Fiscal Policy: Short-Term vs Long-Term Impact and the Importance of Productive Capacity

The video lecture covers fiscal policy, focusing on its impact on economic performance in both the short and long run. It explains expansionary and contractionary fiscal policies, using examples to illustrate their effects on aggregate demand and economic growth. The lecture compares classical and Keynesian views, highlighting the role of spare capacity in determining inflationary impacts. It emphasizes the importance of long run aggregate supply and discusses various fiscal policy initiatives, such as infrastructure and education, in enhancing productive capacity.

What is the primary goal of expansionary fiscal policy?

• To create a budget surplus

• To reduce inflation

• To decrease government spending

• To increase the level of economic activity

In a contractionary fiscal policy, what happens to the level of taxes compared to expenditure?

• Taxes are unrelated to expenditure

• Taxes are lower than expenditure

• Taxes are equal to expenditure

• Taxes are greater than expenditure

According to classical economists, why is fiscal policy limited in its long-term effectiveness?

• It increases unemployment

• It reduces aggregate demand

• It causes inflationary impacts

• It always leads to a budget surplus

What is a key difference between the classical and Keynesian views on fiscal policy?

• Classical view supports government intervention

• Keynesian view ignores spare capacity

• Classical view sees fiscal policy as non-inflationary

• Keynesian view considers spare capacity in inflation outcomes

How does spare capacity affect the inflationary impact of fiscal policy according to Keynesian economics?

• It causes deflation

• It increases inflation

• It reduces inflationary impact

• It has no effect on inflation

Which fiscal policy initiative is likely to expand the productive capacity of the economy?

• Increasing defense spending

• Building new roads

• Providing free medication for pensioners

• Reducing VAT

Why might building new schools be considered a beneficial fiscal policy initiative?

• It decreases aggregate demand

• It enhances the capacity to educate

• It increases the population

• It reduces government expenditure

What is a potential downside of fiscal policy if long-run aggregate supply does not expand?

• Lower short-term growth

• Increased unemployment

• Higher long-term inflation

• Decreased government revenue

What is crucial for the long-term effectiveness of fiscal policy?

• Increasing government borrowing

• Reducing taxes

• Decreasing public sector wages

• Focusing on government spending

What should students do if they are not confident about fiscal policy concepts?

• Skip the assessment

• Review the video again

• Ignore the topic

• Ask a friend for help