Fiscal Policy

9.
Fiscal Policy
Definition: Fiscal policy
The word fiscal comes from the Latin word fiscus, which means treasury or
purse. Fiscal policy is budgetary policy. It involves the use of taxation and
government expenditure contained in a government budget, to achieve
policy objectives. Changes to government expenditure !" and taxation T"
affect the level of economic activity.
Objectives of Fiscal Policy
The overall aim of fiscal policy is non inflationary economic growth with
full employment and external balance.
#conomic growth is measured by the percentage change in !$%. The
Federal !overnment needs to &eep !$% growing at around '( to achieve
other economic objectives li&e full employment. Changes to fiscal policy
and changes to the level of government expenditure and taxation alter the
e)uilibrium level of income and the level of economic growth.
*igher growth rates often cause inflation. Inflation occurs when the general
level of prices increase. If economic growth is unsustainable and demand is
excessive an inflationary gap will develop. Fiscal policy can be used to
reduce the level of aggregate demand and prevent inflation.
Lower rates of economic growth are often associated with unemployment.
+here the level of aggregate demand is deficient a deflation gap will occur.
This is often associated with a recessionary period and higher levels of
unemployment. Fiscal policy can be used to increase the level of aggregate
demand to reduce unemployment.
#xternal balance means that the economy has a sustainable position in
regard to trade and borrowing with the overseas sector. Fiscal policy affects
government borrowing and foreign debt. ,dverse changes in these factors
can act as a constraint on fiscal policy.
The Federal Budget
, budget is a plan of taxation T" and expenditure !" for the year ahead. In
,ustralia there are three levels of government each of which have a budget
or plan of income and expenditure. +e have a Federal government, -tate
.
government and local government. The tables below give a brief overview
of the budget of the Federal !overnment. The Federal !overnment is the
national government and being the largest government it sets economic
policy.
FEDERAL GOVERNMENT
REVENUE EXPENDITURE
TAXATION Defense
Income Tax Education
Provisional Tax Health
Company Tax Social Security
Goods & Services Tax Culture & Recreation
Excise Duty
Housin & Community
Services
Customs Duty Economic Services
Capital Gains Tax !ssistance to the States
"rine #enefits Tax Pu$lic De$t Interest
%ithholdin Tax
NON TAX REVENUE
Immiration "ees
Sales & Goods & Services
Interest Received
Dividends G#E's
"ees & Chares
The Federal /udget is presented each year in 0ay. The budget document
sets out the current economic conditions as well as the government1s policy
response to these conditions and identifies all expenditure and taxation
changes. 0ore details on the latest budget figures can be found in the 0id
2ear #conomic 3 Fiscal 4utloo& statement at www.budget.gov.au
Budget Outcomes
There are three possible budget outcomes.
/udget -urplus5 Taxation 6 !overnment #xpenditure
/alanced /udget5 Taxation 7 !overnment #xpenditure
/udget $eficit5 Taxation 8 !overnment #xpenditure
Budget mpact
It is not the budget outcome that is important but the changes to ! and T that
a budget creates. , budget will either have an expansionary or
contractionary impact on the economy. +e &now from our study of
9eynesian income and expenditure analysis that the economy will expand if
government expenditure is increased or if taxation is reduced. Conversely
:
the economy will contract if taxation is increased or government expenditure
is reduced.
Therefore it is the change to budget outcomes that is important rather than
the budget outcome itself. !oing from a large budget surplus to a small
budget surplus is expansionary. To achieve this government would have to
reduce taxation or increase expenditure. #)ually to go from a small deficit to
a larger deficit would be expansionary. This is called expansionary fiscal
policy.
!oing from a large budget deficit to a small budget deficit is contractionary.
To achieve this, the government would have to reduce government
expenditure or increase taxation. #ither measure is contractionary. #)ually to
go from a small budget surplus to a large surplus would be contractionary.
These changes are called contractionary fiscal policy.
!hanges in Budget Outcomes
". #on$discretionary changes in fiscal policy
The budget outcome can be the result of changes in automatic stabilisers.
,utomatic stabilisers are variables that affect the budget outcome and
change automatically with the level of economic activity. They are also
called cyclical components of the budget outcome because they vary
according to the business cycle. In fact they often play an important counter
cyclical role by ma&ing the extreme periods in the business cycle less severe.
