Macroeconomic Equilibrium and Fiscal Policy Quiz

Fiscal policy aims to stabilize the economy by influencing government spending and taxation.

A recessionary gap occurs when actual output falls below the economy's potential output.

Fiscal policy involves government actions to manage the economy through spending and taxation.

An inflationary gap occurs when actual output surpasses the economy's potential output, leading to inflationary pressures.

A fiscal deficit occurs when total government expenditures surpass total revenues within a fiscal year.

Higher government spending contributes to an increase in aggregate demand within the economy.

Excess aggregate demand over supply leads to inflationary pressures in the economy.

To stimulate economic activity during a recession, the government may increase spending and reduce taxes.

The annual deficit contributes to the accumulation of the national debt over time.

Unemployment benefits automatically increase during economic downturns, providing a stabilizing effect.

Reducing the reserve requirement is a tool of monetary, not fiscal, policy.

Contractionary fiscal policy is used to cool down an overheated economy and reduce inflationary pressures.

The central bank primarily handles monetary policy, influencing interest rates and money supply.

The fiscal multiplier is calculated as 1 divided by the marginal propensity to consume (MPC).

To prevent overheating, the government may use contractionary fiscal policy, reducing spending or increasing taxes.

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

Discretionary fiscal policy involves deliberate government actions, while automatic stabilizers operate automatically based on economic conditions.