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<title>DP Economics: Unit 3.6 Government management of the economy – fiscal policy</title>
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4px"><i class="expander fa fa-caret-right fa-rotate-90"></i><a class="" href="https://www.student.thinkib.net/economics/page/32112/textbook" title="Textbook">Textbook</a></li><ul class="level-1 expanded"><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33061/contents-page" title="Contents page">Contents page</a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/37990/textbook-approach-to-the-new-ib-economics-examination-specificat" title="Textbook approach to the new IB Economics examination specification">Textbook approach to the new IB Economics examination specification</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33060/chapter-1-introduction-to-economics" 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(HL)">Unit 2.4(1): Behavioural economics (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32798/unit-242-business-objectives-hl" title="Unit 2.4(2): Business objectives (HL)">Unit 2.4(2): Business objectives (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32663/unit-251-price-elasticity-of-demand-ped" title="Unit 2.5(1): Price elasticity of demand (PED)">Unit 2.5(1): Price elasticity of demand (PED)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32788/unit-252-income-elasticity-of-demand-yed-" title="Unit 2.5(2): Income elasticity of demand (YED) ">Unit 2.5(2): Income elasticity of demand (YED) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32789/unit-26-price-elasticity-of-supply-pes-" title="Unit 2.6: Price elasticity of supply (PES) ">Unit 2.6: Price elasticity of supply (PES) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33388/unit-271-governments-in-markets-tax-and-subsidy-" title="Unit 2.7(1): Governments in markets - tax and subsidy ">Unit 2.7(1): Governments in markets - tax and subsidy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33424/unit-272-governments-in-markets-price-controls" title="Unit 2.7(2): Governments in markets - price controls">Unit 2.7(2): Governments in markets - price controls</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33665/unit-281-market-failure-externalities" title="Unit 2.8(1): Market failure – externalities">Unit 2.8(1): Market failure – externalities</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/33808/unit-282-market-failure-merit-goods-and-demerit-goods-" title="Unit 2.8(2): Market failure - merit goods and demerit goods ">Unit 2.8(2): Market failure - merit goods and demerit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34054/unit-283-government-intervention-to-manage-externalities-merit-a" title="Unit 2.8(3): Government intervention to manage externalities, merit and demerit goods ">Unit 2.8(3): Government intervention to manage externalities, merit and demerit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34082/unit-284-common-access-pool-resources" title="Unit 2.8(4): Common access (pool) resources">Unit 2.8(4): Common access (pool) resources</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34087/unit-29-public-goods" title="Unit 2.9: Public goods">Unit 2.9: Public goods</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34247/unit-210-asymmetric-information-hl" title="Unit 2.10: Asymmetric information (HL)">Unit 2.10: Asymmetric information (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35118/unit-2111-market-power-theory-of-production-and-costs-hl" title="Unit 2.11(1) Market power - Theory of production and costs (HL)">Unit 2.11(1) Market power - Theory of production and costs (HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35125/unit-2112-market-power-perfect-competitionhl" title="Unit 2.11(2) Market power - Perfect competition(HL)">Unit 2.11(2) Market power - Perfect competition(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35147/unit-2113-market-power-monopolyhl" title="Unit 2.11(3) Market power - Monopoly(HL)">Unit 2.11(3) Market power - Monopoly(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35151/unit-2114-market-power-monopolistic-competitionhl" title="Unit 2.11(4) Market power - Monopolistic competition(HL)">Unit 2.11(4) Market power - Monopolistic competition(HL)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35153/unit-2115-market-power-oligopolyhl" title="Unit 2.11(5) Market power - Oligopoly(HL)">Unit 2.11(5) Market power - Oligopoly(HL)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41603/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43378/opportunity-cost-and-production-possibility-curves" title="Opportunity cost and production possibility curves">Opportunity cost and production possibility curves</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42559/demand-theory" title="Demand theory">Demand theory</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41886/the-price-mechanism" title="The price mechanism">The price mechanism</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43188/market-demand-and-supply" title="Market demand and supply">Market demand and supply</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41705/demerit-goods" title="Demerit goods">Demerit goods</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42275/market-failure-and-climate-change" title="Market failure and climate change">Market failure and climate change</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42925/market-power" title="Market power">Market power</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42099/applying-game-theory" title="Applying game theory">Applying game theory</a></li></ul></ul><li class="ancestor parent" style="padding-left: 14px"><i class="expander fa fa-caret-right fa-rotate-90"></i><a class="" href="https://www.student.thinkib.net/economics/page/34407/chapter-3-macroeconomics" title="Chapter 3: Macroeconomics">Chapter 3: Macroeconomics</a></li><ul class="level-2 expanded"><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34355/unit-311-measuring-the-level-of-economic-activity" title="Unit 3.1(1): Measuring the level of economic activity">Unit 3.1(1): Measuring the level of economic activity</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34432/unit-312-measuring-economic-development" title="Unit 3.1(2): Measuring Economic Development">Unit 3.1(2): Measuring Economic Development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34485/unit-321-variations-in-economic-activity-aggregate-demand-ad-" title="Unit 3.2(1): Variations in economic activity - aggregate demand (AD) ">Unit 3.2(1): Variations in economic activity - aggregate demand (AD) </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34487/unit-322-variations-in-economic-activity-aggregate-supplyas" title="Unit 3.2(2): Variations in economic activity - aggregate supply(AS)">Unit 3.2(2): Variations in economic activity - aggregate supply(AS)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34758/unit-331-macroeconomic-objectives-economic-growth" title="Unit 3.3(1) Macroeconomic objectives: economic growth">Unit 3.3(1) Macroeconomic objectives: economic growth</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34771/unit-332-macroeconomic-objectives-unemployment-" title="Unit 3.3(2) Macroeconomic objectives: unemployment ">Unit 3.3(2) Macroeconomic objectives: unemployment </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34778/unit-333-macroeconomic-objectives-inflation-and-deflation-" title="Unit 3.3(3) Macroeconomic objectives: inflation and deflation ">Unit 3.3(3) Macroeconomic objectives: inflation and deflation </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34925/unit-341-economics-of-inequality-and-poverty" title="Unit 3.4(1) Economics of inequality and poverty">Unit 3.4(1) Economics of inequality and poverty</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34946/unit-342-policies-to-improve-equality-equity-and-poverty" title="Unit 3.4(2) Policies to improve equality, equity and poverty">Unit 3.4(2) Policies to improve equality, equity and poverty</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34993/unit-35-government-management-of-the-economy-monetary-policy" title="Unit 3.5 Government management of the economy – monetary policy">Unit 3.5 Government management of the economy – monetary policy</a></li><li class="current" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/34962/unit-36-government-management-of-the-economy-fiscal-policy" title="Unit 3.6 Government management of the economy – fiscal policy">Unit 3.6 Government management of the economy – fiscal policy</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35017/unit-371-market-based-supply-side-policies-" title="Unit 3.7(1) Market based supply-side policies ">Unit 3.7(1) Market based supply-side policies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35018/unit-372-interventionist-supply-side-policies-" title="Unit 3.7(2) Interventionist supply-side policies ">Unit 3.7(2) Interventionist supply-side policies </a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/45803/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42639/measuring-economic-well-being" title="Measuring economic well-being">Measuring economic well-being</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43044/inflation" title="Inflation">Inflation</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42350/inequality" title="Inequality">Inequality</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41639/inequity" title="Inequity">Inequity</a></li></ul></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35414/chapter-4-the-global-economy" title="Chapter 4: The Global Economy">Chapter 4: The Global Economy</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35346/unit-41-benefits-of-international-trade" title="Unit 4.1 Benefits of international trade">Unit 4.1 Benefits of international trade</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35348/unit-4243-trade-protectionism" title="Unit 4.2/4.3 Trade protectionism">Unit 4.2/4.3 Trade protectionism</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35407/unit-44-economic-integration-" title="Unit 4.4 Economic integration ">Unit 4.4 Economic integration </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35409/unit-45-exchange-rates" title="Unit 4.5 Exchange rates">Unit 4.5 Exchange rates</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35413/unit-46-balance-of-payments-" title="Unit 4.6 Balance of payments ">Unit 4.6 Balance of payments </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35675/unit-47-sustainable-development" title="Unit 4.7 Sustainable development">Unit 4.7 Sustainable development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35685/unit-48-measuring-development-" title="Unit 4.8 Measuring development ">Unit 4.8 Measuring development </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35687/unit-49-barriers-to-economic-development" title="Unit 4.9 Barriers to economic development">Unit 4.9 Barriers to economic development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/35702/unit-410-economic-growth-and-economic-development-strategies" title="Unit 4.10: Economic growth and economic development strategies">Unit 4.10: Economic growth and economic development strategies</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/45804/economics-real-world-examples-and-extension-material-" title="Economics real world examples and extension material ">Economics real world examples and extension material </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41927/foreign-currency" title="Foreign currency">Foreign currency</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43532/exchange-rates" title="Exchange