%utomatic &tabilisers
There are two main automatic stabilisers5
;nemployment /enefits5 +hen the economy moves into recession the level
of economic activity falls causing a rise in unemployment. ,n increase in
unemployment boosts government expenditure on unemployment benefits.
This tends to increase government expenditure in a recession which is
expansionary and will lessen the effects of the recession. ;nemployment
benefits tend to fall in a boom, which tends to decrease government
expenditure. This is contractionary and lessens the problems experienced in
a boom period li&e inflation.
%rogressive Taxation5 , progressive tax is one in which higher income
earners pay a greater proportion of their income in tax. ,s the level of
economic activity increases wor&ers tend to wor& overtime and receive a
<
bonus which means that they earn higher incomes. In addition, the
unemployed usually find wor& and start to pay tax. *igher incomes result in
proportionally higher tax payments. Income taxes increase pushing the
budget towards smaller deficits or larger surpluses. This is contractionary
and reduces the severity of the boom period. ,s economic activity declines
the government receives less taxation from income. , decrease in taxation is
expansionary and lessens the severity of the recession.
'. Discretionary changes in fiscal policy
$iscretionary changes are deliberate changes to a budget as a result of
government policy. , deliberate increase in expenditure or a reduction in
taxation to stimulate demand is an example of a discretionary change. -uch
changes are also called structural components of the budget outcome. These
structural components are used by economists to determine the intent of
government fiscal policy.
$iscretionary changes are re)uired to offset trends in the business cycle.
=on>discretionary changes are insufficient to achieve significant changes in
the business cycle. They influence the business cycle and limit the severity
of the extremes but they are insufficient to alter the trend in economic
activity. !overnments use discretionary fiscal policy to change the direction
of economic activity and to alter the business cycle where possible, to avoid
unfavourable economic conditions.
+hen trying to determine the stance of fiscal policy it is important to
consider the structural components or deliberate taxation and expenditure
changes of the budget. Fiscal stance refers to whether policy is expansionary
or contractionary in impact.
The main macroeconomic goal of fiscal policy is to provide stabilisation.
This means to control variations in the business cycle. Fiscal policy can also
be used to achieve certain microeconomic objectives.
(icroeconomic mpact of Fiscal Policy
%llocation of )esources
Fiscal policy can change prices and demand and this will affect the
pattern of resource use in the economy.
!overnment can promote the production of some goods by offering
subsidies to producers.
!overnment can limit social costs ie. taxing polluters.
'
!overnments provide public goods and collective goods.
0erit goods are often provided at low prices to promote their usage.
Distribution of ncome
!overnments provide for welfare spending and social security as well as
other types of social expenditure in their budgets.
=umerous organisations and charities depend of government for their
funding. Charities provided incomes and assistance to desperate
individuals in the community.
0any government programs that provide training or assistance to the
needy are funded in government budgets.
Changes to taxation can affect disposable incomes.
Taxes can have regressive, progressive or proportional effects on the
distribution of income.
#xam ?uestions
0ultiple Choice ?uestions
.. #xpansionary fiscal policy occurs when5
a" Taxation increases by more than government spending.
b" ,n increase in taxation is offset by a corresponding increase in
government spending.
c" !overnment spending increases by more than taxation.
d" /oth b" and c" above.
:. Contractionary fiscal policy occurs when government moves from5
a" , large budget deficit to a small budget surplus.
b" , small budget surplus to a large budget surplus.
c" , large budget deficit to a small budget deficit.
d" ,ll of the above.
<. +hich of the following is not a function of government@
a" Aeallocation of resources.
b" Aedistribution of income.
c" -tabilisation.
d" -etting the level of inventories.
B
'. #ducation is a good example of a5
a" Collective good.
b" %ublic good.
c" 0erit good.
B. %ollution that is not taxed or compensated is a good example of a5
a" -ocial cost.
b" =egative externality.
c" 0ar&et failure.
C. +hich of the following will act as an automatic stabiliDer in a recession@
a" %rogressive tax rates.
b" %ensions.
c" %ayments made to the unemployed.
d" /usiness subsidies.
E. , change to Federal tax rates is an example of5
a" , structural change to the Federal budget.
b" , cyclical change to the Federal budget.
c" -tabilisation policy.
d" ,utomatic stabilisers.
-hort ,nswer
.. $efine the following terms5 budget, budget surplus, budget deficit,
cyclical components, structural components, automatic stabilisers, fiscal
stance, and stabilisation.
FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF
C
:. +hat are automatic stabilisers and how do they wor&@
Principles of Ta*ation
Definitions
Tax /ase5 The economic variable on which the taxation is based.
Income or consumption are popular bases for taxation. /roadening the
tax base means to increase the activities that are subject to taxation.
$irect Tax5 , tax that is levied directly on a taxpayer and is unable to
be passed on to another party.
Indirect Tax5 ,ny tax the burden of which may be passed on in whole
or in part by the person who actually ma&e the payment to the
government.
,d>valorem $uty5 , tax that is levied according to the value of the
base.
-pecific $uty5 , tax that is charged according to the )uantity of
product sold or imported.
Gero Tax Threshold5 That level of income at which a person first starts
paying tax.
Tax ,voidance5 The legal minimiDation of tax liability. eg Income
splitting using trust accounts.
Tax #vasion5 The illegal minimiDation of tax liability. eg Failing to
declare some income.
E
mpact of Ta*ation
Progressive Ta*5 , tax where a greater proportion of income is paid
in tax as the level of income rises. The following table and graph is an
example of a progressive tax.
Progressive Ta*
Monthly Income Tax Payable Tax as % o Income
( ( )
*+++ + +
,+++ ,-+ *,.-
/+++ *-++ 01.-
2+++ /+++ 22.1
Proportional Ta*5 , tax where all income earners pay the same
proportion of income in tax. The following table and graph is an
example of a proportional tax.
Proportional Ta*
( ( )
*+++ *++ *+
,+++ ,++ *+
/+++ /++ *+
H
2+++ 2++ *+
)egressive Ta*5 , tax where lower income earners pay a higher
proportion of their income in tax. The following table and graph is an
example of a regressive tax.
)egressive Ta*
( ( )
*+++ /++ /+
,+++ /++ ,+
/+++ /++ *+
2+++ /++ 2.1
I
Ta*es in the %ustralian Ta*ation &ystem
ncome Ta*: Income tax is a tax on personal incomes. There are two
main types of income tax5 %ay as you earn %,2# for wage and salary
earners and provisional tax for self employed and owners of
unincorporated enterprises. Income tax is direct and progressive. The
income tax scale re)uires that higher income earners pay a larger
proportion of their income in tax.
!ompany Ta*: Company tax is a tax on company profits. Company
tax is direct and proportional. ,ll companies pay the same proportion
of their profits in tax.
+oods , &ervices Ta* -+&T.: The !-T is a tax on most goods and
services. It is collected by the retailer and passed on to the consumer
so it is an indirect tax. The !-T does not ta&e account of a person1s
income and is a greater burden for lower income earners which means
that it is regressive.
/*cise Duty: #xcise duty is a specific tax that is applied to petrol,
alcohol and tobacco. It is generally seen as a user pays tax and is used
to provide roads and hospitals.
!ustoms Duty: , tax on imported goods also called a tariff.
!apital +ains Ta*: Capital gains occur when assets are sold for more
than was paid for them. +hen this happens capital gains tax is
payable. This tax applied to all assets including land and houses
excluding your place of residence", shares, financial securities,
artwor&, jewellery, stamps, anti)ues, cars, boats etc.
.J
Fringe Benefits Ta*: , fringe benefit includes any benefit that an
employee gains from employment. #mployee benefits may include
company cars, overseas travel, entertainment allowances, clothes etc.
This tax re)uires employers to treat these benefits as income for
employees.
&tamp Duty: , tax paid on the transfer of property or the lodging of
legal documents. -tamp duty is paid on the transfer of property, cars
and the registering of documents li&e mortgages.
0and Ta*: , tax on the land value of investment properties.
Payroll Ta*: , tax on business payrolls.
!ouncil )ates: , tax on property owners that is used to pay for the
services provided by local councils which include, garbage, sewerage,
water supply, street cleaning etc.
!alculating ncome Ta*
To calculate income tax it is important to remember the following
definitions5
Gero Tax Threshold5 Income tax has a Dero tax threshold which is the
level of income needed before a person starts to pay income tax.
0arginal Aate of Tax5 The tax paid on the last dollar of income. This
varies with the tax rates for each income brac&et.
,verage Aate of Tax5 Tax paid divided by income earned.
%n /*ample of !alculating ncome Ta*
;se the following table to calculate the income tax, marginal rate of tax and
average rate of tax for an income earner on K.JJ,JJJ.
