3.6 Demand management - fiscal policy

• Fiscal policy uses government revenue and expenditure

• Revenue sources include direct taxes, indirect taxes, state-owned enterprise sales, and sale of government assets

• Expenditure includes current spending, capital spending, and transfer payments

• Goals include low stable inflation, low unemployment, long-term growth conditions, reduced business cycle fluctuations, equity in income distribution, and external balance

• Expansionary fiscal policy can close deflationary or recessionary gaps

• Contractionary fiscal policy can close inflationary gaps

• Diagram: AD/AS showing expansionary and contractionary fiscal policy in Keynesian and monetarist/new classical models

• Constraints include political pressure, time lags, and sustainable debt

• Strengths include targeting specific sectors and effective government spending in deep recessions

• Evaluation considers effects on growth, unemployment, and price stability