rates">Exchange rates</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/43804/balance-of-payments" title="Balance of payments">Balance of payments</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41796/economic-development" title="Economic development">Economic development</a></li></ul></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20132/units-1-2-microeconomics" title="Units 1-2: Microeconomics">Units 1-2: Microeconomics</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Unit 1: Introduction to economics">Unit 1: Introduction to economics</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20091/introductory-activity" title="Introductory activity">Introductory activity</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20093/unit-11-scarcity-choice-and-opportunity-cost" title="Unit 1.1: Scarcity, choice and opportunity cost">Unit 1.1: Scarcity, choice and opportunity cost</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21647/factors-of-production" title="Factors of production">Factors of production</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20114/economic-systems" title="Economic systems">Economic systems</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20134/public-and-private-sectors" title="Public and private sectors">Public and private sectors</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28055/unit-12-economics-as-a-social-science" title="Unit 1.2: Economics as a social science">Unit 1.2: Economics as a social science</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29921/circular-flow-of-national-income" title="Circular flow of national income">Circular flow of national income</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29829/unit-1-review-terms" title="Unit 1: Review terms">Unit 1: Review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/41600/introduction-to-economics-crossword" title="Introduction to economics crossword">Introduction to economics crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/4331/unit-1-multiple-choice-quiz" title="Unit 1: Multiple choice quiz">Unit 1: Multiple choice quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20177/unit-21-23-competitive-markets-demand-and-supply" title="Unit 2.1-2.3: Competitive markets - demand and supply">Unit 2.1-2.3: Competitive markets - demand and supply</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28517/unit-21-demand" title="Unit 2.1: Demand">Unit 2.1: Demand</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22349/determinants-of-demand" title="Determinants of demand">Determinants of demand</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29949/unit-22-supply-" title="Unit 2.2: Supply ">Unit 2.2: Supply </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20184/changes-to-supply-and-demand-" title="Changes to supply and demand ">Changes to supply and demand </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21992/practise-exercises" title="Practise exercises">Practise exercises</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26112/gold-exchange-game-demand-and-supply" title="Gold exchange game: Demand and supply">Gold exchange game: Demand and supply</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20194/unit-23-competitive-market-equilibrium" title="Unit 2.3: Competitive market equilibrium">Unit 2.3: Competitive market equilibrium</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20144/producer-and-consumer-surplus" title="Producer and consumer surplus">Producer and consumer surplus</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22351/veblen-goods-and-super-luxury-goods" title="Veblen goods and super luxury goods">Veblen goods and super luxury goods</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25677/are-cryptocurrencies-the-new-tulipmania" title="Are Cryptocurrencies the new Tulipmania?">Are Cryptocurrencies the new Tulipmania?</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20472/unit-21-23-multiple-choice-quiz" title="Unit 2.1-2.3: Multiple choice quiz">Unit 2.1-2.3: Multiple choice quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20113/unit-24-consumer-and-producer-behaviour-hl-only" title="Unit 2.4: Consumer and producer behaviour (HL only)">Unit 2.4: Consumer and producer behaviour (HL only)</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/36073/behavioural-economics-consumer-biases-nudge-theory-hl-only" title="Behavioural economics: Consumer biases / nudge theory (HL only)">Behavioural economics: Consumer biases / nudge theory (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20378/business-objectives-hl-only" title="Business objectives (HL only)">Business objectives (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28741/unit-21-24-review-terms-" title="Unit 2.1-2.4: Review terms ">Unit 2.1-2.4: Review terms </a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20195/unit-25-26-elasticity" title="Unit 2.5-2.6: Elasticity">Unit 2.5-2.6: Elasticity</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/28713/unit-25-price-elasticity-of-demand" title="Unit 2.5: Price elasticity of demand">Unit 2.5: Price elasticity of demand</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21545/determinants-of-price-elasticity-" title="Determinants of price elasticity ">Determinants of price elasticity </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21532/ped-elasticity-and-sales-revenue" title="PED elasticity and sales revenue?">PED elasticity and sales revenue?</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21259/unit-25-income-elasticity-of-demand-yed" title="Unit 2.5: Income elasticity of demand (YED)">Unit 2.5: Income elasticity of demand (YED)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21200/unit-26-price-elasticity-of-supply" title="Unit 2.6: Price elasticity of supply">Unit 2.6: Price elasticity of supply</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20207/perfectly-elastic-inelastic-supply-curves" title="Perfectly elastic / inelastic supply curves">Perfectly elastic / inelastic supply curves</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20230/a-mathematical-note-about-elasticity-" title="A mathematical note about elasticity ">A mathematical note about elasticity </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39037/demand-and-supply-crossword" title="Demand and supply crossword">Demand and supply crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29021/unit-25-26-review-terms" title="Unit 2.5-2.6: Review terms">Unit 2.5-2.6: Review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20474/unit-25-26-multiple-choice-quiz-" title="Unit 2.5-2.6: Multiple choice quiz ">Unit 2.5-2.6: Multiple choice quiz </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44474/unit-21-25-competitive-markets-quiz" title="Unit 2.1- 2.5: Competitive markets quiz">Unit 2.1- 2.5: Competitive markets quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20243/unit-27-the-role-of-government-in-microeconomics-" title="Unit 2.7: The role of government in microeconomics ">Unit 2.7: The role of government in microeconomics </a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26590/indirect-taxation" title="Indirect taxation">Indirect taxation</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20246/ped-and-the-burden-of-tax-hl-only-" title="PED and the burden of tax (HL only) ">PED and the burden of tax (HL only) </a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20277/government-subsidies-" title="Government subsidies ">Government subsidies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29117/unit-27-indirect-tax-and-subsidy-review-terms" title="Unit 2.7: Indirect tax and subsidy review terms">Unit 2.7: Indirect tax and subsidy review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20287/price-controls-maximum-price-" title="Price controls − maximum price ">Price controls − maximum price </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20288/minimum-price-" title="Minimum price ">Minimum price </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21540/minimum-wage-" title="Minimum wage ">Minimum wage </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/38849/labour-market-crossword" title="Labour market crossword">Labour market crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29260/unit-27-price-controls-review-terms" title="Unit 2.7: Price controls review terms">Unit 2.7: Price controls review terms</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20303/unit-28-210-market-failure-" title="Unit 2.8-2.10: Market failure ">Unit 2.8-2.10: Market failure </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21543/unit-28-merit-goods-" title="Unit 2.8: Merit goods ">Unit 2.8: Merit goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/23123/unit-28-demerit-goods-negative-externalities" title="Unit 2.8: Demerit goods / negative externalities">Unit 2.8: Demerit goods / negative externalities</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/38850/market-failure-crossword" title="Market failure crossword">Market failure crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29262/unit-29-economics-of-the-environment-and-public-goods-" title="Unit 2.9: Economics of the environment and public goods ">Unit 2.9: Economics of the environment and public goods </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20332/unit-210-asymmetric-information-hl-only" title="Unit 2.10: Asymmetric information (HL only)">Unit 2.10: Asymmetric information (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29828/unit-28-210-market-failure-review-sheet" title="Unit 2.8-2.10: Market failure review sheet">Unit 2.8-2.10: Market failure review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29827/unit-28-210-market-failure-review-terms" title="Unit 2.8-2.10: Market failure review terms">Unit 2.8-2.10: Market failure review terms</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20479/unit-27-210-multiple-choice-quiz-" title="Unit 2.7-2.10: Multiple choice quiz ">Unit 2.7-2.10: Multiple choice quiz </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44501/unit-27-210-government-failure-revision-quiz" title="Unit 2.7-2.10 Government failure revision quiz">Unit 2.7-2.10 Government failure revision quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20330/unit-211-market-power-hl-only" title="Unit 2.11: Market power (HL only)">Unit 2.11: Market power (HL only)</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29835/assessment-map" title="Assessment map">Assessment map</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21528/production-hl-only" title="Production (HL only)">Production (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29978/revenue-theory-hl-only" title="Revenue theory (HL only)">Revenue theory (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20357/costs-of-production-hl-only" title="Costs of production (HL only)">Costs of production (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21286/economies-and-diseconomies-of-scale-hl-only" title="Economies and diseconomies of scale (HL only)">Economies and diseconomies of scale (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22494/long-run-average-cost-curves-hl-only" title="Long run average cost curves (HL only)">Long run average cost curves (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29838/breakeven-hl-only" title="Breakeven (HL only)">Breakeven (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20340/economic-profit-hl-only" title="Economic profit (HL only)">Economic profit (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39082/market-power-crossword" title="Market power crossword">Market power crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22495/revision-exercise-on-cost-and-revenue-hl-only" title="Revision exercise on cost and revenue (HL only)">Revision exercise on cost and revenue (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29845/unit-211-costs-revenue-and-profit-review-sheet-hl-only" title="Unit 2.11: Costs, revenue and profit review sheet (HL only)">Unit 2.11: Costs, revenue and profit review sheet (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44484/unit-211-multiple-choice-quiz-sl-units" title="Unit 2.11: Multiple choice quiz (SL units)">Unit 2.11: Multiple choice quiz (SL units)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29846/market-structures-hl-only" title="Market structures (HL only)">Market structures (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29981/perfect-competition-hl-only" title="Perfect competition (HL only)">Perfect competition (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/24486/profit-in-perfect-competition-hl-only" title="Profit in perfect competition (HL only)">Profit in perfect competition (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21302/efficiency-in-perfect-competition-hl-only" title="Efficiency in perfect competition (HL only)">Efficiency in perfect competition (HL only)</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20430/monopoly-hl-only" title="Monopoly (HL only)">Monopoly (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/24529/profit-and-revenue-maximisation-in-monopoly-hl-only" title="Profit and revenue maximisation in monopoly (HL only)">Profit and revenue maximisation in monopoly (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21306/a-comparison-of-monopoly-and-perfect-competition-hl-only" title="A comparison of monopoly and perfect competition? (HL only)">A comparison of monopoly and perfect competition? (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20435/monopolistic-competition-hl-only" title="Monopolistic competition (HL only)">Monopolistic competition (HL only)</a></li><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20436/oligopoly-hl-only" title="Oligopoly (HL only)">Oligopoly (HL only)</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/22310/game-theory-hl-only" title="Game theory (HL only)">Game theory (HL only)</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29918/unit-211-market-structures-review-sheet-hl-only" title="Unit 2.11: Market structures review sheet (HL only)">Unit 2.11: Market structures review sheet (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32337/unit-211-diagram-revision-" title="Unit 2.11: Diagram revision ">Unit 2.11: Diagram revision </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20480/unit-211-multiple-choice-quiz-hl-only" title="Unit 2.11: Multiple choice quiz (HL only)">Unit 2.11: Multiple choice quiz (HL only)</a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32425/unit-212-the-markets-inability-to-achieve-equity-hl-only" title="Unit 2.12: The market’s inability to achieve equity (HL only)">Unit 2.12: The market’s inability to achieve equity (HL only)</a></li></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21842/unit-3-macroeconomics-" title="Unit 3: Macroeconomics ">Unit 3: Macroeconomics </a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/3942/unit-31-measuring-economic-activity-and-illustrating-its-variati" title="Unit 3.1: Measuring economic activity and illustrating its variations">Unit 3.1: Measuring economic activity and illustrating its variations</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20558/calculating-national-income" title="Calculating national income">Calculating national income</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21297/gdp-gni-as-a-measure-of-living-standards" title="GDP / GNI as a measure of living standards">GDP / GNI as a measure of living standards</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20567/national-income-statistics" title="National income statistics">National income statistics</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21580/the-business-cycle" title="The business cycle">The business cycle</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29931/unit-31-economic-activity-review-sheet" title="Unit 3.1: Economic activity review sheet">Unit 3.1: Economic activity review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20592/unit-32-variations-in-economic-activityaggregate-demand-and-aggr" title="Unit 3.2: Variations in economic activity—aggregate demand and aggregate supply">Unit 3.2: Variations in economic activity—aggregate demand and aggregate supply</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/29933/aggregate-demand-and-supply" title="Aggregate demand and supply">Aggregate demand and supply</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21582/components-of-aggregate-demand" title="Components of aggregate demand">Components of aggregate demand</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20634/equilibrium-in-macroeconomics-neo-classical-perspective" title="Equilibrium in macroeconomics (neo-classical perspective)">Equilibrium in macroeconomics (neo-classical perspective)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20439/equilibrium-in-macroeconomics-keynesian-perspective" title="Equilibrium in macroeconomics (keynesian perspective)">Equilibrium in macroeconomics (keynesian perspective)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21349/john-maynard-keynes" title="John Maynard Keynes">John Maynard Keynes</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20650/keynesian-v-free-market-debate-" title="Keynesian v free market debate ">Keynesian v free market debate </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21342/changes-in-the-long-run-aggregate-supply" title="Changes in the long run aggregate supply">Changes in the long run aggregate supply</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30055/unit-32-aggregate-demand-and-supply-review-sheet" title="Unit 3.2: Aggregate demand and supply review sheet">Unit 3.2: Aggregate demand and supply review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20610/unit-35-and-36-demand-management-fiscal-and-monetary-policy" title="Unit 3.5 and 3.6: Demand management - fiscal and monetary policy">Unit 3.5 and 3.6: Demand management - fiscal and monetary policy</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30058/government-budget" title="Government budget">Government budget</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21585/fiscal-policy-" title="Fiscal policy ">Fiscal policy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21343/multiplier-hl-only" title="Multiplier (HL only)">Multiplier (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21795/monetary-policy-" title="Monetary policy ">Monetary policy </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30071/independent-central-banks" title="Independent central banks">Independent central banks</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30083/unit-35-and-36-review-sheet" title="Unit 3.5 and 3.6 review sheet">Unit 3.5 and 3.6 review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20615/unit-37-supply-side-policies" title="Unit 3.7: Supply side policies">Unit 3.7: Supply side policies</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20651/the-role-of-supply-side-policies" title="The role of supply side policies">The role of supply side policies</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20622/market-based-and-interventionist-supply-side-policies-" title="Market based and interventionist supply side policies ">Market based and interventionist supply side policies </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39129/aggregate-demand-and-supply-crossword" title="Aggregate demand and supply crossword">Aggregate demand and supply crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30086/unit-37-review-sheet" title="Unit 3.7: Review sheet">Unit 3.7: Review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20755/unit-31-32-and-35-37-multiple-choice-quiz-" title="Unit 3.1-3.2 and 3.5-3.7: Multiple choice quiz ">Unit 3.1-3.2 and 3.5-3.7: Multiple choice quiz </a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44522/unit-31-32-and-35-37-revision-quiz" title="Unit 3.1-3.2 and 3.5-3.7: Revision quiz">Unit 3.1-3.2 and 3.5-3.7: Revision quiz</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20686/unit-33-macroeconomic-objectives" title="Unit 3.3: Macroeconomic objectives">Unit 3.3: Macroeconomic objectives</a></li><ul class="level-2 "><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30118/unemployment" title="Unemployment">Unemployment</a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21351/types-of-unemployment" title="Types of unemployment?">Types of unemployment?</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21593/equilibrium-unemployment-" title="Equilibrium unemployment ">Equilibrium unemployment </a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21594/disequilibrium-unemployment" title="Disequilibrium unemployment">Disequilibrium unemployment</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30458/unemployment-review-sheet" title="Unemployment review sheet">Unemployment review sheet</a></li></ul><li class=" parent" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20713/inflation-" title="Inflation ">Inflation </a></li><ul class="level-3 "><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20712/measuring-inflation-hl-only" title="Measuring inflation (HL only)">Measuring inflation (HL only)</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20685/costs-of-inflation-and-deflation" title="Costs of inflation and deflation">Costs of inflation and deflation</a></li><li class="" style="padding-left: 42px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30465/inflation-review-sheet" title="Inflation review sheet">Inflation review sheet</a></li></ul><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20716/unemployment-v-inflation-trade-off-hl-only" title="Unemployment v inflation trade off (HL only)">Unemployment v inflation trade off (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39133/macroeconomic-objectives-crossword" title="Macroeconomic objectives crossword">Macroeconomic objectives crossword</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/44511/unit-33-macroeconomic-indicators-revision-quiz" title="Unit 3.3: Macroeconomic indicators revision quiz">Unit 3.3: Macroeconomic indicators revision quiz</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20741/unit-34-economics-of-inequality-and-poverty" title="Unit 3.4: Economics of inequality and poverty">Unit 3.4: Economics of inequality and poverty</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32398/inequality" title="Inequality">Inequality</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21356/the-role-of-spending-and-taxation-on-inequality-" title="The role of spending and taxation on inequality ">The role of spending and taxation on inequality </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21313/consequences-of-economic-growth" title="Consequences of economic growth">Consequences of economic growth</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30257/economic-growth-and-inequality-review-sheet" title="Economic growth and inequality review sheet">Economic growth and inequality review sheet</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20756/unit-33-34-multiple-choice-" title="Unit 3.3-3.4: Multiple choice ">Unit 3.3-3.4: Multiple choice </a></li></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21844/unit-4-global-economy" title="Unit 4: Global economy">Unit 4: Global