Q. How does an increase in government spending affect the economy?
A.
Decreases aggregate demand
B.
Increases aggregate demand
C.
Has no effect on aggregate demand
D.
Decreases inflation
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Solution
An increase in government spending directly increases aggregate demand, which can lead to higher economic growth.
Correct Answer:
B
— Increases aggregate demand
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Q. What is the potential downside of expansionary fiscal policy?
A.
Increased unemployment
B.
Higher inflation
C.
Decreased GDP
D.
Lower consumer spending
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Solution
The potential downside of expansionary fiscal policy is higher inflation, as increased government spending can lead to demand outpacing supply.
Correct Answer:
B
— Higher inflation
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Q. What is the primary goal of fiscal policy?
A.
Control inflation
B.
Reduce unemployment
C.
Stimulate economic growth
D.
All of the above
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Solution
The primary goal of fiscal policy is to manage the economy by controlling inflation, reducing unemployment, and stimulating economic growth through government spending and taxation.
Correct Answer:
D
— All of the above
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Q. Which fiscal policy action is likely to be taken during a recession?
A.
Increase taxes
B.
Decrease government spending
C.
Increase government spending
D.
Reduce transfer payments
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Solution
During a recession, governments typically increase government spending to stimulate economic activity and boost aggregate demand.
Correct Answer:
C
— Increase government spending
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Q. Which of the following best describes discretionary fiscal policy?
A.
Automatic changes in government spending and taxes
B.
Deliberate changes made by the government to influence the economy
C.
Changes in monetary policy by the central bank
D.
None of the above
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Solution
Discretionary fiscal policy refers to deliberate changes in government spending and taxes made by policymakers to influence economic conditions.
Correct Answer:
B
— Deliberate changes made by the government to influence the economy
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Q. Which of the following is NOT a component of fiscal policy?
A.
Government spending
B.
Taxation
C.
Monetary supply
D.
Transfer payments
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Solution
Monetary supply is a tool of monetary policy, not fiscal policy. Fiscal policy focuses on government spending, taxation, and transfer payments.
Correct Answer:
C
— Monetary supply
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