Fiscal Policy: Government Spending and Taxes Explained

Question 1

During an economic recession, which fiscal policy measures can be used to alleviate its negative impacts?

Accepted Answer

Increase government spending and cut taxes

Answer

Increase government spending and raise taxes

Answer

Reduce government spending and cut taxes

Answer

Reduce government spending and raise taxes

Question 2

When does a budget deficit occur?

Accepted Answer

Government spending exceeds tax revenue

Answer

Tax revenue exceeds government spending

Answer

Government spending equals tax revenue

Answer

Government debt is higher than GDP

Question 3

Which fiscal tool is employed to stimulate aggregate demand?

Accepted Answer

Government spending increase

Answer

Tax increase

Answer

Interest rate increase

Answer

Reserve requirement increase

Question 4

How does a decrease in government spending typically impact economic growth?

Accepted Answer

Decreases economic growth

Answer

Increases economic growth

Answer

Has no impact on economic growth

Answer

Impact on economic growth cannot be predicted

Question 5

What is the Keynesian multiplier effect?

Accepted Answer

Government spending has a greater impact on output than its initial value

Answer

Tax cuts stimulate economic growth more than spending increases

Answer

Fiscal policy is ineffective in influencing economic outcomes

Answer

Monetary policy is more powerful than fiscal policy

Question 6

Which fiscal tool can the government utilize to reduce the budget deficit?

Accepted Answer

Tax increase

Answer

Tax cut

Answer

Government spending increase

Answer

Interest rate decrease

Question 7

How does an increase in taxes affect aggregate supply?

Accepted Answer

Decreases aggregate supply

Answer

Increases aggregate supply

Answer

Has no effect on aggregate supply

Answer

Impact on aggregate supply cannot be predicted

Question 8

What is the primary role of an automatic stabilizer in fiscal policy?

Accepted Answer

Adjust fiscal policy automatically based on economic changes

Answer

Prevent the government from running a budget deficit

Answer

Stabilize prices in the economy

Answer

Regulate the money supply

Question 9

How does government borrowing to implement fiscal policy contribute to crowding out?

Accepted Answer

Government borrowing reduces the availability of loanable funds, raising interest rates and potentially decreasing private investment.

Answer

Government borrowing boosts private investment by increasing the supply of loanable funds and lowering interest rates.

Answer

Government borrowing has no effect on the supply of loanable funds or interest rates.

Answer

Government borrowing always results in favorable economic outcomes and increased private investment.

Question 10

How does fiscal policy affect income inequality, considering both progressive and regressive measures?

Accepted Answer

The impact of fiscal policy on income inequality depends on the specific measures used.

Answer

Progressive policies always reduce income inequality.

Answer

Regressive policies always increase income inequality.

Question 11

Which of the following is NOT a fiscal policy tool used by governments?

Accepted Answer

Monetary policy

Answer

Government spending

Answer

Taxation

Answer

Interest rates

Question 12

Expansionary fiscal policy typically involves:

Accepted Answer

Increased government spending and decreased taxes

Answer

Decreased government spending and increased taxes

Answer

Increased government spending and increased taxes

Answer

Decreased government spending and decreased taxes

Question 13

The multiplier effect in fiscal policy refers to:

Accepted Answer

The magnified increase in national income generated by an initial increase in government spending

Answer

The decrease in national income caused by an initial increase in government spending

Answer

The increase in interest rates caused by an initial increase in government spending

Answer

The decrease in employment caused by an initial increase in government spending

Question 14

Automatic stabilizers are:

Accepted Answer

Government spending or tax policies that automatically adjust to changes in the economy

Answer

Government policies that require manual intervention to adjust to changes in the economy

Answer

Private sector mechanisms that help stabilize the economy during economic downturns

Answer

Central bank policies that use interest rates to control inflation

Question 15

Which institution is primarily responsible for conducting monetary policy in the United States?

Accepted Answer

The Federal Reserve

Answer

The Treasury Department

Answer

The Congressional Budget Office

Answer

The President

Question 16

What is a potential long-term consequence of persistent budget deficits?

Accepted Answer

Increased inflation

Answer

Increased fiscal sustainability

Answer

Sustained economic growth

Answer

Reduced unemployment

Question 17

To stimulate economic growth during a recession, which fiscal policy tool should be implemented?

