Fiscal Policy

### Which of the following is an example of automatic stabilizers in fiscal policy? - [ ] A newly approved bridge-building project. - [x] Unemployment benefits that increase when more people lose their jobs. - [ ] Temporary loan programs for small businesses. - [ ] A special presidential decree on infrastructure spending. > **Explanation:** Automatic stabilizers, such as unemployment benefits, adjust automatically during economic ups and downs without the need for new legislative action. ### What is the primary difference between fiscal policy and monetary policy? - [x] Fiscal policy involves government spending and taxation, while monetary policy involves central bank activities such as setting interest rates. - [ ] Fiscal policy focuses on export/import regulations, while monetary policy deals with exchange rates. - [ ] Fiscal policy is aimed at only raising money for national defense, and monetary policy targets consumer protection. - [ ] Fiscal policy is handled by private institutions, while monetary policy is solely guided by public referendums. > **Explanation:** Fiscal policy is managed by the government via spending and taxation, whereas monetary policy is handled by central banks through tools such as rate adjustments and open market operations. ### Which of the following is generally regarded as an expansionary fiscal policy? - [x] An increase in government spending along with a decrease in tax rates. - [ ] A reduction in both government spending and taxes. - [ ] A reduction in government spending but an increase in taxes. - [ ] A balanced budget with no change in spending or taxes. > **Explanation:** Expansionary fiscal policy aims to increase aggregate demand. A common approach is to raise spending and lower taxes simultaneously. ### A high debt-to-GDP ratio raises concerns about: - [x] The sustainability of government debt levels. - [ ] Easier access to international financial markets. - [ ] Lower interest costs. - [ ] Elimination of all future tax liabilities. > **Explanation:** When debt grows too large relative to GDP, there are concerns about the government’s ability to manage its obligations and potential upward pressure on interest rates. ### Which of the following best describes the “multiplier effect” of government spending? - [x] A single dollar of government spending can generate more than one dollar’s worth of economic output. - [ ] Government spending has zero net effect on the economy. - [x] The effect can vary based on the marginal propensity to consume (MPC). - [ ] It reduces the overall demand in the economy by crowding out investment. > **Explanation:** Fiscal stimulus can lead to a multiplied effect on overall economic output, depending on how much consumers spend of each additional dollar. Both statements about the dollar’s effect and the MPC are correct. ### Which of the following is most likely a contractionary fiscal measure? - [x] Cutting back on infrastructure projects. - [ ] Offering more comprehensive unemployment benefits. - [ ] Reducing the national sales tax. - [ ] Increasing infrastructure spending by 25%. > **Explanation:** Reducing government spending is typically a contractionary measure aimed at lowering aggregate demand. ### What is a common challenge faced by policymakers when implementing fiscal policy? - [x] Time lags between policy decisions and their actual economic impact. - [ ] Lack of any public debate or scrutiny regarding policy measures. - [x] Political constraints that delay or water down the proposed policy. - [ ] Zero need for legislative approval. > **Explanation:** Fiscal policy is often subject to time lags and political considerations, making it difficult to implement quickly and effectively. Both time lags and political constraints are correct. ### Which of the following might be considered a benefit of expansionary fiscal policy? - [x] Reduced unemployment during a recession. - [ ] Immediate reduction in the debt-to-GDP ratio. - [ ] Lower inflation in overheated economic conditions. - [ ] Eased legislative approval given universal political support. > **Explanation:** Expansionary fiscal measures often help reduce unemployment by increasing aggregate demand, especially during economic downturns. ### Crowding out refers to: - [x] A situation where increased government borrowing leads to higher interest rates, reducing private investment. - [ ] Lower government borrowing because of private investment. - [ ] Decreased advertising budgets in the private sector. - [ ] Public anxiety about rising unemployment. > **Explanation:** Crowding out occurs when government borrowing raises the cost of capital (interest rates), thereby dissuading private firms from investing. ### Fiscal policy can be considered “contractionary” if: - [x] True - [ ] False > **Explanation:** Yes, if the government raises taxes or cuts spending to dampen aggregate demand, that policy is considered contractionary.