#1
1. What is the primary goal of fiscal policy?
Stabilize the economy
ExplanationFiscal policy aims to stabilize the economy by adjusting government spending and taxation.
#2
6. During an economic recession, what type of fiscal policy is generally recommended?
Expansionary fiscal policy
ExplanationTo counter recessionary effects, expansionary fiscal policy involves increased government spending or tax cuts.
#3
15. How does fiscal policy differ from monetary policy in influencing the economy?
Fiscal policy involves changes in government spending and taxation, while monetary policy involves changes in the money supply and interest rates.
ExplanationFiscal policy adjusts government spending and taxes, while monetary policy manipulates the money supply and interest rates.
#4
2. Which of the following is an example of expansionary fiscal policy?
Decreasing taxes
ExplanationExpansionary fiscal policy involves increasing aggregate demand, often achieved by reducing taxes.
#5
3. What is the crowding-out effect in fiscal policy?
Increased government borrowing leads to higher interest rates, reducing private investment
ExplanationCrowding-out effect occurs when government borrowing elevates interest rates, hampering private sector investments.
#6
7. Which component of government expenditure includes spending on infrastructure, education, and healthcare?
Capital expenditures
ExplanationCapital expenditures encompass investments in infrastructure, education, and healthcare, contributing to long-term development.
#7
8. How does an increase in the government budget deficit affect interest rates in the loanable funds market?
Increases interest rates
ExplanationA higher government budget deficit tends to raise interest rates in the loanable funds market.
#8
12. What is the purpose of countercyclical fiscal policy?
To counteract the effects of economic downturns or upswings
ExplanationCountercyclical fiscal policy aims to offset economic downturns or upswings by adjusting government spending and taxation accordingly.
#9
13. How does a budget surplus affect the national debt?
It decreases the national debt
ExplanationA budget surplus reduces the national debt as the government generates more revenue than it spends.
#10
16. What is the multiplier effect in fiscal policy?
The amplification of initial fiscal stimulus through successive rounds of spending and income generation.
ExplanationThe multiplier effect magnifies the impact of initial fiscal stimulus by generating additional spending and income in the economy.
#11
4. How does discretionary fiscal policy differ from automatic stabilizers?
Discretionary fiscal policy is pre-planned, while automatic stabilizers are responsive to economic conditions
ExplanationDiscretionary fiscal policy involves planned government actions, while automatic stabilizers adapt to economic changes.
#12
5. In the context of fiscal policy, what is the 'Laffer curve' often used to illustrate?
The impact of tax rates on government revenue
ExplanationThe Laffer curve depicts the relationship between tax rates and government revenue, highlighting the point of revenue maximization.
#13
9. What is the primary purpose of a sovereign wealth fund in the context of government finance?
To stabilize the currency
ExplanationSovereign wealth funds aim to stabilize the currency by managing and investing government reserves.
#14
10. How does a balanced budget multiplier differ from a simple spending multiplier?
A balanced budget multiplier considers both government spending and taxes
ExplanationUnlike a simple spending multiplier, a balanced budget multiplier accounts for changes in both government spending and taxes.
#15
11. What is the difference between discretionary fiscal policy and automatic stabilizers?
Discretionary fiscal policy is intentional and requires legislative action, while automatic stabilizers operate without explicit government decisions.
ExplanationDiscretionary fiscal policy involves intentional legislative actions, whereas automatic stabilizers operate without explicit government decisions.
#16
14. What is the Ricardian equivalence theorem in the context of fiscal policy?
Consumers view government debt as equivalent to future taxes and adjust their behavior accordingly
ExplanationRicardian equivalence suggests that consumers see government debt as future taxes, influencing their present behavior.
#17
18. What is the significance of the government debt-to-GDP ratio?
It measures the affordability of government debt in relation to the size of the economy.
ExplanationThe government debt-to-GDP ratio gauges the affordability of government debt relative to the overall economic output.