Cambridge International as and a level Economics Ebook

Figure 5.1 
The automatic stabilisation process
Fiscal policy: 
the use of taxation and government spending 
to influence aggregate demand.
Discretionary fiscal policy: 
deliberate changes in 
government spending and taxation.
Automatic stabilisers: 
changes in government spending 
and taxation that occur to reduce fluctuations in aggregate 
demand without any alteration in government policy.
KEY TERMS
Initially, the economy is operating below full employment 
at
 
Y
 
with a signifi cant gap between government spending 
and taxation. As GDP rises, government spending on 
benefi ts falls while tax revenue rises with more people in 
employment and so receiving more income.
Equilibrium and eff iciency: 
Equilibrium and eff iciency 
are important key concepts when assessing an economy’s 
initial macroeconomic position. If an economy is in 
macroeconomic equilibrium below full capacity, it is not 
being productively eff icient.
KEY CONCEPT LINK
The budget position
Th
e annual 
budget
is a statement of fi scal policy. It oft en 
achieves much media attention as it is an indicator of both 
fi scal policy intentions and economic performance. In 
the budget statement, the fi nance minister outlines the 
The aims of macroeconomic 
policy
Th
e main government macroeconomic policy aims are:
■ 
full employment
■ 
low and stable inflation
■ 
balance of payments equilibrium
■ 
steady and sustained economic growth
■ 
avoidance of exchange rate fluctuations
■ 
sustainable economic development.
At any one time, a government may prioritise one 
objective. For example, if the infl ation rate is at 20% 
and rising, a government may decide to concentrate on 
achieving price stability.
Th
e macroeconomic policy aims are examined in 
more detail in 
policy aims, a government will use a range of policy 
measures. In examining macroeconomic policy measures, 
the key concepts of effi
ciency, equilibrium and progress 
are important.