Accepted Answer

Increase government spending

Answer

Reduce government spending

Answer

Increase taxes

Answer

Reduce the budget deficit

Question 18

**Which of the following is a primary goal of fiscal policy?**

Accepted Answer

**Managing economic activity**

Answer

Promoting cultural diversity

Answer

Protecting national security

Answer

Ensuring social equality

Question 19

**Expansionary fiscal policy, typically involves:**

Accepted Answer

**Increased government spending and lower taxes**

Answer

No change in government spending or taxes

Answer

Lower government spending and higher taxes

Answer

Increased taxes and higher government spending

Question 20

**Which of the following is NOT a potential benefit of fiscal policy?**

Accepted Answer

**Eliminating income inequality**

Answer

Reducing unemployment

Answer

Stimulating economic growth

Question 21

**The automatic stabilizers in the fiscal system aim to:**

Accepted Answer

**Mitigate economic fluctuations without explicit government intervention**

Answer

Increase government revenue during recessions

Answer

Provide direct financial aid to businesses

Question 22

**Which of the following is a potential drawback of using fiscal policy to manage the economy?**

Accepted Answer

**Time lags**

Answer

Political gridlock

Answer

High implementation expenses

Answer

Lack of perceived effectiveness

Question 23

**Discretionary fiscal policy refers to:**

Accepted Answer

**Government spending and tax changes enacted through intentional legislative or executive actions**

Answer

Automatic changes in government revenue and spending triggered by economic indicators

Answer

Long-term economic planning by the government

Question 24

**Expansionary fiscal policy is generally implemented to:**

Accepted Answer

**Increase aggregate demand**

Answer

Control inflation

Answer

Reduce aggregate supply

Answer

Manage international trade

Question 25

**What is a key distinction between fiscal policy and monetary policy?**

Accepted Answer

**Fiscal policy involves government spending and taxation, while monetary policy is the domain of central banks**

Answer

Fiscal policy is more focused on managing inflation, while monetary policy is more focused on managing unemployment

Answer

Fiscal policy is more effective in the short run, while monetary policy is more effective in the long run

Question 26

**The multiplier effect in fiscal policy refers to:**

Accepted Answer

**The amplified impact of government spending or tax changes on aggregate demand**

Answer

The negative effect of government debt on economic growth

Answer

The time lag between the enactment of fiscal policy and its economic impact

Question 27

**Which of the following factors can affect the effectiveness of fiscal policy?**

Accepted Answer

**Size of the public sector, level of public debt, and economic conditions**

Answer

International trade agreements, inflation, and exchange rates

Answer

Political ideology of the government, weather conditions, and consumer preferences

Question 28

Primary objective of fiscal policy is:

Accepted Answer

To regulate economic activity level

Answer

To control money supply

Answer

To regulate interest rates

Answer

To optimize resource allocation

Question 29

Fiscal policy involving increased government spending is termed as:

Accepted Answer

Expansionary fiscal policy

Answer

Neutral fiscal policy

Answer

Monetary policy

Answer

Contractionary fiscal policy

Question 30

Major fiscal policy tool utilized to generate revenue is:

Accepted Answer

Taxation

Answer

Interest rates

Answer

Bank reserves

Answer

Open market operations

Question 31

Infrastructure investment by the government is an example of:

Accepted Answer

Expansionary fiscal policy

Answer

Monetary policy

Answer

Contractionary fiscal policy

Answer

Neutral fiscal policy

Question 32

Primary responsibility for fiscal policy lies with the:

Accepted Answer

Legislature

Answer

Judicial branch

Answer

Executive branch

Answer

Federal Reserve

Question 33

To combat inflation, fiscal policy would typically use:

Accepted Answer

Decreased government spending and/or increased taxes

Answer

Unchanged government spending and taxes

Answer

Increased government spending and/or decreased taxes

Question 34

Which of the following represents a balanced budget:

Accepted Answer

Government revenue equals government expenditure

Answer

Government expenditure exceeds government revenue

Answer

Government revenue exceeds government expenditure

Answer

Negative government revenue

Question 35

Which of the following is not considered a fiscal policy tool?