economy</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21367/unit-41-benefits-of-international-trade" title="Unit 4.1: Benefits of international trade">Unit 4.1: Benefits of international trade</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30529/benefits-of-international-trade" title="Benefits of international trade">Benefits of international trade</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20823/absolute-and-comparative-advantage-hl-only" title="Absolute and comparative advantage (HL only)">Absolute and comparative advantage (HL only)</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20845/unit-42-43-trade-protection" title="Unit 4.2-4.3: Trade protection">Unit 4.2-4.3: Trade protection</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32419/barriers-to-trade-calculations-are-hl-only" title="Barriers to trade (calculations are HL only)">Barriers to trade (calculations are HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21610/case-study-on-tata-steel" title="Case study on Tata Steel">Case study on Tata Steel</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/23455/the-defence-industry" title="The Defence industry">The Defence industry</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30610/unit-41-43-review-sheet" title="Unit 4.1-4.3: Review sheet">Unit 4.1-4.3: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20894/unit-44-economic-integration-" title="Unit 4.4: Economic integration ">Unit 4.4: Economic integration </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30634/economic-integration-some-hl-tasks" title="Economic integration (some HL tasks)">Economic integration (some HL tasks)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20840/world-trade-organisation-wto" title="World trade organisation (WTO)">World trade organisation (WTO)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30635/unit-44-review-sheet" title="Unit 4.4: Review sheet">Unit 4.4: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20853/unit-45-exchange-rates" title="Unit 4.5: Exchange rates">Unit 4.5: Exchange rates</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30611/floating-exchange-rates" title="Floating exchange rates">Floating exchange rates</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/31824/fixed-managed-exchange-rate-systems-some-hl-tasks" title="Fixed / managed exchange rate systems (some HL tasks)">Fixed / managed exchange rate systems (some HL tasks)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21624/the-market-for-foreign-exchange" title="The market for foreign exchange">The market for foreign exchange</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30614/unit-45-review-sheet" title="Unit 4.5: Review sheet">Unit 4.5: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20859/unit-46-balance-of-payments" title="Unit 4.6: Balance of payments">Unit 4.6: Balance of payments</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30624/balance-of-payments-" title="Balance of payments ">Balance of payments </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21386/current-account-hl-only" title="Current account (HL only)">Current account (HL only)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20872/the-marshall-lerner-condition-j-curve-hl-only" title="The Marshall-Lerner condition / J curve (HL only)">The Marshall-Lerner condition / J curve (HL only)</a></li></ul><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20899/units-41-46-multiple-choice-quiz-" title="Units 4.1-4.6: Multiple choice quiz ">Units 4.1-4.6: Multiple choice quiz </a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/42989/unit-41-46-multiple-choice-quiz-ii" title="Unit 4.1-4.6: Multiple choice quiz II">Unit 4.1-4.6: Multiple choice quiz II</a></li><li class="" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/39438/unit-41-46-international-trade-crossword" title="Unit 4.1-4.6: International trade crossword">Unit 4.1-4.6: International trade crossword</a></li><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32423/unit-47-sustainable-development-" title="Unit 4.7: Sustainable development ">Unit 4.7: Sustainable development </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/26092/water-scarcity-activity" title="Water scarcity activity">Water scarcity activity</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32426/sustainable-development" title="Sustainable development">Sustainable development</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20928/unit-48-measuring-development-" title="Unit 4.8: Measuring development ">Unit 4.8: Measuring development </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30686/measuring-development" title="Measuring development">Measuring development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21627/economic-development-" title="Economic development ">Economic development </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30679/unit-47-48-review-sheet" title="Unit 4.7-4.8: Review sheet">Unit 4.7-4.8: Review sheet</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Unit 4.9: Barriers to development">Unit 4.9: Barriers to development</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30727/barriers-to-development-in-international-trade" title="Barriers to development in International trade">Barriers to development in International trade</a></li></ul><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/32430/unit-410-economic-growth-andor-economic-development-strategies" title="Unit 4.10: Economic growth and/or economic development strategies">Unit 4.10: Economic growth and/or economic development strategies</a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30687/the-role-of-domestic-factors" title="The role of domestic factors">The role of domestic factors</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30688/the-role-of-international-trade-and-development" title="The role of international trade and development">The role of international trade and development</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30689/the-role-of-foreign-direct-investment-fdi" title="The role of foreign direct investment (FDI)">The role of foreign direct investment (FDI)</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25240/the-role-of-foreign-aid-" title="The role of foreign aid ">The role of foreign aid </a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30819/multilateral-development-assistance" title="Multilateral development assistance">Multilateral development assistance</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21632/the-role-of-international-debt" title="The role of international debt">The role of international debt</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/25242/the-balance-between-markets-and-intervention" title="The balance between markets and intervention">The balance between markets and intervention</a></li><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/30926/unit-49-410-review-sheet" title="Unit 4.9 - 4.10: Review sheet">Unit 4.9 - 4.10: Review sheet</a></li></ul></ul><li class=" parent std-toplevel" style="padding-left: 4px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/21380/assessment" title="Assessment">Assessment</a></li><ul class="level-1 "><li class=" parent" style="padding-left: 14px"><i class="expander fa fa-caret-right "></i><a class="std-disabled" href="#" title="Internal assessment ">Internal assessment </a></li><ul class="level-2 "><li class="" style="padding-left: 28px"><i class="expander fa fa-caret-right "></i><a class="" href="https://www.student.thinkib.net/economics/page/20608/how-to-write-your-ia-student-handout" title="How to write your IA? (student handout)">How to write your IA? 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<div id="main-column" class="span9"> <article id="unit-36-government-management-of-the-economy-fiscal-policy" style="margin-top: 16px;">
<h1 class="section-title">Unit 3.6 Government management of the economy – fiscal policy</h1>
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<div class="intro-card"><div class="content"><p class="text">Governments can use fiscal policy as a demand-side policy to achieve their macroeconomic objectives in a similar way to the application of monetary policy. Fiscal policy involves governments using tax and government expenditure to achieve macroeconomic objectives.</p></div></div><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h3><strong>What you should know by the end of this chapter:</strong></h3></div></div><img alt="" src="/media/ib/economics/images/textbook/macro-policies/cnbc-stimulus.jpg" style="float: right; width: 451px; height: 253px;" title="https://www.cnbc.com/video/2020/03/18/coronavirus-federal-fiscal-stimulus-package-worldwide-exchange.html" /></div><ul><li>Objectives of fiscal policy</li><li>Sources of government revenue</li><li>Types of government expenditure</li><li>Expansionary and contractionary fiscal policy</li><li>Keynesian multiplier (HL)</li><li>Crowding out</li><li>Strengths of fiscal policy</li><li>Weaknesses of fiscal policy</li><li>Automatic stabilisers<hr class="hidden" /></li></ul><div class="greyBg"><h3>Revision material</h3><p><img alt="" src="/media/ib/economics/images/textbook/revision-material/logo.jpg" style="width: 200px; height: 95px; float: left;" />The link to the attached pdf is revision material from <strong>Unit 3.6 Government management of the economy – fiscal policy. </strong>The revision material can be downloaded as a student handout.</p><p><a href="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/fiscal-policy-revision-notes.pdf" target="_blank" title="Revision"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/revision.png" /> Revision notes</a></p></div><div class="blueBg"><h3><strong>The objectives of fiscal policy </strong></h3><p>Governments can use fiscal policy as a demand-side policy to achieve their macroeconomic objectives in a similar way to the application of monetary policy. Fiscal policy involves governments using tax and government expenditure to achieve macroeconomic objectives. The tools of fiscal policy can be used to target the following objectives:</p><ul><li>Sustainable economic growth</li><li>Low unemployment</li><li>External balance on the current account balance of payments</li><li>Low inflation or price stability</li><li>Achievement of a more equitable distribution of income</li></ul><h3><strong>Sources of government revenue </strong></h3><p>Government can access revenue to fund its expenditure from the following sources:</p><ul><li><strong>Direct taxation</strong> on household incomes in the form of income tax and tax on business profits in the form of corporation tax.</li><li><strong>Indirect taxation</strong> such as VAT and specific duties on goods and services.</li><li><strong>Profit from the operations of state-run organisations</strong>. Many governments own organisations in the transport and energy sectors and make a profit from them.</li><li><strong>Asset sales</strong> when governments privatise industries. When governments sell the assets of state-owned enterprises it leads to an inflow of funds to the state.</li></ul><h3><strong>Government borrowing</strong></h3><p>Government borrowing is an important part of fiscal policy because it is needed when government expenditure is greater than taxation. Government borrowing is financed <strong>by selling bonds in the financial markets</strong>. For example, the Indian government might sell $200 billion of government bonds to raise $200 billion in funds to spend on health, education and defence, etc.</p><p>The <strong>budget deficit</strong> is one year’s government borrowing. The current Indian budget deficit is $137 billion.