Questions and Answers
Define expansionary fiscal policy and list its three forms.
Expansionary fiscal policy is fiscal policy that increases aggregate demand. The three forms include: (1) increase in government purchases of goods and services, (2) a cut in taxes, and (3) an increase in government transfers.
Define contractionary fiscal policy and list its three forms.
Contractionary fiscal policy is fiscal policy that reduces aggregate demand. The three forms include: (1) a reduction in government purchases of goods and services, (2) an increase in taxes, and (3) a reduction in government transfers.
Determine whether the policy is an expansionary or contractionary fiscal policy: several military bases around the country, in which together employ tens of thousands of people, are closed.
Determine whether the policy is an expansionary or contractionary fiscal policy: the number of weeks an unemployed person is eligible for unemployment benefits is increased.
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Determine whether the policy is an expansionary or contractionary fiscal policy: the federal tax on gasoline is increased.
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Which of the following contributes to the lag in implementing fiscal policy? (Select all that apply)
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Which of the following is a government transfer program? (Select all that apply)
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Which of the following is an example of expansionary fiscal policy?
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Which of the following is a fiscal policy that is appropriate to combat inflation?
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An income tax rebate is an example of:
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In an inflationary gap, what type of fiscal policy is appropriate? List the three variables the government can change to implement fiscal policy.
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In a recessionary gap, what type of fiscal policy is appropriate? List the three variables the government can change to implement fiscal policy.
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State which fiscal policy is appropriate: the government cuts personal income taxes.
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State which fiscal policy is appropriate: the government increases its orders for a new missile defense system.
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State which fiscal policy is appropriate: the government eliminates tax incentives for business.
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State which fiscal policy is appropriate: in response to world pressure, the government drops its order for new missiles.
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State which fiscal policy is appropriate: the government increases personal income taxes in response to a budget deficit.
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State how you would solve this problem using fiscal policy: the national unemployment rate has increased by 1% for the last three years.
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Study Notes
Fiscal Policy Overview
- Expansionary fiscal policy aims to boost aggregate demand through three main methods: increasing government purchases, cutting taxes, and increasing government transfers.
- Contractionary fiscal policy reduces aggregate demand via three main methods: decreasing government purchases, raising taxes, and cutting government transfers.
Expansionary vs. Contractionary Policies
- Closing military bases employs tens of thousands of people; this represents contractionary fiscal policy due to reduced government spending.
- Extending unemployment benefits increases disposable income, categorizing it as expansionary fiscal policy.
- Raising the federal gasoline tax decreases disposable income, identifying it as contractionary fiscal policy.
Policy Implementation Delays
- Lag in implementing fiscal policy includes time taken for Congressional approval, analysis of economic data, and recognition of existing output gaps.
Government Transfer Programs
- Government transfer programs encompass various aids such as Social Security, Medicare/Medicaid, unemployment insurance, and food stamps, classified as comprehensive support mechanisms.
Expansionary Fiscal Policy Examples
- Increasing government spending serves as a classic example of expansionary fiscal policy.
- An income tax rebate exemplifies an expansionary fiscal policy aimed at stimulating economic activity.
Contractionary Measures Against Inflation
- To combat inflation, appropriate fiscal policy includes decreasing government spending rather than raising taxes or increasing transfers.
Appropriate Policies for Economic Gaps
- In an inflationary gap, contractionary fiscal policy adjustments are necessary, focusing on government expenditures.
- For a recessionary gap, expansionary fiscal policy is preferred, involving tax reductions and increased government purchases.
Specific Fiscal Policy Measures
- Cutting personal income taxes is identified as an expansionary fiscal policy.
- Increasing orders for defense systems also signifies expansionary fiscal policy.
- Eliminating tax incentives for businesses reflects contractionary fiscal policy.
- A drop in missile orders is categorized as contractionary fiscal policy due to reduced government expenditure.
Long-Term vs. Short-Term Policies
- Increasing income taxes may be contractionary in the short run, but can also be viewed as expansionary in the long run if it addresses a budget deficit effectively.
Addressing Unemployment with Fiscal Policy
- To resolve a rising national unemployment rate, increasing government spending is recommended as a proactive fiscal policy measure.
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Description
This quiz covers expansionary and contractionary fiscal policies in economics. You will define expansionary fiscal policy and list its three forms, along with understanding contractionary measures. Perfect for Module 20 revision!
