Fiscal Policy and Commercial Law Session One

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Questions and Answers

What is the primary goal of fiscal policy?

To reduce government spending

To stimulate economic growth and keep inflation low (correct)

To increase the trade deficit

To reduce exports

What is aggregate demand (AD) equal to?

C - I - G - (X-M)

C / I / G / (X-M)

C + I + G + (X+M)

C + I + G + (X-M) (correct)

What is the purpose of fiscal policy in a period of recession?

To reduce exports

To stimulate economic growth (correct)

To reduce government spending

To increase inflation

What is investment (I) in the context of aggregate demand?

Spending by firms on the purchase of new machines or equipment Signup and view all the answers

What is the term for exports minus imports?

Net Exports Signup and view all the answers

What is fiscal policy often utilized alongside?

Monetary policy Signup and view all the answers

What are the three categories of fiscal policy?

Not mentioned in the content Signup and view all the answers

What is the formula for calculating aggregate demand?

C + I + G + (X-M) Signup and view all the answers

What is the main principle of Keynesian economics?

Economic stability can be achieved through government intervention Signup and view all the answers

What is the formula for aggregate demand according to Keynesian economics?

AD = C + I + G + (X-M) Signup and view all the answers

What is the result of insufficient aggregate demand, according to Keynes?

Unemployment Signup and view all the answers

What is the purpose of fiscal policy?

To achieve full employment and price stability Signup and view all the answers

What is Say's Law?

Supply creates its own demand Signup and view all the answers

What are the four factors that comprise the output of goods and services of an economy?

Consumption, investment, government purchases, and net exports Signup and view all the answers

What is the result of strong forces during a recession?

Decreased demand Signup and view all the answers

What was the limitation of the existing economy theory before Keynesian economics?

It could not explain the causes of the Great Depression Signup and view all the answers

What is the consequence of a contraction in consumer spending?

A decline in business investment spending Signup and view all the answers

What is the purpose of state intervention in Keynesian economics?

To moderate the fluctuations in economic activity Signup and view all the answers

What is the effect of an increase in government spending on output?

An increase in output Signup and view all the answers

What is the characteristic of prices in Keynesian economics?

Relatively rigid Signup and view all the answers

What is the result of a one-dollar increase in government spending if the fiscal multiplier is greater than one?

A magnitude increase in output Signup and view all the answers

What is the concept that describes the proportional change in output in response to a change in spending?

The multiplier effect Signup and view all the answers

Study Notes

Fiscal Policy Definition and Importance

Fiscal policy involves changing government taxation and spending to influence aggregate demand and economic activity.
The goal of fiscal policy is to stimulate economic growth, keep inflation low, and stabilize economic growth, avoiding a boom-and-bust cycle.

Fiscal Policy Components

Three categories of fiscal policy:
- Government purchases of goods and services
- Taxation policies
- Transfer payments (e.g., unemployment compensation, social security benefits, welfare payments)

Keynesian Economics

Keynesian economics argues that government intervention is necessary to achieve economic stability.
Before Keynesian economics, existing economic theory failed to explain the Great Depression of the 1930s.
Keynes argued that free markets lack self-balancing mechanisms to produce full employment.

Aggregate Demand and Its Components

Aggregate Demand (AD) = Consumption (C) + Investment (I) + Government Purchases (G) + Net Exports (X-M)
Components of AD:
- Consumption (C): household purchases
- Investment (I): business spending on new machines or equipment
- Government Purchases (G): government spending
- Net Exports (X-M): exports minus imports

Fiscal Policy and the Keynesian Multiplier

Increasing government spending, while holding other components constant, will increase output.
The fiscal multiplier effect: changes in output are proportional to a multiple of the increase or decrease in spending.
A one-dollar increase in government spending can result in a magnitude increase in output if the fiscal multiplier is greater than one.

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Description

This quiz covers the fundamentals of fiscal policy, including its definition, rules, multipliers, and types. It also touches on Keynesian Economics and its relation to commercial law.