</p><p>The <strong>national debt</strong> is accumulated government borrowing over time. The current Indian national debt is $2219 billion.</p></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - Japan’s huge national debt</strong></h4></div></div></div><p><img alt="" height="232" src="/media/ib/economics/images/textbook/macro-policies/japan-s-debt.jpg" style="float: left;" title="https://en.wikipedia.org/wiki/Economy_of_Japan" width="436" />Japan's Government debt accounted for 200.6 % of the country's GDP last year, although this is down from a peak of 233% of GDP in 2017. It is the most indebted government in the world. So how did the Japanese government get here?</p><hr class="hidden" /><p>Japan was a miracle economy following the end of World War 2 growing year after year to become the world’s third-largest economy. The Japanese economy experienced a major setback in 1989 when the stock market crashed and there was a financial crisis. The government bailed out lots of banks, insurance companies and many large firms leading to a huge rise in government borrowing. Relatively slow economic growth over the last 30 years has not helped increase tax revenues and this, along with large government expenditure packages used to try and stimulate the economy, has led to a bigger and bigger national debt. </p><p><a href="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/japan-debt.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions </a></p><h5><strong>Questions</strong></h5><p><strong>a. Outline the difference between a budget deficit and the national debt. [4]</strong></p><section class="tib-hiddenbox"><p>A budget deficit is one year’s government borrowing and the national debt is accumulated government borrowing over time.</p></section><p><strong>b. The Japanese GDP is $4.971 trillion and its national debt is currently 200.6% of GDP. Calculate the value of the Japanese national debt</strong>.<strong> [2]</strong></p><section class="tib-hiddenbox"><p>$4.971 trillion x 2.006 = $9.972 trillion</p></section><p><strong>c. Explain why a large national debt might be a problem for the Japanese government. [4]</strong></p><section class="tib-hiddenbox"><p>A large national debt might be a problem for the Japanese government because it has to make interest payments on the debt. Some of the debt also has to be continuously repaid. The repayments and interest payments have an opportunity cost in terms of current government spending on public services such as health and education. </p></section><h5><strong>Investigation</strong></h5><p><strong>Research into another country with a significant national debt and look at the reasons why the country has such a large fiscal deficit. </strong></p></div><div class="blueBg"><h3><strong>Types of government expenditure</strong></h3><p>There are three types of government expenditure:</p><ul><li><strong>Current expenditure</strong> on the day-to-day running of the government sector such as paying the wages of teachers, doctors and military personnel.</li><li><strong>Capital expenditure </strong>on investment projects financed by the government such as building roads, bridges and schools.</li><li><strong>Transfer expenditure</strong> on welfare payments such as unemployment and housing benefits.</li></ul><h3><strong>The influence of the Keynesian multiplier on fiscal policy</strong></h3><p>The application of fiscal policy by governments is affected by the Keynesian multiplier. This is because the application of fiscal policy in an economy involves changing injections into the circular flow of income in the form of government expenditure and withdrawals out of the circular flow of income in the form of taxation.</p><h4><strong>Defining the multiplier</strong></h4><p>The government expenditure multiplier is the ratio of change in government expenditure to a change in national income. A multiplier effect occurs when a change in injections brings about a greater proportionate change in national income. The multiplier can occur because of a change in any one of the injections into the circular flow of income: investment(I), government expenditure (G) and exports (X).</p><p>The multiplier can be measured as the ratio of change in any one of these injections (J) to a change in national income (Y).</p><p>multiplier = change in national income / change in injections</p><p>The government expenditure multiplier involved with fiscal policy would be:</p><p>government expenditure multiplier = change in national income / change in government expenditure</p><div><strong> </strong></div><p>Multiplier situations occur when funds are injected into the circular flow of income through investment, government expenditure and exports and this leads to a greater final change in the value of the national income than the value of the change in the injection. Diagram 3.31 shows the circular flow of income with injections (I, G and X) and withdrawals (S, T and M). The increase in injections causes a multiplier effect to take place, but the strength of the multiplier is determined by the level of consumption and the withdrawals from the circular flow, savings, tax and imports. For example, an increase in government expenditure will cause an increase in national income which will lead to a rise in consumption by households and also a rise in the amount saved, paid in tax and spent on imports. </p><hr class="hidden" /><p><img alt="" height="368" src="/media/ib/economics/images/textbook/macro-policies/circular-flow.jpg" style="float: left;" width="561" /></p><h4></h4><h4></h4><h4></h4><h4></h4><h4></h4><h4></h4><h4></h4><h4></h4><hr class="hidden" /><h4><strong>Calculating the value of the multiplier</strong></h4><p>The value of the multiplier can be calculated by using the following equations:</p><p>Multiplier = 1/(1-MPC) or 1/(MPS+MPT+MPM)</p><p><strong>Marginal propensity to consume (MPC)</strong></p><p>This is the proportionate change in consumption brought about by a change in income. It is calculated using the equation:</p><p>MPC = ∆C/∆Y </p><p>If household income rises from $10,000 and consumption rises by $6,000 then the MPC will be:</p><p>+$6,000 / +$10,000 = 0.6</p><p><strong>Marginal propensity to save (MPS)</strong></p><p>This is the proportionate change in saving brought about by a changing income. It Is calculated using the equation:</p><p>MPS = ∆S/∆Y </p><p>If household income rises by $10,000 and savings rise by $500 then the MPS will be:</p><p>+$500 / +$10,000 = 0.05</p><p><strong>Marginal propensity to tax (MPT)</strong></p><p>This is the proportionate change in tax brought about by a changing income. It Is calculated using the equation:</p><p>MPT = ∆T/∆Y </p><p>If household income rises by $10,000 and tax rises by $2,000 then the MPT will be:</p><p>+$2,000 / +$10,000 = 0.20</p><p><strong>Marginal propensity to imports (MPM)</strong></p><p>This is the proportionate change in imports brought about by a changing income. It Is calculated using the equation:</p><p>MPM = ∆M/∆Y </p><p>If household income rises by $10,000 and imports rise by $1,500 then the MPM will be:</p><p>+$1,500 / +$10,000 = 0.15</p><p><strong>Calculation</strong></p><p>In this case, the value of the multiplier would be:</p><p>1 / 0.05 + 0.20 + 0.15 = 2.5</p><h4><strong>Example of the multiplier <img alt="" height="213" src="/media/ib/economics/images/textbook/macro-policies/bridge-workers.jpg" style="float: right;" title="https://www.beltandroad.news/2019/05/30/thai-cp-group-wins-government-approval-on-high-speed-airport-rail/" width="379" /></strong></h4><p>The multiplier process can be explained using the following example where the government decides to spend $2 billion building a new bridge as part of the improvement in the infrastructure of a region of the country. </p><hr class="hidden" /><p>These are the stages of the multiplier effect brought about by the rise in government expenditure:</p><p><strong>Stage 1</strong> $2Bn is paid to factors of production to build the new bridge. This will partly be wages paid to labour who work directly on the construction of the bridge. Funds will also be paid to firms that supply construction equipment, raw materials and services like law and architects. These payments will generate income for the workers and for the owners of the businesses who supply factors of production to build the bridge. </p><p><strong>Stage 2</strong> The $2Bn income paid to the factors of production to build the bridge will be partly spent as consumption expenditure and the rest will be leaked out of the economy in the form of savings, tax and imports. The size of the extra income consumed depends on the MPC of the economy and the amount leaked depends on the MPS, MPT and MPM of the economy. In our example the MPC is 0.6 so $1.2Bn will be consumption expenditure and the MPW is 0.4 so $0.8Bn will be withdrawn from the economy as savings, tax and imports.</p><p><strong>Stage 3</strong> The $1.2bn of consumption spending by households will be on buying goods and services produced by firms and this will become income for the factors of production employed by these firms. The households that receive the $1.2bn of income will spend part of this income (0.6 x $1.2Bn = $0.72Bn) on consumption and the rest will be withdrawn (0.4 x $1.2Bn = $0.48Bn) from the economy as savings, tax and imports.</p><p><strong>Stage 4</strong> The $0.72Bn is another spending round that works in the same way as the previous spending rounds with income to households which is partly spent on consumption and partly withdrawn out of the economy. This process continues with each spending round getting smaller and smaller until they no longer add to the total national income.</p><p><strong>Stage 5</strong> The flow chart shows how adding together the income generated by each spending round gives us the final change in national income.</p><hr class="hidden" /><p><img alt="" height="182" src="/media/ib/economics/images/textbook/macro-policies/multiplier.jpg" style="float: left;" width="516" /></p><h4></h4><h4></h4><hr class="hidden" /><h4><strong>Calculating the final change in national income</strong></h4><p>The final change in national income in this example is calculated using the equation 1/1-MPC or 1/MPS + MPT + MPM</p><p>In this case:</p><ul><li>MPS = 0.05</li><li>MPT = 0.20</li><li>MPM = 0.15</li></ul><p>1/0.05 + 0.20 + 0.15 = 2.5</p><p>The final change in national income brought about by the $2 billion government expenditure on the bridge is calculated as:</p><p>2.5 x $2Bn = $5Bn</p><p>The final change in national income resulting from the government expenditure of $2 billion on the bridge is $5 billion.</p><h4><strong>Graphical interpretation of the multiplier</strong><img alt="" height="274" src="/media/ib/economics/images/textbook/macro-policies/multiplier-adas.jpg" style="float: right;" width="418" /></h4><p>When there is an increase in injections into the economy aggregate demand in the economy increases. In our example, when the government spends $2 billion on the bridge aggregate demand in the economy initially increases from AD to AD1 in diagram 3.32. The additional spending rounds cause aggregate demand to increase further and the final change in aggregate demand is at AD2 in diagram 3.32.</p><hr class="hidden" /><h4><strong>Evaluation of the multiplier</strong></h4><p>The Keynesian multiplier has strengths and weaknesses when it is applied to the economy.</p><h5><strong>Strengths of the multiplier</strong></h5><ul><li>It is useful for building models of the economy and analysing how changes in national income are affected by changes in government expenditure, investment and exports.</li><li>The multiplier can be used to improve economic forecasting.