectives

2. Policy options  Fiscal policy  Monetary policy  Supply-side policies

3. Fiscal policy  Taxation & spending decisions of a government  Tax rates  Types of taxes & what it taxes  Composition, amount & timing of government spending

4. Key aim  Influence AD  How?  Reflationary, expansionary or loose fiscal policy = attempt to increase AD  Deflationary, contractionary or tight fiscal policy = attempt to reduce AD

5. Other than AD, aims to …  Encourage consumption of merit goods  Discourage consumption of demerit goods  Alter distribution of income  Alter incentives

6. Discretionary fiscal policy  When a government actively influences AD by changing its expenditure or taxes  e.g. seeking to create greater economic stability by offsetting changes in private sector spending, i.e. acting counter- cyclically

7. Automatic stabilisers  Forms of government spending and taxation that change automatically to dampen down economic fluctuations  e.g. government spending on job seekers’ allowance falls when economic activity rises  e.g. when real GDP rises, will receive more income tax without raising tax rate because there will be more people employed & at higher wages

8. Fiscal policy rules  Designed to create greater certainty & stability  Golden rule - government should only borrow to pay for investment spending, i.e. must finance its current spending through taxation

9. Types of taxes  Progressive tax  Takes a higher % from the income of the rich  Income tax (direct tax)  Regressive tax  Takes a greater % from the income of the poor  VAT (indirect tax)

10. Government spending  Capital expenditure (hospitals, schools, roads)  Current spending (running of public services)  Transfer payments (transfer money from tax payers to recipients of benefits)  Debt interest payments (made to holders of government debt, e.g. National Savings certificate holders)

11. Top 5 areas of government spending in the UK  Social protection  Health  Education  Defence  Debt interest

12. The Budget  Chancellor of the Exchequer outlines government spending proposals in 3- year spending reviews  Tax changes announced in annual budget  Provides information on budget position for the past year + predictions for future years

13. Budget position  Relationship between government spending & tax revenue  Deficit - when government spending exceeds tax revenue  Surplus - vice versa (will allow government to repay some of debt)  Deficit or surplus caused by cyclical or structural factors  Automatic stabilisers & discretionary fiscal policy