Part A — The budget, fiscal stance and evaluation
This worksheet develops the fiscal-policy skills the exam tests: identifying the budget balance, classifying a stance, showing it on the AD/AS model, and evaluating fiscal policy's strengths and weaknesses.
The budget
1. Define fiscal policy and name the two main instruments the government uses.
2. For each, state whether the budget is in surplus, deficit or balance: (a) revenue $620b, spending $590b; (b) revenue $560b, spending $600b; (c) revenue $580b, spending $580b.
3. Explain the difference between the planned and the actual budget outcome, and give one reason they may differ.
Stance and the model
4. On a fully labelled AD/AS diagram, show an expansionary fiscal stance closing a recessionary gap. Label the AD shift, the new equilibrium, and the change in output.
5. Complete the table.
| Stance | Change in G and/or T | Direction AD shifts | When used |
|---|---|---|---|
| Expansionary | |||
| Contractionary |
6. Explain how automatic stabilisers cushion the business cycle in (a) a downturn and (b) a boom, without any new government decision.
Evaluation
7. Evaluate the use of fiscal policy to stimulate a weak economy. In your answer, refer to the multiplier, implementation lags, government debt and the possibility of crowding out.