Government Fiscal Policy and Economic Dynamics Quiz

Fiscal policy aims to foster economic growth and stability through government actions on taxation and spending.

Expansionary fiscal policy involves boosting economic activity, often by raising government spending.

Monetary policy, involving control over money supply and interest rates, is distinct from fiscal policy.

Income tax is the levy on individuals and businesses based on their earnings, contributing to government revenue.

Contractionary fiscal policy involves reducing government spending to curb inflation and cool down an overheated economy.

Expansionary fiscal policy includes tools like increasing transfer payments to stimulate economic activity.

A budget deficit occurs when government spending surpasses its revenue, leading to a shortfall.

Time lags represent delays in the impact of fiscal policy, hindering its timely response to economic fluctuations.

Keynesian economics advocates using government spending to counterbalance fluctuations in private sector demand.

Contractionary fiscal policy, aimed at cooling down an overheated economy, is typically implemented during the peak phase of the business cycle.

To counter high inflation, governments may employ contractionary fiscal policy, which involves reducing spending and increasing taxes.

Automatic stabilizers are mechanisms, like unemployment benefits, built into the system to automatically counteract economic fluctuations without direct government intervention.

Counter-cyclical fiscal policy aims to achieve budget balance across various economic cycles.

Budget balance occurs when government revenue matches its spending.

Discretionary fiscal policy involves deliberate government changes in taxation or spending, like a broad reduction in income taxes.

Ricardian equivalence posits that individuals may alter their behavior in response to fiscal policy changes, potentially negating the intended impact.

Unemployment insurance serves as an automatic stabilizer, providing support during economic downturns without requiring specific government action.

During an economic boom, governments may implement fiscal policy measures like increasing taxes to prevent overheating and maintain stability.