Income
!"ac#et Rate
Tax
Pa$%
+ & 2+++ + +
2++* & ,++++ *-) ,*++
,+++* & /++++ ,-) -+++
/+++* & 3++++ /+) *2+++
3+++* & a$ove -+) *++++
%ns1er5 The taxpayer pays no tax on the first KCJJJ dollars of income. This
is called the Dero tax threshold and all taxpayers benefit from this. For every
dollar of income earned between KCJJJ and K:JJJJ .B( is paid in tax. 4ur
taxpayer earns K.'JJJ in this brac&et and pays K:.JJ in tax. For every
..
dollar of income earned between K:JJJJ and K'JJJJ :B( is paid in tax. 4ur
taxpayer earns K:JJJJ in this brac&et and pays KBJJJ in tax. For every
dollar of income earned between 'JJJJ and HJJJJ 'J( is paid in tax. 4ur
taxpayer earns K'JJJJ in this brac&et and pays K.CJJJ in tax. For every
dollar of income earned above KHJJJJ BJ( is paid in tax. 4ur taxpayer
earns K:JJJJ in this brac&et and pays K.JJJJ in tax.
4ur taxpayer pays a total tax bill of K<<,.JJ. The marginal rate of tax for
this taxpayer is BJ(. The average rate of tax for this taxpayer is <<.JJ L
.JJJJJ 7 <<..(
)emember5 ,ll taxpayer receive the benefit of lower marginal tax rates at
lower level of income. Income tax is a progressive tax which means that the
marginal tax rates are higher for higher income earners. The average tax rate
is therefore always going to be lower than the marginal tax rate for a
progressive tax.
!riteria for a +ood Ta* &ystem
The ,sprey Aoyal Commission in)uiry" into the ,ustralian taxation system
established three important aims that all ta&es should try to achieve.
/2uity5 ,ll taxes should be fair and should not discriminate against
any group of taxpayers or section of the community. There are two
types of e)uity5 *oriDontal and Mertical.
*oriDontal #)uity5 If a tax is to achieve horiDontal e)uity is must
treat e)ual income earners e)ually. Two income earners on the
same tax should pay an e)ual amount of income.
Mertical #)uity5 The principal of vertical e)uity is satisfied if a tax
is progressive and ma&es higher income earners pay a larger
proportion of their income in tax.
It is essential to achieve e)uity so as to improve the distribution of
income and reduce the level of ine)uality.
/fficiency5 ,n efficient tax does not distort the allocation of
resources. Taxes can change incomes and prices and this may result in
an undesirable allocation of resources. -ome change to resource
allocation is necessary. Taxes that provide revenue for collective
goods which would not be provided by the mar&et system, is an
example of a desirable change. Taxes that stop pollution and reduce
.:
social costs are also important. /ut not all tax changes improve the
allocation of resources. Taxation efficiency is needed to achieve an
optimal allocation of resources.
&implicity5 This covers several criteria that appeared in the first
economics boo& called the +ealth of =ations which was written by
,dam -mith in the .EJJ1s. In the boo& -mith referred to the cannons
of taxation. These cannons included5
#conomy5 The cost of collecting the tax is less than the revenue
that it raises.
Convenience5 The cost of record &eeping and compliance is not
an unreasonable burden on the community and does not create
disproportionate costs compared to the revenue raised.
Certainty5 , tax should be simple and easy to apply and the tax
liability should be able to be calculated exactly.
,ll taxes should be exact, simple to understand and worth collecting.
Performance of %ustralian Ta*es on the !riteria
ncome Ta*: Income tax is progressive so it achieves vertical e)uity.
Tax avoidance creates some problems with horiDontal e)uity. The self
employed have greater access to measures to reduce tax and %,2#
taxpayers pay a greater proportion of this tax. Income tax law has
become very complex and is constantly trying to &eep pace with the
tax avoidance industry. This means that the tax fails on convenience.
+oods , &ervices Ta* -+&T.: The !-T is an indirect tax and is
therefore regressive. This means that is fails on e)uity. The !-T has a
constant rate for all industries and is therefore efficient. The !-T has
a significant increase in record &eeping and would fail on
convenience. It does raise significant amounts of money and therefore
passes on economy.
