Study notes

Fiscal Policy - Impact on Aggregate Supply and Economic Growth

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB, Other

Fiscal policy can have important effects on the supply-side of developed and developing countries.

Labour market incentives:

  1. Changes in income tax can improve incentives for people to actively look for work
  2. Lower taxes might also have a positive effect on work effort and labour productivity

2.Capital spending:

  1. Spending on infrastructure provides the capacity needed for other businesses to flourish.
  2. Lower rates of corporation tax might attract inward investment from overseas

3.Entrepreneurship and investment:

  1. Government spending can be used to fund an expansion in new small business start-ups

4.Research and development and innovation

  1. Government spending and tax allowances could be used to encourage research
  2. Tax incentives can be used to stimulate investment in low carbon technologies

5.Human capital of the workforce:

  1. Spending on education and increased investment in health and transport can also have important supply-side effects in the long run
  2. Government spending can help to improve human capital, employability and productivity 
Taxation and aggregate supply
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