Government Fiscal Policy and Economic Theories Quiz

Tax policy is a central element of fiscal policy, influencing government revenue and economic behavior.

The Federal Reserve, often referred to as the Fed, is responsible for conducting monetary policy in the United States, controlling the money supply and interest rates to achieve economic goals.

Rational expectations theory posits that individuals form expectations about future economic conditions by systematically analyzing all available information, incorporating past experiences and current data into their forecasts.

The Triffin dilemma suggests that a single currency serving as the world's primary reserve currency can lead to trade imbalances and global economic instability, as the issuer of the reserve currency faces conflicting domestic and international economic objectives.

Discretionary fiscal policy refers to policy measures that are subject to the decision of policymakers and can be adjusted according to economic conditions or government objectives.

Expansionary fiscal policy aims to boost economic activity by increasing government spending or cutting taxes.

John Maynard Keynes is credited as the pioneer of modern macroeconomics, advocating for government intervention during economic downturns.

Automatic stabilizers, such as unemployment benefits and progressive taxation, automatically activate during economic downturns to stabilize aggregate demand without the need for legislative intervention.

Crowding out occurs when increased government borrowing leads to higher interest rates, reducing private sector borrowing and investment.

Countercyclical fiscal policy aims to stabilize the economy by using expansionary measures during downturns and contractionary measures during periods of economic expansion.

The Laffer Curve depicts the relationship between tax rates and government revenue, suggesting an optimal tax rate that maximizes revenue.

The Ricardian equivalence theorem posits that individuals anticipate future tax increases to finance government spending, leading them to save rather than spend extra income.

Classical economics advocates for minimal government intervention in the economy, relying on free markets to allocate resources efficiently.

In a liquidity trap, interest rates are so low that individuals prefer holding cash rather than investing or spending, limiting the effectiveness of monetary policy.

Discretionary fiscal policy involves deliberate changes in government spending or taxation to influence economic activity, such as providing tax rebates to stimulate consumer spending.