</li><li>The government can use the multiplier to analyse the impact of a change in government spending across the whole economy and at a local level.</li></ul><h5><strong>Weaknesses of the multiplier</strong></h5><ul><li>The marginal propensities to consume, save, tax and import can be difficult to measure and can change over time. This makes establishing a multiplier value difficult.</li><li>Isolating the impact of a change of one item of expenditure is difficult to do because different items of expenditure are all changing at the same time. The government might be spending funds on a new bridge at the same time as firms are investing in new factories.</li><li>Many expenditure projects take place over a long time period so expenditure gradually comes into the economy rather than as one sum of expenditure all at the same time. The $2 billion of government expenditure on the bridge might take several years to be spent.</li></ul><hr class="hidden" /></div><div class="pinkBg"><div class="panel" style="box-shadow: rgba(0, 0, 19, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - China’s Belt and Road project</strong></h4></div></div><div class="panel-footer" style="background-color: rgba(39, 45, 105, 0.1);"><div><p>text</p></div></div></div><p><strong><img alt="" src="/media/ib/economics/images/textbook/macro-policies/china-silk-road.jpg" style="float: left; width: 400px; height: 302px;" title="https://www.accaglobal.com/vn/en/professional-insights/acca-and-the-belt-and-road-initiative.html" /></strong>China’s Belt and Road project is one of the most ambitious infrastructure projects any government in the world has ever embarked on. The project aims to improve connectivity between China and its surrounding markets, increasing international trade and boosting economic growth. The Chinese government hope the project will connect it with 65 per cent of the world’s population.</p><hr class="hidden" /><p>The Belt and Road project will not only boost the Chinese economy it will also benefit countries like Russia, India, Iran, Egypt and Pakistan who will gain from sub-projects in those countries. The forecasted size of this government investment project is huge at $900 billion in nearly 70 countries covered by the project. The impact on all those countries will be further boosted when the influence of the multiplier effect of such a significant investment project is taken into account.</p><p>The construction of the road element of the project will trace the historic Silk Road that connected Europe and Asia. The belt element of the project develops maritime connectivity between China, India and East Africa.</p><p><a href="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/china-belt.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions</a></p><h5><strong>Questions</strong></h5><p><strong>a. Define the term government expenditure multiplier. [2]</strong></p><section class="tib-hiddenbox"><p>The government expenditure multiplier is the ratio of change in government expenditure to a change in national income.</p></section><p><strong>b. As part of the Belt and Road Project the Egyptian government is building the new road infrastructure. The data for the project is:</strong></p><ul><li><strong>$1.8 billion government expenditure</strong></li><li><strong>MPS = 0.02, MPT = 0.19, MPM 0.21</strong></li></ul><p><strong>(i) Calculate the value of the multiplier. [2]</strong></p><section class="tib-hiddenbox"><p>1 / 0.42 = 2.38</p></section><p><strong>(ii) Calculate the final change in GDP from the project. [2]</strong></p><section class="tib-hiddenbox"><p>2.38 x $1.8 billion = $4.28 billion</p></section><p><strong>c. Explain the multiplier effect of the change in national income when government expenditure is increased. [10]</strong></p><section class="tib-hiddenbox"><p>Answers might income:<img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/multiplier.jpg" style="float: right; width: 400px; height: 260px;" /></p><ul><li>Definitions of the multiplier, national income and government expenditure.</li><li>A diagram to show the impact of the effect of the multiplier when there is an increase in government expenditure.</li><li>An explanation of the multiplier using a numerical example to illustrate such as the Belt and Road project.</li><li>An explanation of the successive spending rounds triggered by a government expenditure project.<hr class="hidden" /></li><li>An explanation using the diagram that the change in national income is greater than the change in government expenditure because of the multiplier.</li></ul></section><h5><strong>Investigation</strong></h5><p><strong>Research the Belt and Road project and think about how it might increase the economic growth in the countries affected by it. </strong></p></div><div class="blueBg"><h3><strong>Expansionary fiscal policy</strong></h3><p>Expansionary fiscal is where the government decreases taxation and increases government spending to increase aggregate demand. For example, the US government has agreed to a $2 trillion increase in expenditure to deal with the fall in economic growth caused by the Covid19 crisis.</p><h4><strong>How the policy works</strong><img alt="" height="320" src="/media/ib/economics/images/textbook/macro-policies/expansionary-fiscal-policy.jpg" style="float: right;" width="426" /></h4><p>As a component of aggregate demand, an increase in government expenditure will directly increase aggregate demand. Cutting direct and indirect tax will increase consumption as households have more disposable income to increase their spending and firms have more profit to fund increased investment. As consumption and investment increase aggregate demand increases.</p><hr class="hidden" /><p>Diagram 3.33 shows how an increase in aggregate demand will shift AD to AD1 leading to an increase in national income from Y to YFE and the average price level increases from P to P1. The rise in national income also closes the deflationary gap. The rise in national income can increase the rate of economic growth and reduce unemployment. </p><hr class="hidden" /><p>The flow cha<img alt="" height="96" src="/media/ib/economics/images/textbook/macro-policies/expansionary-fiscal-chart.jpg" style="float: left;" width="489" />rt shows the transmission mechanism of expansionary fiscal policy.</p><hr class="hidden" /><hr class="hidden" /><h5><strong>Increased employment</strong><img alt="" height="304" src="/media/ib/economics/images/textbook/macro-policies/labout-market-diagram.jpg" style="float: right;" width="407" /></h5><p>As aggregate demand increases there is a rise in real GDP which means businesses might produce more and employ more workers to do this. This is illustrated in the labour market diagram where the demand for labour increases from ADL to ADL1 and the rise in employment reduces unemployment.</p><hr class="hidden" /><h4><strong>Fiscal policy and crowding out</strong></h4><p>An issue with expansionary fiscal policy is the impact it can have on interest rates in the financial markets. An expansionary fiscal policy can lead to an increase in the budget deficit that in turn leads to a rise in money market interest rates. This makes financing a budget deficit more difficult and can make borrowing costs increase throughout the economy. The crowding out process associated with an expansionary fiscal policy can be summarised in the following way:</p><ul><li><strong>Stage 1 </strong>- Expansionary fiscal policy leads to a budget deficit.</li><li><strong>Stage 2</strong> - To fund the deficit the government sells bonds in the money markets.</li><li><strong>Stage 3</strong> - The government needs to make the bonds attractive to buyers which means increasing the rate of interest paid on the bonds which pushes up market interest rates.</li><li><strong>Stage 4</strong> - As the government borrows more there is a higher demand for borrowed funds in the money markets which also pushes up market interest rates</li><li><strong>Stage 5 </strong>- Higher market interest rates reduce consumption and investment, and this leads to a fall in aggregate demand.</li><li><strong>Stage 6</strong> - Where expansionary fiscal policy means higher government borrowing in the money markets this is seen as a situation where public sector spending ‘crowds out’ private sector spending. <img alt="" height="212" src="/media/ib/economics/images/textbook/macro-policies/standard-and-poor.jpg" style="float: right;" width="318" /></li></ul><h5>Credit rating</h5><p>Credit rating agencies can also look unfavourably on expansionary fiscal policy when it leads to an increase in the budget deficit. Credit rating agencies such as Moody's and Standard and Poor, are organisations that make judgements about the security of government borrowing.</p><hr class="hidden" /><p>The credit rating agencies may look at very large government deficits unfavourably and downgrade the government credit rating, which makes the money markets charge higher interest rates to the government because they appear to be a greater risk. This happened to Greece and Spain in 2012 when they increased their budget deficits following the global financial crisis.</p><hr class="hidden" /><h4><strong>Evaluation of expansionary fiscal policy </strong></h4><h5><strong>Strengths </strong></h5><ul><li>Fiscal policy is most appropriate for <strong>demand deficient unemployment</strong> in a recession where the fall in aggregate demand has caused the rise in unemployment and expansionary fiscal policy increases aggregate demand.</li><li>Increasing government expenditure and reducing taxation have a <strong>direct impact on the economy</strong>. Cutting taxation directly increases consumer incomes and an increase in government expenditure directing increases aggregate demand as it is one of the components of aggregate demand.</li><li>Fiscal policy does not affect the <strong>exchange rate</strong> in the way monetary policy does when interest rates are changed. A decrease in interest rates when an expansionary monetary policy is applied causes a country’s exchange rate to depreciate and this will not happen with an expansionary fiscal policy.</li></ul><h5><strong>Weaknesses </strong></h5><ul><li>Cutting taxes and increasing government spending will lead to an increase in a country’s <strong>budget deficit and national debt.</strong> This may be particularly difficult for a government when there is already a budget deficit because the economy is in a recession where government transfer spending rises and tax revenues fall.</li><li><strong>Crowding out</strong> of the private sector by public sector spending when a government budget deficit increases market interest rates.</li><li>Some economists question the <strong>effectiveness of tax cuts</strong> in a recession. Tax cuts rely on households spending the extra disposable income they receive, and they may save it when they are fearful of spending in a recession when households are uncertain about their employment. </li><li>Increasing government spending may lead to an <strong>inefficient use of resources.</strong> Government spending on projects just for the sake of spending may mean resources are used to improve roads that do not need improving or money gets lost in the bureaucracy associated with government expenditure projects.</li><li>Fiscal policy <strong>lacks flexibility</strong> because the government can only change tax and expenditure a certain number of times each year. The process of changing tax, for example, is difficult because firms and households need to be told of the proposed changes and they have to be worked through by the tax authorities.