Fiscal Policy and Economic Impact

The video discusses the concept of output gaps, particularly recessionary output gaps, and explores how fiscal and monetary policies can address these gaps. It explains the role of government spending and taxation in shifting aggregate demand to achieve full employment. The video also delves into the concept of multipliers, comparing the effects of government spending and tax cuts on the economy, using simple models to illustrate these impacts.

What is a recessionary output gap?

• When the economy is above full employment output

• When the short-run equilibrium output is above full employment output

• When the short-run equilibrium output is below full employment output

• When the economy is at full employment output

Which of the following is a tool of fiscal policy?

• Setting exchange rates

• Government spending

• Adjusting the money supply

• Changing interest rates

What happens when the government increases spending?

• It decreases the money supply

• It has no effect on total output

• It increases total output

• It decreases total output

What is the role of the central bank in monetary policy?

• Regulating employment levels

• Managing the money supply and interest rates

• Adjusting government spending

• Setting tax rates

What is the formula for the regular multiplier?

• 1 minus the marginal propensity to consume

• 1 over 1 minus the marginal propensity to consume

• The marginal propensity to consume over 1

• The marginal propensity to consume minus 1

How does a tax multiplier differ from a regular multiplier?

• It does not involve the marginal propensity to consume

• It is always larger than a regular multiplier

• It is the negative of the marginal propensity to consume over 1 minus the marginal propensity to consume

• It is the same as a regular multiplier

In the example, what is the effect of government spending $100 billion with a marginal propensity to consume of 0.8?

• $100 billion increase in output

• $400 billion increase in output

• $500 billion increase in output

• $200 billion increase in output

What is the effect of reducing taxes by $100 billion with a marginal propensity to consume of 0.8?

• $200 billion increase in output

• $500 billion increase in output

• $400 billion increase in output

• $100 billion increase in output

Why might a decrease in taxes have a lower total impact than an equivalent increase in government spending?

• Because people save all of the tax reduction

• Because the government spends the tax reduction

• Because the tax reduction is invested

• Because the initial tax reduction amount is not fully spent

What is the main takeaway regarding fiscal policy from the video?

• Monetary policy is more effective than fiscal policy

• Different multipliers should be used for spending and taxation

• Fiscal policy has no impact on the economy

• Government spending and tax reductions are always equivalent