Accepted Answer

Monetary policy

Answer

Government spending

Answer

Income taxes

Question 36

Expansionary fiscal policy is primarily employed to:

Accepted Answer

Stimulate economic growth and demand

Answer

Reduce the deficit

Answer

Balance the federal budget

Answer

Control inflation

Question 37

A potential unintended consequence of an expansionary fiscal policy is:

Accepted Answer

Inflation

Answer

Increased tax revenue

Answer

Higher employment

Answer

Reduced government spending

Question 38

Contractionary fiscal policy aims to primarily achieve:

Accepted Answer

Reduce inflation and cool down the economy

Answer

Stimulate economic growth

Answer

Increase aggregate demand

Answer

Balance the trade deficit

Question 39

Which of the following is an example of an automatic fiscal stabilizer?

Accepted Answer

Unemployment benefits

Answer

Government subsidies

Answer

Discretionary spending

Answer

Tax credits

Question 40

The multiplier effect refers to:

Accepted Answer

The amplified impact of changes in government spending or taxes on macroeconomic variables

Answer

The influence of foreign exchange rates on economic growth

Answer

The cyclical pattern of economic expansion and contraction

Question 41

Which of the following is not a primary goal of fiscal policy?

Accepted Answer

Maximize the unemployment rate

Answer

Control inflation

Answer

Reduce income inequality

Answer

Stabilize economic growth

Question 42

The Laffer curve illustrates:

Accepted Answer

The relationship between tax rates and the resulting tax revenue

Answer

The relationship between interest rates and investment

Answer

The relationship between inflation and unemployment

Answer

The relationship between government spending and economic growth

Question 43

A potential limitation of fiscal policy is:

Accepted Answer

Political gridlock and challenges in implementing policy changes

Answer

Its lack of impact on income distribution

Answer

Its instant impact on the economy

Answer

Its effectiveness in all phases of the business cycle

Question 44

The balanced budget amendment is a proposal that would:

Accepted Answer

Require the government to maintain a balanced budget, with spending not exceeding revenue

Answer

Increase government spending on education and healthcare

Answer

Eliminate all taxes on income

Question 45

Which of the following is an expansionary fiscal policy action aimed at increasing economic activity?

Accepted Answer

Increase government spending

Answer

Reduce government purchases

Answer

Decrease interest rates

Answer

Raise taxes

Question 46

During an economic recession characterized by low aggregate demand, the government may implement a fiscal policy that includes:

Accepted Answer

Increasing government spending and reducing taxes

Answer

Decreasing government spending and increasing taxes

Answer

Decreasing government spending and reducing taxes

Answer

Increasing government spending and increasing taxes

Question 47

Which of the following is a primary goal of fiscal policy?

Accepted Answer

Stabilize economic growth and manage inflation

Answer

Regulate the stock market

Answer

Control international trade

Answer

Provide social welfare benefits

Question 48

What is the multiplier effect in fiscal policy?

Accepted Answer

The initial change in government spending leads to a larger change in aggregate spending

Answer

The reduction in government spending leads to a smaller change in aggregate spending

Answer

The increase in government spending leads to a decrease in aggregate spending

Question 49

Which type of fiscal policy is generally implemented to curb inflation?

Accepted Answer

Contractionary

Answer

Expansionary

Answer

Neutral

Answer

Stagflationary

Question 50

What is the key distinction between fiscal policy and monetary policy?

Accepted Answer

Fiscal policy involves government spending and taxes, while monetary policy involves central bank actions related to interest rates and money supply.

Answer

Fiscal policy is short-term, while monetary policy is long-term.

Question 51

Which fiscal policy tool directly influences aggregate demand?

Accepted Answer

Government purchases

Answer

Interest rate changes

Answer

Foreign exchange intervention

Answer

Bank reserve requirements

Question 52

What is a key tenet of the Keynesian view of fiscal policy?

Accepted Answer

Government spending and taxation can significantly influence economic outcomes.

Answer

Fiscal policy is ineffective in influencing the economy.

Answer

Fiscal policy should only be used to address long-term structural issues.

Question 53

How does automatic fiscal stabilization operate?

Accepted Answer

It involves built-in changes in tax revenues and government spending that counteract economic fluctuations without explicit policy adjustments.

Answer

Government manually adjusts spending and taxes to stabilize the economy.