Fiscal Policy and Central Banking Quiz
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Questions and Answers

What is the primary focus of fiscal policy?

  • Issuing physical money
  • Government expenditures and taxation (correct)
  • Controlling interest rates
  • Regulating the money supply

    • A central bank provides financial services directly to the public.

    False (B)

    What is relative poverty?

    When people are unable to reach a specified level of income, typically 50% of their country's average earnings.

    If government expenditure exceeds revenue, it results in a _____ deficit.

    <p>budget</p> Signup and view all the answers

    Match the following functions to the central bank:

    <p>Determines the money supply = Conducts monetary policy Issues bonds = Regulates the banking system Lender of last resort = Makes loans to commercial banks Prints physical money = Facilitates government payments</p> Signup and view all the answers

    What role does a central bank play regarding commercial banks?

    <p>It regulates and supervises their operations. (D)</p> Signup and view all the answers

    Monetary policy involves the use of taxes to manage the economy.

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

    Identify one responsibility of central banks in relation to the government.

    <p>Holds government cash or receives payments for the government.</p> Signup and view all the answers

    What is the effect of selling bonds on economic policy?

    <p>Contractionary policy (A)</p> Signup and view all the answers

    Buying bonds leads to a contractionary policy.

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

    What happens to investment and consumption when the central bank raises its minimum reserve requirement?

    <p>They decrease.</p> Signup and view all the answers

    Quantitative Easing involves the buying and selling of _____ on a larger scale.

    <p>bonds</p> Signup and view all the answers

    Which of the following is NOT a source of government revenue?

    <p>Transfer payments (C)</p> Signup and view all the answers

    Match the following fiscal tools with their definitions:

    <p>Direct taxation = Taxes levied directly on income or profits Sales taxes = Indirect tax applied to the purchase of goods and services Transfer payments = Payments made to individuals without goods or services received Capital expenditures = Long-term investments in physical assets</p> Signup and view all the answers

    Current expenditures refer to long-term investments by the government.

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

    When the government raises interest rates through the base rate, it leads to _____ investment and consumption.

    <p>decreased</p> Signup and view all the answers

    What is economic inequality primarily concerned with?

    <p>The distribution of income and wealth among individuals (A)</p> Signup and view all the answers

    Wealth inequality has decreased in many countries after a period of post-war decline.

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

    What is the term used to describe the disparity between the rich and the poor?

    <p>wealth gap</p> Signup and view all the answers

    In capitalist systems, resources and wealth are concentrated in the hands of _____ owners.

    <p>business</p> Signup and view all the answers

    Match the following concepts of economic inequality with their descriptions:

    <p>Unequal distribution of income = Inequalities present in people's income in society Unequal distribution of wealth = Inequalities present in people's wealth in society Wealth concentration = Hinders social mobility due to lack of access to resources Social mobility = The ability to move up the economic ladder</p> Signup and view all the answers

    What is a key question regarding inequality in society?

    <p>What is the acceptable level of inequality before it becomes detrimental? (A)</p> Signup and view all the answers

    Fairness in capitalist systems is often based on the standard of living of the highest-income earners.

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

    What can hinder social mobility in the context of wealth concentration?

    <p>Lack of access to quality education and healthcare</p> Signup and view all the answers

    Which type of unemployment is caused by a downturn in the business cycle?

    <p>Cyclical Unemployment (A)</p> Signup and view all the answers

    Structural unemployment occurs when there is a mismatch between skills and job requirements.

    <p>True (A)</p> Signup and view all the answers

    Name one personal cost of unemployment.

    <p>Stress</p> Signup and view all the answers

    Inflation is the sustained rise in the general price level in an economy over _____ time.

    <p>time</p> Signup and view all the answers

    Match the types of unemployment with their descriptions:

    <p>Cyclical Unemployment = Unemployment due to economic downturns Structural Unemployment = Unemployment due to skill mismatch Seasonal Unemployment = Unemployment due to seasonal demand changes Frictional Unemployment = Unemployment during job transitions</p> Signup and view all the answers

    What policy can be used to support the growth of the industrial sector?

    <p>Tax cuts (A)</p> Signup and view all the answers

    Frictional unemployment is primarily caused by layoffs during a recession.

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

    What are the economic costs of high unemployment?

    <p>Lower GDP and lower tax revenues</p> Signup and view all the answers

    Which of the following best describes the Multidimensional Poverty Index?

    <p>An index tracking various components of poverty, including health and education. (C)</p> Signup and view all the answers

    Transfer payments are aimed at increasing income for those who work and pay taxes.

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

    What is a debt trap?

