HSC · Topic explainer
Fiscal policy in HSC Economics
Fiscal policy is how governments use spending and taxation to influence the economy. Higher spending or lower taxes can support aggregate demand. Lower spending or higher taxes can restrain it. In an HSC response, separate deliberate budget decisions from automatic changes in tax receipts and transfer payments as economic activity changes.
Worked example
Suppose the government brings forward maintenance on public buildings during a downturn. Paying contractors increases public spending directly. Contractors may then hire workers or buy supplies, creating further demand.
Explain the effect on employment and then qualify it. Spare capacity makes it easier for firms to expand. Import spending can reduce the effect on domestic production. Falling tax receipts during the downturn are a separate automatic stabiliser.
Official exam practice
Find other years and marking guidance in the Economics official exam archive.
Further reading. Reserve Bank of Australia explanation of fiscal policy and economic activity