Fiscal Policy
Fiscal policy comprises government decisions on spending and taxation levels to influence AD, output, and inflation. Expansionary policy (increased spending or tax cuts) boosts AD; contractionary policy (spending cuts or tax increases) reduces it.
Real World
During COVID-19, Chancellor Rishi Sunak launched the furlough scheme costing over £70 billion, directly paying 80% of wages for 11.7 million workers to prevent mass unemployment and maintain consumer spending.
Exam Focus
For evaluation, always weigh the multiplier effect against crowding out and time lags when assessing fiscal policy effectiveness.
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