Government Fiscal Policy Quiz

Government spending is a tool of fiscal policy used to stimulate or cool down the economy.

Expansionary fiscal policy aims to boost aggregate demand to stimulate economic growth during a recession.

The primary objective of fiscal policy is to achieve macroeconomic stability, economic growth, full employment, and income distribution.

Unemployment benefits automatically increase during economic downturns, helping stabilize the economy by providing income support to those out of work.

Taxation is a primary tool of fiscal policy used to regulate aggregate demand by adjusting tax rates to influence consumption and investment.

While fiscal policy may indirectly impact exchange rates, its primary goals are macroeconomic stability, growth, employment, and income distribution.

Contractionary fiscal policy involves reducing government spending and increasing taxes to slow down economic growth and curb inflation.

Increased government spending can lead to higher interest rates, which may reduce private investment, known as the crowding-out effect.

Fiscal drag refers to the automatic increase in tax revenues during economic growth, which can slow down economic activity.

The Ricardian equivalence proposition suggests that individuals anticipate future tax increases to finance government deficits, leading to increased private savings that offset the deficits.

A budget deficit occurs when government spending exceeds revenue within a fiscal year, leading to increased borrowing.

Discretionary fiscal policy involves deliberate changes in government spending and taxation to achieve economic goals, such as increasing defense spending during a war.

Classical economics suggests that fiscal policy may be less effective during recessions due to factors like price rigidities and expectations.

Expansionary fiscal policy during an economic boom may lead to increased aggregate demand, potentially causing inflationary pressures.

Neutral fiscal policy occurs when simultaneous changes in government spending and taxation have no net effect on aggregate demand.

Fiscal equilibrium occurs when government revenue equals spending within a fiscal year, resulting in a balanced budget.

Supply-side economics advocates for policies that promote economic growth by reducing barriers to production and encouraging investment, often through tax cuts and deregulation.