Navigating Expansionary Fiscal Policy

The video discusses expansionary fiscal policy, emphasizing its effectiveness when resources are underemployed and the government can target them well. It explains how a drop in consumer spending can lead to a recession, and how government intervention through increased spending or tax cuts can mitigate this. The video also highlights the challenges of implementing fiscal policy and encourages further learning.

What is the best-case scenario for the effectiveness of expansionary fiscal policy?

• When inflation rates are low

• When there are many underemployed resources and the government can target them effectively

• When the economy is at full employment

• When consumer confidence is high

What happens to the aggregate demand curve when consumers reduce their spending?

• It shifts upwards

• It shifts to the right

• It remains unchanged

• It shifts to the left and down

What triggers a shift in the aggregate demand curve to the left?

• Increased government spending

• Decreased consumer spending

• Decreased interest rates

• Increased consumer spending

Why does the economy take time to adjust to a reduction in consumption?

• Due to government intervention

• Because wages and prices are sticky

• Due to high inflation

• Because of the multiplier effect

What is the role of sticky wages and prices in the economy's adjustment process?

• They have no impact on the adjustment process

• They only affect the supply curve

• They speed up the adjustment process

• They slow down the adjustment process

What did John Maynard Keynes famously say about the long run?

• "In the long run, we're all dead."

• "In the long run, inflation is what matters."

• "In the long run, the economy will adjust itself."

• "The long run is a misleading guide to current affairs."

What does expansionary fiscal policy aim to counteract during an economic slump?

• Falling aggregate demand

• Rising interest rates

• Falling aggregate supply

• Rising inflation

How can the government try to mitigate an economic downturn?

• By decreasing government spending

• By increasing government spending or decreasing taxes

• By increasing taxes

• By imposing trade barriers

What is the multiplier effect in the context of fiscal policy?

• The effect of increasing taxes on consumption

• The reduction of government debt

• The impact of government spending on reducing inflation

• The amplification of initial spending through the economy

What are some challenges of implementing fiscal policy?

• Reducing the money supply

• Increasing consumer confidence

• Shifting real resources in a large economy

• Determining the correct interest rate