Fiscal Policy

What is a recessionary gap?

• When actual output is below potential GDP

• When actual output exceeds potential GDP

• When the government increases taxes

• When the economy is growing too fast

What is the purpose of fiscal policy?

• To manipulate the stock market

• To manage the economy's fluctuations

• To increase government officials' power

• To decrease the country's population

What does expansionary fiscal policy involve?

• Decreasing taxes and increasing government spending

• Increasing taxes and reducing government spending

• Increasing interest rates

• Selling government bonds

Who was a major proponent of using fiscal policy to manage the economy?

• Adam Smith

• Karl Marx

• John Maynard Keynes

• Milton Friedman

What is a key argument against deficit spending?

• It can lead to crowding out

• It decreases unemployment

• It reduces the national debt

• It can lead to hyperinflation

What is the 'crowding out' effect?

• When government spending replaces private investment

• When private investment replaces government spending

• When inflation reduces the value of money

• When unemployment leads to lower consumer spending

How did the U.S. government respond to the 2008 financial crisis?

• By launching a stimulus program

• By implementing austerity measures

• By raising interest rates

• By reducing government spending

What was the outcome of the U.S. stimulus program compared to European austerity measures?

• The Euro-zone outperformed the U.S. in terms of GDP growth

• The U.S. saw economic growth while the Euro-zone GDP shrank

• Both approaches failed to improve the economy

• Both approaches led to similar economic growth

What is the multiplier effect?

• The increase in interest rates due to government borrowing

• The reduction in GDP due to higher taxes

• The increase in total economic activity from an initial spending increase

• The decrease in unemployment due to government spending

What tends to have a higher multiplier effect?

• Tax cuts for high-income individuals

• Spending on infrastructure

• Increasing interest rates

• General cuts to payroll taxes