Principles and Practices of Fiscal Policy Quiz

Fiscal policy refers to the government's use of taxation and spending to influence the economy.

Decreasing taxes is a tool of expansionary fiscal policy as it puts more money in the hands of consumers, boosting spending.

Interest rate adjustments are a tool of monetary policy, not fiscal policy.

Trade balance is not a goal of fiscal policy; it is a goal of trade policy.

Expansionary fiscal policy is characterized by increased government spending and decreased taxes to stimulate economic activity.

The budget deficit is the term for the difference between government revenue and expenditure, indicating the amount by which government spending exceeds its income.

The primary goal of contractionary fiscal policy is to reduce inflation by decreasing aggregate demand.

A fiscal deficit occurs when government spending exceeds revenue, leading to borrowing.

The crowding out effect in fiscal policy refers to the decrease in private investment due to increased government borrowing.

The multiplier effect in fiscal policy refers to the impact of government spending on increasing aggregate demand by generating further economic activity.

Government subsidies for renewable energy are an example of discretionary fiscal policy as they are a deliberate action taken by the government to achieve specific economic goals.

Unemployment insurance benefits are an example of automatic stabilizers in fiscal policy as they automatically increase during economic downturns, providing a buffer for individuals and stabilizing aggregate demand.

Keynesian economics argues for the use of fiscal policy to stabilize the economy, particularly during recessions.

The Ricardian equivalence theorem suggests that government deficits are not a concern because individuals will adjust their saving to offset tax changes, effectively neutralizing the impact of government borrowing.

According to the Laffer curve, tax revenue decreases at very high tax rates due to disincentives to work and invest, which reduce taxable income.

The main drawback of using fiscal policy to stabilize the economy is that it can lead to time lags in implementation and effectiveness, which may limit its ability to respond quickly to economic changes.

The output gap is the term for the difference between actual GDP and potential GDP, indicating the underutilization or overutilization of resources in the economy.