#1
Which of the following is an example of expansionary fiscal policy?
Increasing government spending
ExplanationExpansionary fiscal policy involves increasing government spending to stimulate economic growth.
#2
What is the primary goal of countercyclical monetary policy?
To stabilize fluctuations in economic activity
ExplanationCountercyclical monetary policy aims to smooth out the peaks and troughs of the business cycle.
#3
What is the primary tool used by central banks to implement monetary policy?
Open market operations
ExplanationOpen market operations involve buying and selling government securities to control the money supply and interest rates.
#4
During an economic boom, what fiscal policy action might be taken to prevent overheating?
Decreasing government spending
ExplanationReducing government spending helps prevent inflation and excessive economic growth during a boom.
#5
Which of the following is a tool of expansionary monetary policy?
Lowering interest rates
ExplanationLowering interest rates encourages borrowing and investment, stimulating economic growth.
#6
During a recession, what action might a central bank take to implement a countercyclical monetary policy?
Lowering interest rates
ExplanationLowering interest rates encourages borrowing and spending, stimulating economic activity during a recession.
#7
What is a potential drawback of expansionary fiscal policy during an economic expansion?
Increased government debt
ExplanationExpansionary fiscal policy can lead to higher government borrowing, contributing to increased national debt.
#8
In which phase of the business cycle would countercyclical policies typically be most effective?
Recession
ExplanationCountercyclical policies are most effective during a recession when economic activity is low and unemployment is high.
#9
What is the term for the difference between actual output and potential output in an economy?
Output gap
ExplanationThe output gap represents the difference between what an economy could produce and what it actually produces.
#10
What is the name for the period of declining economic activity between a peak and a trough?
Recession
ExplanationA recession is a period of economic decline characterized by reduced production and increased unemployment.
#11
How does the use of automatic stabilizers contribute to countercyclical fiscal policy?
They automatically adjust tax revenues and transfer payments in response to economic conditions
ExplanationAutomatic stabilizers help stabilize the economy by adjusting taxes and welfare payments automatically as economic conditions change.
#12
What is the primary objective of a countercyclical policy?
To stabilize economic fluctuations
ExplanationThe primary goal of countercyclical policy is to smooth out economic fluctuations and maintain stability.
#13
What is the term for a situation where the inflation rate is too high?
Hyperinflation
ExplanationHyperinflation is a rapid and excessive increase in the general price level of goods and services.
#14
In which phase of the business cycle would contractionary fiscal policy typically be most appropriate?
Expansion
ExplanationContractionary fiscal policy is usually applied during the expansion phase to cool down an overheating economy and prevent inflation.
#15
During an economic expansion, what fiscal policy action might be taken to prevent overheating?
Raising taxes
ExplanationRaising taxes reduces disposable income, curbing excessive spending and preventing overheating during an economic expansion.