Understanding Fiscal Policy Tools

The video provides a follow-up on fiscal policy tools, focusing on how governments can influence GDP by either increasing spending or lowering taxes, both of which typically involve taking on more debt. It explains the components of GDP—consumption, investment, government spending, and net exports—and how these are affected by fiscal policy. The video emphasizes that fiscal policy is not only about government spending but also involves tax policy, which can increase consumer and firm spending by reducing taxes.

What is the primary focus of the fiscal policy tool discussed in the introduction?

• Increasing taxes

• Reducing taxes and increasing spending

• Reducing government spending

• Keeping taxes constant and increasing spending

How does increased government spending affect GDP?

• It increases GDP

• It has no effect on GDP

• It decreases GDP

• It keeps GDP constant

Which component of GDP is directly affected by increased government spending?

• Net exports

• Government expenditure

• Consumption

• Investment

What is the role of net exports in the GDP equation discussed?

• It is the largest component

• It completes the GDP picture

• It is not part of the GDP equation

• It is the only variable component

What is the alternative fiscal policy tool discussed in the video?

• Increasing taxes while reducing spending

• Reducing both taxes and spending

• Reducing taxes while keeping spending constant

• Increasing both taxes and spending

What is the common theme when the government reduces taxes or increases spending?

• The government reduces debt

• The government takes on more debt

• The government increases taxes

• The government saves more

What happens to consumer spending when taxes are reduced?

• Consumer spending increases

• Consumer spending remains unchanged

• Consumer spending is unaffected by tax changes

• Consumer spending decreases

What is the effect on GDP when consumer and firm taxes are reduced?

• GDP remains constant

• GDP increases

• GDP is unaffected

• GDP decreases

What is the result of holding government spending constant while reducing taxes?

• Decreased GDP

• Increased government savings

• Decreased consumer spending

• Increased consumer and firm spending

What is a key aspect of fiscal policy besides government spending?

• Environmental policy

• Tax policy

• Trade policy

• Monetary policy