Fiscal and Monetary Policy Quiz

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Questions and Answers

What is the primary goal of fiscal policy?

  • Regulating interest rates
  • Managing external trade balances
  • Stabilizing the economy through government intervention (correct)
  • Controlling inflation

Which action is associated with monetary policy during a recession?

  • Implementing savings measures
  • Raising expenditure on public projects
  • Decreasing interest rates to stimulate investments (correct)
  • Increasing taxes to curb spending

Which of the following is NOT a component of the stabilization measures?

  • Stability and Growth Acts of 1967
  • Inflation control (correct)
  • Reserves for crisis times
  • High employment

What type of indicator is gross domestic product (GDP) considered in the context of the business cycle?

<p>Current indicator (B)</p> Signup and view all the answers

Which of the following measures is included in the components of stabilization measures?

<p>Price stability (B)</p> Signup and view all the answers

What is a primary reason businesses refrain from investing during a period of unemployment equilibrium?

<p>Poor future expectations inhibit investment. (B)</p> Signup and view all the answers

How do extremely low interest rates contribute to a liquidity trap?

<p>They lead to money being hoarded rather than invested. (C)</p> Signup and view all the answers

What aspect of the labor market is highlighted by wage rigidity during unemployment?

<p>Wages do not decrease effectively, leading to stagnation. (A)</p> Signup and view all the answers

What is a direct consequence of low demand in an economy characterized by unemployment equilibrium?

<p>Decline in production and employment. (C)</p> Signup and view all the answers

What best describes the overall state of an economy experiencing unemployment equilibrium?

<p>Stagnation with high unemployment and low demand. (B)</p> Signup and view all the answers

Flashcards

Fiscal Policy

Government policies aimed at influencing the economy through spending, taxation, and debt management.

Monetary Policy

Control of money supply and interest rates by the central bank to influence the economy.

Stabilization Measures

Economic policies aimed at stabilizing the economy through various measures, such as promoting stable growth, price stability, and high employment.

Leading Indicators

Data that predicts future economic activity. They help forecast upcoming economic trends.

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Current Indicators

Economic data reflecting the current state of the economy. They offer a snapshot of the present economic performance.

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Investment Fall

A situation where businesses are reluctant to invest even with low interest rates due to pessimistic future prospects. This leads to low demand, production, and subsequently high unemployment.

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Liquidity Trap

A condition where lowering interest rates has little effect on investment. This is because extremely low rates cause people to hoard cash instead of investing, leading to reduced demand and employment.

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Wage Rigidity

When wages are inflexible and resist declining during periods of unemployment.

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Unemployment Equilibrium

When businesses are reluctant to invest, demand stays low, and the economy gets stuck in a state of high unemployment and low demand, even with low interest rates and wage inflexibility.

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Stagnation

The combination of Investment Fall, Liquidity Trap, and Wage Rigidity that creates an unhealthy economic situation with persistent unemployment.

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