!apital +ains Ta*: This tax was introduced to increase the e)uity of
the tax system. %rior to its introduction in .IHB households earning
income from capital gains paid no tax whilst wage earners paid
income tax. This was seen as a failure of horiDontal e)uity.
Fringe Benefits Ta*: This was another measure to improve e)uity in
the tax system. /efore this was introduced many executive were being
paid with generous fringe benefits and paying no tax on them.
.<
0and Ta*: This is a &ind of wealth tax and affects rich property
owners. It is seen as progressive and introduces some vertical e)uity.
/*cise Duty: This is a user pays tax that deliberately reallocates
resources. It scores well on efficiency. #xcise duty li&e all indirect
taxes is regressive and scores badly on e)uity.
Payroll Ta*: This is a tax on employment and reduces the willingness
of firms to employ wor&ers. It fails on efficiency because it distorts
the factor mar&ets.
.'
#xam ?uestions
.. +hat would be the impact on personal incomes of an increase in the tax
rate for the !oods 3 -ervices Tax@
a" %rogressive.
b" %roportional.
c" Aegressive.
d" Flat.
:. +hat would be the impact on personal incomes of a broadening of the tax
base for Capital !ains Tax@
a" %rogressive.
b" %roportional.
c" Aegressive.
d" Flat.
<. Tax avoidance causes problems for the5
a" #)uity of the tax system.
b" #fficiency of the tax system.
c" -implicity of the tax system.
'. Company tax is a5
a" %rogressive tax.
b" %roportional tax.
c" $irect tax.
d" /oth b" 3 c" above.
B. %ersonal income tax is a5
a" %rogressive tax.
b" %roportional tax.
c" $irect tax.
d" /oth a" 3 c" above.
C. If the average rate of tax for all income earners is e)ual to their marginal
rate of tax then the tax must be5
a" %rogressive.
b" %roportional.
c" Aegressive.
d" Flat.
.B
-hort ,nswer
.. $efine the following terms5 tax base, tax threshold, tax avoidance, tax
evasion, proportional tax, progressive tax, regressive tax, marginal rate of
tax, and average rate of tax.
:. +ith the use of diagrams explain the difference between a progressive and
a proportional tax.
<. +ith the use of diagrams explain the difference between a regressive and
a progressive tax.
'. +hat are the criteria for a good tax system@ #xplainN
.C
(ethods of Financing a Budget Deficit
+hen the government budgets for a deficit it is planning to spend more than
it receives in revenue over the current financial year. This means that
revenue is not sufficient to cover expenditure and the government needs
additional funds to meet its expenditure. There are various ways in which the
government can source these funds.
Borro1ing from the domestic private sector
!overnment -ecurities5 Treasury bonds are sold using a tender system. ,
treasury bond is a long>term debt security issued by a government. ,
tender system means that the amount borrowed is determined first and
then mar&et participants are as&ed to ma&e offers for the securities are
various interest rates. The A/, selects the lowest bids interest rates"
first and so on until the tender is filled.
Tender -iDe5 The siDe of the budget deficit determines the siDe of the
tender.
Crowding 4ut5 The disadvantage of this approach is that it can lead to
crowding out during periods of strong demand for funds by the private
sector. !overnment borrowing will increase interest rates and result in
less investment proceeding. If it is done in a recession when investment
is low then it will create Ocrowding inP and help stimulate the economy"
=ational $ebt5 ,nother disadvantage is that past deficits add to the
=ational $ebt debt owed by the public sector". This burdens future
governments with higher interest payments on outstanding debt. This is
o& in a recession as long as the budget surpluses in the boom years are
used to reduce the =ational $ebt".
Borro1ing from Overseas
4verseas -ales5 ,ustralian government securities can be sold overseas in
international debt mar&ets. The A/, sells government securities in return
for foreign currencies. The A/, holds the foreign currencies in its
reserves and credits the ,;$ e)uivalent to the !overnment1s accounts.
=o Crowding 4ut5 International borrowing avoids the domestic crowding
out effect and there is no increase in domestic interest rates.
Lower /orrowing Costs5 International interest rates may be lower than
domestic rates and this could reduce the cost of borrowing to the
,ustralian government.
#xchange Aate Ais&5 International debt is usually written in the debtor
currency and therefore carries an exchange rate ris&. Changes in the value
.E
of the exchange rate of the lender country can cause significant changes
in the value of the debt.
