Explain how expansionary fiscal policy could be used to close a deflationary (recessionary) gap.

Evaluate the view that fiscal policy is the most effective way of achieving long-term economic growth.

Answers may include:

• definitions of fiscal policy, expansionary fiscal policy, deflationary (recessionary) gap
• diagram to show the potential effects of expansionary fiscal policy in terms of an outward shift of AD
• explanation of how an expansionary fiscal policy will boost aggregate demand and increase output, thereby closing a deflationary gap
• examples of countries that have used expansionary fiscal policy.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of long-term economic growth, short-term economic growth, fiscal policy
• diagram to show an outward shift in the PPC or a rightward shift of LRAS
• explanation of how fiscal policy leads to long-term economic growth indirectly by creating an economic environment that is favourable to private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest
• examples of fiscal policy that has led to long-term economic growth
• synthesis or evaluation.

Evaluation may include: the type of fiscal policy and how it is financed, advantages and disadvantages of fiscal policy, consideration of alternative policies, such as monetary and supply-side policies, consideration of ‘best.’

NB Candidates who only consider the effects of fiscal policy on AD, and do not consider the supply side effects on long-term economic growth cannot be awarded above Level 2.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.