1. 1 webnote 240 Syllabus 2.4 The BIG ideas! I.b Syllabus 2.4: Macroeconomic Objectives: Unemployment Syllabus 113-119 240: Powerpoint summary 241: Laffer 242: Fiscal policy overview 243: Crowding out Sample Exam Question – see slide 2 244: Exam Questions

2. Webnote 3302 Fiscal Policy 1. 1. Key government policy to realloate wealth e.g progressive taxation 2. 2. Key government policy to improve spending in the short run and therefore a key anti recession policy because it can have immediate short term effects 3. 3. Typically described as a ‘Keynesian’ policy tool but it is of key importance for supply siders also. Remember demand and supply side economists do not “own” fiscal and monetary policy. They share the use of these policies to manage the macroeconomy hhhh tttt tttt pppp :::: //// //// wwww wwww wwww.... yyyy eeee llll llll oooo wwww ssss uuuu bbbb mmmm aaaa rrrr iiii nnnn eeee rrrr.... cccc oooo mmmm Webnote 240 Syllabus reference: items 129 +132

3. Ib question May 2013 - HP1 Macroeconomics 3. (a) Using a diagram, describe how expansionary monetary policy might be used to close a deflationary (recessionary) gap. [10 marks] 3. (a) Using a diagram, describe how expansionary monetary policy might be used to close a deflationary (recessionary) gap. [10 marks] (b) Discuss why, in contrast to the monetarist/new classical model, an economy can remain stuck in a deflationary (recessionary) gap according to the Keynesian model. (b) Discuss why, in contrast to the monetarist/new classical model, an economy can remain stuck in a deflationary (recessionary) gap according to the Keynesian model. Webnote 3303 Webnote 240

4. Webnote 3304 http://economics@isdedu.de Laffer Curve economics@isdedu.de A tax rate of 0r1 maximises tax revenue because more people want to work and firms will be inclined to expand A tax rate of 0r1 maximises tax revenue because more people want to work and firms will be inclined to expand Webnote 240

5. Webnote 3315 For full details please see webnote 331 in section 2.4 For full details please see webnote 331 in section 2.4 P = progressive as average rate of tax increases as income Y increases Oy1 to Oy2 the tax paid increases from 0t1 to 0t2 R = average rate of tax decreases as income Y increases. As income increases Oy1 to Oy2 the total tax paid increases from 0t3 to 0t4. http:// eeee cccc oooo nnnn oooo mmmm iiii cccc ssss @@@@ iiii ssss dddd eeee dddd uuuu.... dddd eeeenote see 331 Fiscal policy and taxes Webnote 240

6. Webnote 3306 http://economics@isdedu.de Laffer Curve economics@isdedu.de Critics of the Laffer curve argue that a cut in tax rates would in all probability lead to a fall in tax revenue. Critics of the Laffer curve argue that a cut in tax rates would in all probability lead to a fall in tax revenue. Idea here is based on backward bending supply curve whereby at higher wage rates workers may offer less hours of labour i.e. workers value leisure time more that additional hours at work subject of course to some minimum required standard of living Idea here is based on backward bending supply curve whereby at higher wage rates workers may offer less hours of labour i.e. workers value leisure time more that additional hours at work subject of course to some minimum required standard of living Webnote 240

7. 7 2. “crowding out” 1. Public sector (G) spending crowds out private sector (F+H) gdp 1 gdp2 ad1 ad2 pl Ad 1 to ad 2 C I G X M Syllabus 2.4 The BIG ideas! 2. As a result “crowding out” ( public sector can occur and therefore ad2 shifts back to ad3. Government spending rises but how is it paid for? 1.Borrowing interest rates will rise thus affecting the household spending 2.Tax increases- H and F spending will fall 3.Government can print the money higher inflation = higher prices ad3 Webnote 240

8. Evaluate Fiscal Policy syllabus 119 Webnote 3308 Webnote 240

9. syllabus 119 + 117 syllabus 119 + 117 119 (weight = 5) Evaluate the effectiveness of fiscal policy through consideration of factors including the ability to target sectors of the economy, the direct impact on aggregate demand, the effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supply-side causes of instability. 117 Explain how factors including the progressive tax system and unemployment benefits, which are influenced by the level of economic activity and national income, automatically help stabilize short-term fluctuations. Webnote 3309 Webnote 240

10. Exam November 2014 4a 4a Using an appropriate diagram, explain how a recession might lead to more poverty. (10 marks) Using an appropriate diagram, explain how a recession might lead to more poverty. (10 marks) 4b 4b Evaluate the view that attempts to achieve greater equity in the distribution of income will reduce economic efficiency (15 marks) Evaluate the view that attempts to achieve greater equity in the distribution of income will reduce economic efficiency (15 marks) Webnote 33010 Webnote 240

11. Webnote 33011 http://economics@isdedu.de Laffer Curve economics@isdedu.de Reading: Reading: See Glanville p.334 and McGee ‘The Good, the bad and the economist’ p.455 See Glanville p.334 and McGee ‘The Good, the bad and the economist’ p.455 End End Webnote 240