#1
What is the primary goal of fiscal policy?
Stabilize the economy
ExplanationFiscal policy aims to stabilize economic fluctuations through government spending and taxation.
#2
Which of the following is an expansionary fiscal policy tool?
Increasing government spending
ExplanationExpansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic growth.
#3
What is the crowding-out effect in fiscal policy?
Decreased private sector investment due to increased government borrowing
ExplanationWhen the government borrows more, it raises interest rates, reducing private investment.
#4
In fiscal policy, what is the purpose of countercyclical measures?
To stabilize the economy by offsetting cyclical fluctuations
ExplanationCountercyclical measures aim to counteract economic fluctuations, smoothing out the business cycle.
#5
What is the difference between fiscal policy and monetary policy?
Fiscal policy deals with government revenue and expenditure, while monetary policy deals with interest rates and money supply.
ExplanationFiscal policy involves government decisions regarding taxation and spending, whereas monetary policy is controlled by central banks, regulating money supply and interest rates.
#6
What is the Laffer curve in the context of fiscal policy?
A curve showing the impact of tax rates on government revenue.
ExplanationThe Laffer curve illustrates the relationship between tax rates and tax revenue, suggesting that at a certain point, raising tax rates may decrease revenue.
#7
What is the primary purpose of automatic stabilizers in fiscal policy?
To automatically adjust fiscal policy in response to economic conditions
ExplanationAutomatic stabilizers automatically kick in during economic downturns to stabilize incomes and cushion the impact of economic shocks.
#8
Which economic indicator is often used to assess the effectiveness of fiscal policy?
Gross Domestic Product (GDP)
ExplanationGDP measures the total value of goods and services produced in a country, reflecting economic performance.
#9
What is the difference between discretionary and automatic fiscal policy measures?
Discretionary policies are deliberate actions, while automatic policies are unplanned reactions.
ExplanationDiscretionary measures are consciously enacted by policymakers, whereas automatic measures kick in automatically based on economic conditions.
#10
What is the multiplier effect in fiscal policy?
The amplification of initial changes in spending through the economy.
ExplanationThe multiplier effect describes how an initial change in spending leads to further changes in income and consumption throughout the economy.
#11
Which type of fiscal policy tool is considered more immediate in its impact on the economy?
Government spending changes
ExplanationAdjusting government spending can have a more immediate impact on economic activity compared to changes in taxation.
#12
What is the Ricardian equivalence proposition in fiscal policy?
The idea that consumers view government debt as equivalent to their own debt and adjust their behavior accordingly.
ExplanationConsumers may anticipate future tax increases to pay for government spending, leading them to save rather than spend.
#13
Which fiscal policy approach would be appropriate during periods of high inflation?
Contractionary fiscal policy
ExplanationDuring inflation, contractionary fiscal policy, such as reducing government spending or increasing taxes, can help cool down the economy.