Foreign $ebt5 Foreign borrowing adds to foreign debt and increases
interest payments, which tends to worsen the net incomes balance on the
current account. Foreign debt includes all sums of money that ,ustralian
consumers, firms and governments owe to similar parties overseas.
International Crowding 4ut5 Foreign borrowing will increase capital
inflow and this will cause the exchange rate to rise. *igher exchange
rates will ma&e exports more expensive and imports cheaper. Less
exports will be sold and more imports will be purchased. This is called
international crowding out.
Borro1ing from the )eserve Ban3
0onetising the $eficit5 +hen the !overnment borrows from the A/, to
finance a deficit this is called monetising the deficit. This effectively
means that the A/, prints money to pay for the deficit.
Inflation5 This increases the money supply and decreases the relative
scarcity of money which inevitably results in inflation.
$ebt and Aates5 This creates no change to interest rates or =ational $ebt
because it eliminates the need to issue government securities.
%sset &ales
!overnments can sell assets to finance their expenditure. Large asset
sales are a )uic& way to pay for large expenditure items.
,sset -ales5 ,sset sales include privitisation of government business
enterprises and the sale of government property.
4ne>4ff Impact5 ,sset sales create a one>off impact on the budget and
may result in the loss of government revenue in future years.
4sing Budget &urpluses
If revenue is greater than expenditure then the government then they
government will create a surplus of money. If this continues for several years
the government will accumulate a significant holding of money. The
government can use a budget surplus in three ways5
Deposit the money 1ith the )eserve Ban3
Lower Circulation5 , deposit with the A/, would re)uire money to be
ta&en out of circulation.
.H
0oney -upply 3 Aates5 This would reduce the money supply and
increase interest rates.
)etire public sector debt
Cancel $ebt5 The government has the ability to purchase bac& and cancel
government securities, which are always sold with repurchase
agreements.
=ational 3 Foreign $ebt5 This reduces government or =ational $ebt as
well as foreign debt.
Interest /urden5 Aeducing debt will reduce the interest rate burden on the
government and improve the C,$.
0oney -upply5 Aetiring domestic debt will not change the money supply
because the increase in deposits will offset by the taxation and spending
changes used by the government to achieve the surplus.
%ccumulate the &urplus
Future -pending5 *old the surplus funds and increase spending in future
years. ie tax cuts before an election.
%ublic 4wnership5 Increase public ownership of infrastructure and public
assets.
)ecent Fiscal Policy in %ustralia
It is important for students to be aware of the current fiscal policy position of
the ,ustralian government as exam )uestions on economic policy may
re)uire this information. This information is constantly changing as new
budgets are released each year. The study guide will provide recent
information. For the latest figures see the following web site5
www.budget.gov.au
nternet )esearch
For your own information research the following )uestions5
.. +hat was the planned budget outcome for the recent Federal budget@
:. *ow does this compare with recent years@
<. +hat were the main changes to revenue and expenditure items in the
recent Federal budget@
'. *as government announced any policy changes recently@ +ere there
any costing of these policies@
.I
#xam ?uestions
.. +hich of the following is not a method of financing a budget deficit@
a" -elling government securities.
b" 4verseas borrowing.
c" ,sset sales.
d" %rinting money.
:. 4ne of the advantages of overseas borrowing is5
a" Lower interest rates.
b" =o crowding out.
c" Lower foreign debt.
d" -table exchange rates.
-hort ,nswer
.. $efine the following terms5 tender system, crowding out, crowding in,
national debt, and foreign debt.
FFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFF
:. *ow can government finance a budget deficit@
:J
<. *ow can government use a budget surplus@
#xtended Aesponse
5o1 can fiscal policy be used to influence the level of economic activity6
Aule .5 $efine the terms in the )uestion5 Fiscal policy, economic activity.
Aule :5 Identify 3 define related concepts5 #xpansionary and Contractionary
fiscal policy, aggregate demand, trade cycle, inflationary 3 deflationary gap
Aule <5 Lin& introduced terms to the )uestion5 #xpansionary fiscal policy
can be used to reduce the level of economic activity in a boom.
Aule B5 $raw relevant diagrams5 Inflationary 3 deflationary gap diagram.
Aule C5 Text reference to diagram in your answer5 ,n inflationary gap exists
between points , 3 / in diagram ..
Aule '5 $raw logical conclusions5 ,n inflationary gap can be closed if a
government uses contractionary fiscal policy.
:.

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