IB Economics Topic 3.6.6 Strengths of Fiscal Policy Revision Notes (SL/HL)

IB Economics Topic 3.6.6 Strengths of Fiscal Policy Revision Notes (SL/HL) | RevisionDojo

Written by official IB examiners

Fiscal policy can be a very effective tool in achieving macroeconomic objectives, as it allows:

Targeting of Specific Economic Sectors
Direct Effect on Aggregate Demand
Can Pull the Economy from Deep Recession

Targeting Specific Sectors

Fiscal policy can be precisely directed to address the specific economic needs set by the government:

Infrastructure Projects: Government spending can be allocated to build roads, schools, or hospitals, boosting employment in construction and related industries.
It can be focused on a variety of public goods as well, such as police forces, fire extinguishing forces, etc.
Tax Incentives: Tax breaks can be offered to specific sectors, like renewable energy, to encourage investment and innovation.

Direct Effect on Aggregate Demand

The changes in government spending (G), directly affect the aggregate demand (AD), causing a short time shift in AD in the desired direction.

Note

Fiscal policy can indirectly effect AD, through encouraging consumer spending(C) and investments(I) by e.g managing tax systems and rates.
However, changes with respect to taxes are less direct and take a long time to shift the AD.

Ability to pull economy out of deep recession

According to the Keynesian model, the wages on the way down are "sticky" (inflexible), hence the market forces alone may not be able to deal with the pressures of wages falling down.
Therefore, fiscal policy can be used to stimulate growth in the aggregate demand and economic activity, hence addressing the recessionary gap.

Evaluating Fiscal Policy

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Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
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Fiscal policy can be a very effective tool in achieving macroeconomic objectives, as it allows:

Targeting of Specific Economic Sectors
Direct Effect on Aggregate Demand
Can Pull the Economy from Deep Recession

Targeting Specific Sectors

Fiscal policy can be precisely directed to address the specific economic needs set by the government:

Infrastructure Projects: Government spending can be allocated to build roads, schools, or hospitals, boosting employment in construction and related industries.
It can be focused on a variety of public goods as well, such as police forces, fire extinguishing forces, etc.
Tax Incentives: Tax breaks can be offered to specific sectors, like renewable energy, to encourage investment and innovation.

Direct Effect on Aggregate Demand

The changes in government spending (G), directly affect the aggregate demand (AD), causing a short time shift in AD in the desired direction.

Note

Fiscal policy can indirectly effect AD, through encouraging consumer spending(C) and investments(I) by e.g managing tax systems and rates.
However, changes with respect to taxes are less direct and take a long time to shift the AD.

Ability to pull economy out of deep recession

According to the Keynesian model, the wages on the way down are "sticky" (inflexible), hence the market forces alone may not be able to deal with the pressures of wages falling down.
Therefore, fiscal policy can be used to stimulate growth in the aggregate demand and economic activity, hence addressing the recessionary gap.

Evaluating Fiscal Policy

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 3.6.6 Strengths of Fiscal Policy Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Targeting Specific Sectors

Direct Effect on Aggregate Demand

Ability to pull economy out of deep recession

Evaluating Fiscal Policy

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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Targeting Specific Sectors

Direct Effect on Aggregate Demand

Ability to pull economy out of deep recession

Evaluating Fiscal Policy

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account