IBDP Economics

Fiscal policy is a demand side policy that is implemented by the government. There are two types of fiscal policy - Discretionary fiscal policy and automatic fiscal policy. Discretionary fiscal policy allows the government to manipulate the economy by implementing contractionary or expansionary fiscal policy with the help of instruments such as government spending, 'G', and tax rates, 'T'. On the other hand automatic fiscal policy utilizes progressive taxation and unemployment benefits as a tool to stabilize the economy. Automatic fiscal policies operate independently without much need for government intervention, therefore, it allows the government to focus on other issues. Progressive tax increases and reduces government revenue proportionately more than rise or fall in income. This leads to less unrest in aggregate demand therefore there is greater price stability. Similarly, unemployment benefits increases with rise in unemployment levels and vice versa. This sup