#1
Which of the following is a component of fiscal policy?
Government spending
ExplanationGovernment spending is a key component of fiscal policy, influencing economic activity through the allocation of public funds.
#2
What is the primary objective of fiscal policy?
Achieving price stability
ExplanationThe primary goal of fiscal policy is to achieve price stability by controlling inflation and ensuring a stable economic environment.
#3
If a government increases taxes to control inflation, what type of fiscal policy is being used?
Contractionary fiscal policy
ExplanationIncreasing taxes to control inflation is an example of contractionary fiscal policy, aiming to reduce overall spending.
#4
How does an increase in government spending affect GDP?
Increases GDP
ExplanationAn increase in government spending has a positive impact on GDP, stimulating economic activity and growth.
#5
What does the term 'crowding out' refer to in fiscal policy?
Reduction in private investment due to government borrowing
ExplanationCrowding out refers to the reduction in private investment caused by increased government borrowing, limiting funds available for private projects.
#6
During an economic recession, which fiscal policy action would be most appropriate?
Increase in government spending
ExplanationDuring a recession, increasing government spending is an appropriate fiscal policy action to boost demand and stimulate economic recovery.
#7
Which of the following is an example of an automatic stabilizer in fiscal policy?
Unemployment benefits
ExplanationUnemployment benefits act as automatic stabilizers, providing support during economic downturns by automatically increasing government spending.
#8
Which of the following best describes the fiscal multiplier effect?
The effect of government spending on overall economic activity
ExplanationThe fiscal multiplier effect refers to the impact of government spending on the broader economy, influencing overall economic activity.
#9
What is the relationship between fiscal policy and the Phillips curve?
Fiscal policy only affects the short-run Phillips curve
ExplanationFiscal policy influences the short-run Phillips curve, impacting the trade-off between inflation and unemployment in the short term.
#10
Which of the following is a drawback of using fiscal policy to stabilize the economy?
It is difficult to implement in a timely manner
ExplanationOne drawback of fiscal policy is its difficulty in timely implementation, making it less effective in responding quickly to economic changes.