    <p>A situation where a country or firm needs to take out new loans to pay back old ones.</p> Signup and view all the answers

    The _____ is a measure of the cost of living for typical households in an economy.

    <p>Consumer Price Index</p> Signup and view all the answers

    What is the impact of crowding out in economics?

    <p>A decrease in private investment due to increased government borrowing. (B)</p> Signup and view all the answers

    Deregulation is aimed at increasing government control over private sector activities.

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

    What are automatic stabilizers?

    <p>Factors that stabilize the economy by reducing short-term fluctuations without government intervention.</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Nominal Value = Value measured at current prices Minimum Reserve Requirement = Fraction of deposits that must be held in reserve Quantitative Easing = Buying of bonds to increase money supply Fiscal Policy = Government's manipulation of taxes and expenditures</p> Signup and view all the answers

    Which type of inflation occurs when aggregate demand exceeds aggregate supply?

    <p>Demand-pull inflation (B)</p> Signup and view all the answers

    Cost-push inflation results from an increase in aggregate demand.

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

    What does the term 'sticky wages' refer to?

    <p>Wages that do not adjust downward easily during economic downturns.</p> Signup and view all the answers

    An example of an automatic stabilizer is __________.

    <p>unemployment benefits</p> Signup and view all the answers

    What is absolute poverty?

    <p>When people cannot access basic human needs (D)</p> Signup and view all the answers

    What is the primary effect of likely minimum wage laws on employment during a recession?

    <p>They may contribute to unemployment because companies cannot lower wages.</p> Signup and view all the answers

    Progressive taxes automatically decrease when an individual's income increases.

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

    Study Notes

    Part A: Definitions

    • Multidimensional Poverty Index: Tracks components of poverty (health, education, living standards), providing a more comprehensive view.
    • Absolute Poverty: Inability to access basic human needs (food, shelter).
    • Transfer Payments: Government payments to redistribute income, supporting vulnerable groups.
    • Unemployment: Individuals of working age actively seeking employment but not currently employed. Four types exist.
    • Debt Trap: Borrowing where new loans are required to repay prior loans.
    • Leakages: Withdrawals from the income flow (savings, taxes, imports).
    • Nominal Value: Measured in terms of current prevailing prices.
    • Consumer Price Index: Measures the cost of living for typical households.
    • Crowding Out: Increased government borrowing reduces private investment spending, impacting real GDP.

    Part B: Short Answer

    • Unemployment Types:
      • Cyclical Unemployment: Unemployment resulting from a downturn in the business cycle. Shown as a deflationary gap on AD/AS curves. Upturns reduce unemployment.
    • Structural Unemployment: Unemployment due to skill mismatches (e.g., automated jobs) requiring retraining or relocation.
    • Seasonal Unemployment: Unemployment due to cyclical changes in demand (e.g., ski instructors in summer).

    Part C: Long Answer

    • Constraints and Strengths: Monetary and Fiscal Policy tools are discussed as both constraints and strengths; italicized text denotes strengths and underlined constrains.
    • Monetary Tools:
      • Open Market Operations (OMOs): Central bank buying/selling government bonds to increase/decrease money supply, affecting interest rates and inflation. Buying bonds increases money supply and encourages growth, lowering interest rates; selling bonds decreases money supply (reduces inflation), increasing interest rates.
    • Minimum Reserve Requirements: Banks are required to hold a certain portion of customer deposits, impacting lending and economic activity.

    Part D: Graphs and Illustrations

    • Crowding Out: Increased government spending can lead to higher interest rates, reducing private investment and possibly offsetting the initial impact of government spending. This can be partial or complete. Partial crowding out occurs when a fall in investment spending is smaller than the increase in government spending; complete when both are equal.
    • Lorenz Curve and Gini Coefficient: Visual tools used in analyzing income inequality; the closer the curve is to the diagonal line, the lower the inequality. Gini coefficient = A / (A+B), where "A" is the area between the curve and the line of equality and "B" is the area below the Lorenz curve.

    Part E: Case Studies

    • The provided article will likely discuss economic conditions, particularly focusing on economic inequality, potential output, and actual output.
    • Economic Inequality: The degree to which people have access to resources like income and wealth.
    • Potential vs. Actual Output: Potential output is the predicted output at a future time, while actual output represents the current amount being produced.
    • Economic Growth: Increases in total real output.
    • Technology Improvements: Increased efficiency in production leads to higher output.

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    Description

    Test your knowledge on fiscal policy and the role of central banks in the economy. This quiz covers key concepts such as government revenue sources, monetary policy tools, and the functions of a central bank. Enhance your understanding of how these economic elements interact.

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