Fiscal policy involves the manipulation of government spending, taxation and the budget balance
Fiscal policy means the government deliberately changes how much it spends, how much it taxes, and whether it spends more or less than it collects.
Formula
Budget Balance = Government Revenue − Government Expenditure
Real World
In 2020–21 the UK government ran a budget deficit of £322bn, equivalent to 15% of GDP, using increased spending (furlough scheme) and tax deferrals to offset the collapse in private demand during COVID-19.
Exam Focus
State whether fiscal policy is expansionary or contractionary before analysing effects — this frames your answer for the examiner immediately.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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