</li><li>Increasing aggregate demand through expansionary fiscal policy may lead to a <strong>rise in inflation</strong>. This is particularly true if the policy is used when unemployment is not that high and is not caused by falling aggregate demand. The economy could be operating at full employment and expansionary fiscal policy just leads to inflation.</li><li>Expansionary fiscal policy will only really tackle demand deficient unemployment. and fails with other types of unemployment such as <strong>structural and frictional unemployment</strong> because they are not directly caused by falling aggregate demand. </li></ul></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry cash example - A massive US fiscal stimulus</strong></h4></div></div></div><p><img alt="" src="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/biden.jpg" style="float: right; width: 400px; height: 280px;" />It is a record-breaking stimulus package at $2.8 trillion. In March and April, the US government passed a series of relief packages to the US economy to mitigate the worst aspects of the Covid19 crisis. The nationwide lockdowns combined with falling business and consumer confidence led to a very significant fall in both American aggregate demand and aggregate supply.</p><hr class="hidden" /><p>The spending packages have been released in phases to provide funds to directly fight the virus such as vaccine funding, money to support people who were no longer working and financial support to businesses to stop them from going bankrupt. Whilst there is broad support for the US stimulus it will come at a significant cost to the US government which has a national debt of over $24 trillion.</p><h5><a href="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/us-stimulus.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions</a></h5><h5><strong>Question</strong></h5><p><strong>Using a real-world example, evaluate the view that fiscal policy is the most effective way to increase real GDP when an economy is in a recession. [15]</strong></p><section class="tib-hiddenbox"><p>Answers might include:<img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/expansionary-fiscal-policy.jpg" style="float: right; width: 400px; height: 293px;" /></p><ul><li>Definitions of fiscal policy, real GDP and recession.</li><li>A diagram to show the impact of expansionary fiscal policy on an economy in a recession that has a deflationary gap.</li><li>An explanation that expansionary fiscal policy where tax is decreased and government expenditure is increased will increase aggregate demand and real GDP.</li><li>An explanation that as real GDP increases the economy should come out of recession and close the deflationary gap.</li></ul><hr class="hidden" /><ul><li>An example to illustrate expansionary fiscal policy such as the fiscal stimulus used by the US government during the pandemic.</li><li>Evaluation might include discussion of the problems of using an expansionary fiscal policy such as: financing an increase in budget deficit; crowding out; inefficient government spending; time lags that lead to policy mistakes; consumers who are reluctant to spend a tax cut if confidence is low and the policy could lead to inflation. It would also be important to consider monetary policy as an alternative. </li></ul></section><h5>Investigation</h5><p><strong>Research into another country that has also used expansionary fiscal policy to try and deal with the Covid19 crisis. </strong></p></div><div class="blueBg"><h3><strong>Contractionary fiscal policy</strong></h3><h4><strong>How contractionary fiscal policy reduces inflation</strong><img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/fiscal-policy-inflationary-gap.jpg" style="float: right; width: 400px; height: 318px;" /></h4><p>A contractionary fiscal policy is where the government increases taxation and decreases government expenditure to reduce inflation and close an inflationary gap. A rise in taxation will reduce consumption if household income taxes rise and reduce investment if business taxes are increased. An increase in tax combined with a decrease in government spending leads to a fall in aggregate demand. This is shown in diagram 3.35 where AD shifts to AD1 which leads to a decrease in the average price level and inflation falls. There is also a decrease in real GDP from Y to YFE and the inflationary gap is closed.</p><hr class="hidden" /><p>The flow<img alt="" height="103" src="/media/ib/economics/images/textbook/macro-policies/contractionary-flow-diagram.jpg" style="float: left;" width="492" /> diagram shows the transmission mechanism of contractionary fiscal policy.</p><hr class="hidden" /><h4><strong>Evaluation of contractionary fiscal policy</strong></h4><h5><strong>Strengths </strong></h5><ul><li>Fiscal policy does not rely on a transmission mechanism in the same way monetary policy does and has a more <strong>direct effect on aggregate demand</strong>. For example, increasing taxation will directly decrease household income whereas an increase in interest rates relies on the banking system passing the increased interest rate on to households.</li><li>Because fiscal policy has a more direct effect on the economy compared to monetary policy there is a <strong>shorter</strong> <strong>time lag </strong>associated with the use of contractionary fiscal policy compared to monetary policy. </li><li>Changing tax and government expenditure does not affect a country’s <strong>exchange rate</strong> in the way a change in interest rates can change a country’s exchange rate. Contractionary monetary policy means increasing interest rates which can lead to appreciation in the exchange rate.</li><li>Fiscal policy can be <strong>targeted more specifically</strong> at different sectors of the economy to reduce inflation. For example, reducing indirect tax will directly reduce the price of goods and services.</li></ul><p><strong>Weakness </strong></p><ul><li>Raising taxes may have a <strong>negative impact on the motivation</strong> of workers and entrepreneurs because of the potential reduction in their income. Reduced incentives might have a negative effect on the supply side of the economy if, for example, entrepreneurs are less likely to start businesses because of higher taxation.</li><li>Higher indirect taxes can <strong>add to business costs</strong> and higher direct taxes on workers might mean they ask for higher wages to make up for their reduction in income. Higher business costs may increase cost-push inflation.</li><li>Reducing government expenditure and increasing taxation can lead to <strong>austerity which has a negative effect on welfare</strong> in society. For example, reducing government expenditure may mean reducing the quality of public services like education and healthcare.</li><li>Fiscal policy <strong>lacks flexibility</strong> because it is difficult to change tax rates and government expenditure more than a certain number of times a year. On the other hand, interest rates can be changed much more regularly.</li><li>Increasing tax and cutting government expenditure can lead to a fall in aggregate demand which <strong>reduces the rate of economic</strong> <strong>growth</strong> and could even lead to a recession and rising unemployment.</li></ul></div><div class="pinkBg"><div class="panel panel-has-footer" style="box-shadow: rgba(17, 34, 51, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h4><strong>Inquiry case example - The paid of austerity in Greece</strong></h4></div></div></div><p><img alt="" height="251" src="/media/ib/economics/images/textbook/macro-policies/greek-austerity.jpg" style="float: left;" title="https://rdln.wordpress.com/2015/07/06/greece-votes-no-to-austerity-what-happens-now/" width="387" />Following the global financial crisis of 2008 government fiscal deficits across the world spiralled out of control. Many viewed this as an unsustainable situation and governments sought to cut their deficits by increasing taxation and cutting government expenditure. The effect of this contractionary fiscal position was austerity.</p><hr class="hidden" /><p>This was a very painful process for the populations of many nations but particularly for the people of Greece who suffered as much as anyone. Deep cuts to public services combined with higher taxes had a huge negative impact on the welfare of the Greek population, particularly the poorest. The Greek economy contracted by 25 per cent and unemployment increased to 27 per cent. Poverty increased and people’s health suffered. The mental health of the nation declined, and the suicide rate increased. The government austerity policy also led to considerable political and civil unrest.</p><p><a href="/media/ib/economics/images/textbook/macro-policies/fiscal-policy/greece.pdf" target="_blank" title="Questions"><img class="ico" src="https://assets.inthinking.net/thinkib/icons/question.png" /> Worksheet questions</a></p><h5><strong>Questions</strong></h5><p><strong>a. Define the term contractionary fiscal policy. [2]</strong></p><section class="tib-hiddenbox"><p>A contractionary fiscal policy is where the government increases taxation and decreases government expenditure.</p></section><p><strong>b. Using a diagram explain how a contractionary fiscal policy can reduce inflation. [4]</strong></p><section class="tib-hiddenbox"><p><img alt="" src="/media/ib/economics/images/textbook/inquiry-case-example-questions/inflationary-gap(1).jpg" style="float: right; width: 400px; height: 319px;" />As tax is increased and government expenditure is decreased aggregate demand falls from AD to AD1 in the diagram which leads to a decrease in the average price level from P to P1 and inflation.</p></section><hr class="hidden" /><p><strong>c. Explain why contractionary fiscal policy was a problem in Greece. [4]</strong></p><section class="tib-hiddenbox">Contractionary fiscal policy in Greece was part of austerity which meant increasing taxation and reducing government expenditure. Higher tax reduced household incomes and reducing government expenditure reduced welfare payments and the funds for public services. The resulting fall in aggregate demand also causes a fall in real GDP in Greece.</section><p><strong>Investigate another country that used austerity where contractionary fiscal policy has been applied. </strong></p></div><div class="blueBg"><h3><strong>Automatic stabilisers</strong></h3><p>Automatic stabilizers are a part of fiscal policy and occur because tax and government expenditure automatically change during the business cycle, and this has consequences of inflationary and deflationary gaps.</p><h4><strong>Inflationary gap</strong><img alt="" height="303" src="/media/ib/economics/images/textbook/macro-policies/automatic-inflationary(1).jpg" style="float: right;" width="384" /></h4><p>The boom phase of the business cycle may lead to an inflationary gap in an economy where inflation rises. Automatic stabilisers can reduce the strength of the inflationary effect in the following ways:</p><ul><li>Direct tax rises in the economy because household income and business profits increase.</li><li>Government expenditure falls because there is less transfer spending on benefits such as unemployment payments.<hr class="hidden" /></li></ul><p>Diagram 3.36 shows how the rise in tax and fall in government expenditure causes aggregate demand to fall from AD1 to AD2 when the automatic stabiliser starts to work when there is an inflationary gap.</p><h4><strong>Deflationary gap</strong></h4><p><img alt="" height="287" src="/media/ib/economics/images/textbook/macro-policies/automatic-deflationary.jpg" style="float: left;" width="394" />In the recession phase of the business cycle, there may be a deflationary gap and a rise in unemployment. Automatic stabilisers can reduce the strength of the deflationary effect in the following way:</p><ul><li>The amount of direct tax falls as household incomes fall and firms make lower profits. Indirect tax also falls as households spend less.