Fiscal Policy Quiz

What is fiscal policy primarily used for?

• To control the nation's money supply and interest rates

• To influence the nation's economic growth, employment, and price level through government spending and taxation

• To manage the nation's foreign exchange rates

• To regulate the stock market and financial institutions

Which type of fiscal policy would a government most likely implement during an economic downturn to boost real GDP?

• Contractionary fiscal policy

• Monetary policy

• Expansionary fiscal policy

• Supply-side policy

What does expansionary fiscal policy typically involve?

• Decreasing government spending and increasing taxes

• Increasing government spending and decreasing taxes

• Increasing both government spending and taxes

• Decreasing both government spending and taxes

What is the main goal of contractionary fiscal policy?

• To increase inflation

• To decrease aggregate demand and reduce inflation

• To boost consumer spending

• To increase government provided goods and services

What would be the effect of an increase in taxes?

• Increase in disposable income for consumers

• Decrease in disposable income for consumers

• No change in disposable income for consumers

• Increase in government spending

What is the purpose of expansionary fiscal policy?

• To decrease aggregate demand during economic growth

• To increase aggregate demand during a downturn or recession

• To balance the government's budget

• To reduce government spending and increase taxes

What does expansionary fiscal policy typically involve?

• Increasing taxes and reducing government spending

• Reducing government spending and increasing exports

• Increasing government spending and/or reducing taxes

• Reducing taxes and increasing imports

What happens when the government increases spending on highways?

• It has no effect on the economy

• It decreases investment demand and shifts AD to AD1

• It increases investment demand and shifts AD to AD1

• It reduces the need for workers in the economy

What are the effects of expansionary fiscal policy when the economy is close to full employment according to the AD/AS model?

• Real GDP would increase without inflation occurring.

• There would be potentially high inflation and not much impact on real GDP.

• There would be a decrease in both inflation and real GDP.

• Real GDP would decrease without any change in inflation.

Why might a government implement contractionary fiscal policy?

• To increase government spending and reduce taxes.

• To slow down the rate of inflation by reducing government spending or increasing taxes.

• To increase disposable income and consumption demand.

• To shift the AD curve to the right and increase real GDP.