</li><li>Government expenditure on benefits increases as unemployment rises and the government pays more unemployment and related benefits.<hr class="hidden" /></li></ul><p>Diagram 3.37 shows how the fall in tax and rise in government expenditure causes aggregate demand to rise from AD1 to AD2 when the automatic stabiliser takes effect when there is a deflationary gap.</p></div><div class="panel" style="box-shadow: rgba(38, 0, 0, 0.3) 0px 10px 30px -15px; border-color: rgb(124, 7, 21);"><div class="panel-heading" style="background-color: rgb(124, 7, 21);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><p>Thinking about a key concept - Equity</p></div></div><div class="panel-body" style="background-color: inherit;"><p>The application of contractionary fiscal policy by a government has important implications for equity in society. Many governments embarked on a policy of contractionary fiscal policy (austerity) following the global financial crisis in 2008 because of rising budget deficits. Austerity involved increasing taxation which reduced the disposable income of the low-paid. But more significantly for those on the lowest incomes who were hit hardest by decreasing government spending, there were cuts in public services and big reductions in welfare payments. The policy of austerity was a significant challenge to equity in many countries and led to significant hardship for the most vulnerable in society.</p><p><strong>Do you think the benefits of austerity were worth the costs in terms of equity?</strong></p><div></div></div><div class="panel-footer" style="background-color: rgba(124, 7, 21, 0.1);"><div><p>text</p></div></div></div><div class="panel" style="box-shadow: rgba(0, 0, 19, 0.3) 0px 10px 30px -15px; border-color: rgb(39, 45, 105);"><div class="panel-heading" style="background-color: rgb(39, 45, 105);"><a class="expander pull-right" href="#"><span class="fa fa-plus"></span></a><div><h3>Now test yourself</h3></div></div></div><div class="tib-quiz" data-quiz-id="1312" data-structure="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" data-score-answers="6d4a526a457a48584f763758344a7649472f76324c53614b78524c393439595570496d5a5971374b38686f3d"><div class="exercise"><div class="q-question"><p>Which of the following is not a form of raising money by a government to fund its expenditure?</p></div><div class="q-answer"><p><label class="radio" data-answer="05dbedd6cee9eee0c9fd3c12b9422d9b"><input type="radio" /><span> Corporation tax on business profits</span></label></p><p><label class="radio" data-answer="268ec028d5dc2f790c8d4a41876728b2"><input type="radio" /><span> Buying government bonds in open market operations</span></label></p><p><label class="radio" data-answer="721e0e0a2e4b166cc33d10f817fac7f0"><input type="radio" /><span> Selling assets when an industry is privatised</span></label></p><p><label class="radio" data-answer="48d4509f0a30cdd816081c519b2f0053"><input type="radio" /><span> Revenues of a state-owned enterprise</span></label></p></div><div class="q-explanation"><p>Buying bonds by the government in open market operations is government expenditure.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is an example of government transfer expenditure?</p></div><div class="q-answer"><p><label class="radio" data-answer="1521f12c0b1309e8c43f4481cd1741a5"><input type="radio" /><span> State pensions</span></label></p><p><label class="radio" data-answer="27d53e1e929c367672113f411479bca6"><input type="radio" /><span> Cost of building a hospital</span></label></p><p><label class="radio" data-answer="e82e1f453c82924e65742f2b2d664347"><input type="radio" /><span> Teachers’ pay in a state school</span></label></p><p><label class="radio" data-answer="c769b96f3a3e1735605f1516bc210f59"><input type="radio" /><span> Maintenance expenditure on roads</span></label></p></div><div class="q-explanation"><p>Pensions paid by the government are an example of transfer expenditure.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Using the following data from County A, which of the following is the value of the multiplier?</p><p>MPS = 0.25</p><p>MPT = 0.32</p><p>MPM = 0.14</p></div><div class="q-answer"><p><label class="radio" data-answer="c0cb9d6332204d92465b906ffd029706"><input type="radio" /><span> 1.41</span></label></p><p><label class="radio" data-answer="ee184e7c6c5ad84c35b973fb4befa344"><input type="radio" /><span> 0.71<span class="radio"></span></label></span></p><p><label class="radio" data-answer="79310bd1b2f138c88bc3e1443929a24e"><input type="radio" /><span> 4.00</span></label></p><p><label class="radio" data-answer="ddbdb62ab62254676650237e67056cf3"><input type="radio" /><span> 14.1</span></label></p><p> </p></div><div class="q-explanation"><p>Country A's multiplier: 1 / 0.25 + 0.32 + 0.14 = 1.41</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Using the following data from Country B, which of the following is the final change in national income when the government builds a new <dollar>$</dollar>1.3 billion airport?</p><p>MPS = 0.21</p><p>MPT = 0.29</p><p>MPM = 0.16</p></div><div class="q-answer"><p><label class="radio" data-answer="650c99942aa048ba1e7eaac5147f6c38"><input type="radio" /><span> 0.198B</span></label></p><p><label class="radio" data-answer="48bcf93509d1272bfda0075038372f59"><input type="radio" /><span> <dollar>$</dollar>0.86B</span></label></p><p><label class="radio" data-answer="5f0fb7e10181d21d8178483c601901bb"><input type="radio" /><span> <dollar>$</dollar>1.98B</span></label></p><p><label class="radio" data-answer="f9bb527c4042b3682d404a25c2c6238e"><input type="radio" /><span> <dollar>$</dollar>6.19B</span></label></p><p> </p></div><div class="q-explanation"><p>Country B's multiplier: 1/ 0.21 + 0.29 + 0.16 = 1.52; 1.52 x <dollar>$</dollar>1.3B = <dollar>$</dollar>1.98</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is least likely to be the result of expansionary fiscal policy?<br /> </p></div><div class="q-answer"><p><label class="radio" data-answer="154b939732f0350ea168afc2a5b16f57"><input type="radio" /><span> A rise in the budget deficit</span></label></p><p><label class="radio" data-answer="16967fd3d90926687f2ee2aa0409c332"><input type="radio" /><span> An increase in government capital expenditure</span></label></p><p><label class="radio" data-answer="19a2fe4a07c51f29d200c464a8dec839"><input type="radio" /><span> A decrease in the national debt</span></label></p><p><label class="radio" data-answer="037484b282952d49cf8feb56728c0bc3"><input type="radio" /><span> An increase in aggregate demand</span></label></p></div><div class="q-explanation"><p>Cutting government expenditure and increasing taxation increases government borrowing and adds to the national debt.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is the most likely to be a disadvantage of expansionary fiscal policy?</p></div><div class="q-answer"><p><label class="radio" data-answer="560b1773f249b28bcddf16497dc5785b"><input type="radio" /><span> Closes a deflationary gap</span></label></p><p><label class="radio" data-answer="46d21c4cd9eb522ae4c6638d251b892b"><input type="radio" /><span> Does not directly affect the exchange rate</span></label></p><p><label class="radio" data-answer="5daf00dc19368ac0774478de84e26f34"><input type="radio" /><span> Can cause crowding out</span></label></p><p><label class="radio" data-answer="c9889ea5e1053da9b732190f3301bf7c"><input type="radio" /><span> Reduces demand deficient unemployment</span></label></p></div><div class="q-explanation"><p>Expansionary fiscal policy can cause crowding out which increases interest rates and reduces aggregate demand.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is least likely to be a consequence of contractionary fiscal policy?</p></div><div class="q-answer"><p><label class="radio" data-answer="ef6411e9781097f403c118b84b4c8df6"><input type="radio" /><span> Economic growth falls</span></label></p><p><label class="radio" data-answer="276b3f6b0cd1b8b375ce970c1ccdab53"><input type="radio" /><span> Unemployment rises </span></label></p><p><label class="radio" data-answer="5008b01c86f1b68213bab36ee8fac045"><input type="radio" /><span> Rise in the budget deficit</span></label></p><p><label class="radio" data-answer="c4043aecb33bf3266c88b0124510b664"><input type="radio" /><span> Tax revenues rise</span></label></p></div><div class="q-explanation"><p>Increase tax and decreasing government expenditure will cause a fall in the budget deficit.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is the most likely consequence of an automatic stabiliser when there is an inflationary gap?</p></div><div class="q-answer"><p><label class="radio" data-answer="1e6b9cc3cd4d828a7c8529592ac24f26"><input type="radio" /><span> Tax revenue falls</span></label></p><p><label class="radio" data-answer="752e65b646168021c191cd9845a47d46"><input type="radio" /><span> Budget deficit decreases</span></label></p><p><label class="radio" data-answer="a1a0121cde10ecc0428802e5b7f33ed6"><input type="radio" /><span> Rate of economic growth increases</span></label></p><p><label class="radio" data-answer="9b82d2f9d2bc245e43f7fd51b2356c0c"><input type="radio" /><span> Government spending increases</span></label></p><p> </p></div><div class="q-explanation"><p>The budget deficit is likely to decrease because tax revenue increases and government expenditure decreases when automatic stabilisers work in an inflationary gap situation.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following reasons is most likely to make expansionary fiscal policy less effective at increasing economic growth?</p></div><div class="q-answer"><p><label class="radio" data-answer="cb5c44482fc16dc4856b39232343ac93"><input type="radio" /><span> High marginal propensity to consume</span></label></p><p><label class="radio" data-answer="68cf8a4a23106ba6c240945b834c3b8e"><input type="radio" /><span> Low consumer confidence</span></label></p><p><label class="radio" data-answer="8f6859c746a577eea1650260104add3e"><input type="radio" /><span> High business confidence</span></label></p><p><label class="radio" data-answer="0c0921352c72598f4c6ec394a1b87b20"><input type="radio" /><span> Low levels of household debt</span></label></p></div><div class="q-explanation"><p>Low consumer confidence means households might not increase consumption spending if the government reduces tax when it is using expansionary fiscal policy.</p></div><div class="actions"><span class="score" data-score="0"></span><button class="btn check"><i class="fa fa-check-square-o"></i> Check</button></div></div><p> </p><div class="exercise"><div class="q-question"><p>Which of the following is the least likely consequence of contractionary fiscal policy in Country X?</p></div><div class="q-answer"><p><label class="radio" data-answer="6c081b4dd5be04b332edd30489409619"><input type="radio" /><span> Decrease in Country X’s budget deficit</span></label></p><p><label class="radio" data-answer="cfbee33c4dcc01d4c4d0de90428a954c"><input type="radio" /><span> Increase in Country X’s tax revenues</span></label></p><p><label class="radio" data-answer="784cbce79074547f789599a3138de2f0"><input type="radio" /><span> Increase in Country X’s aggregate demand</span></label></p><p><label class="radio" data-answer="fe1e84b38af12d0859197fd555adfc8d"><input type="radio" /><span> Decrease in Country X’s government expenditure</span></label></p></div><div class="q-explanation"><p>Contractionary fiscal policy 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