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Fiscal Policy Basics

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Questions and Answers

What is the primary objective of an expansionary fiscal policy?

To reduce government spending

To increase the money supply to individuals (correct)

To limit public projects

To decrease taxation for high earners

What effect does increased government spending typically have on demand?

It creates higher demand (correct)

It has no effect on demand

It leads to a decrease in demand

It stabilizes existing demand

How does increased taxation affect the economy according to the discussion?

It generates more government revenue to stimulate demand (correct)

It reduces overall economic activity

It encourages businesses to spend less

It reallocates money without increasing demand

What is the primary goal of contractionary fiscal policy?

To reduce the money supply in the economy Signup and view all the answers

Which statement best describes the relationship between government spending and public projects?

Increased spending often leads to more public projects Signup and view all the answers

What does the intersection of the Aggregate Demand (AD) and Aggregate Supply (AS) curves determine?

The equilibrium price level and output Signup and view all the answers

Which of the following best defines Full Employment GDP?

The level of GDP when unemployment is minimized Signup and view all the answers

How does a significant decline in Aggregate Demand (AD) typically affect the economy?

It results in lower output and higher unemployment Signup and view all the answers

What is the typical unemployment rate range in the US as stated in the notes?

3 - 4% Signup and view all the answers

Which economic factor is NOT typically influenced by monetary policies?

Government spending Signup and view all the answers

What is the primary cause of cyclical unemployment?

Business cycles Signup and view all the answers

According to Okun's Law, what is the impact of a 1% increase in the unemployment rate on GDP?

6.72% decrease in GDP Signup and view all the answers

What does the full employment rate of unemployment imply?

There will always be some level of unemployment. Signup and view all the answers

What does potential GDP represent?

The output level associated with full employment. Signup and view all the answers

What would be a direct result of a decrease in GDP as per Okun’s Law?

A rise in the unemployment rate Signup and view all the answers

Study Notes

Fiscal Policy

Fiscal policy involves government spending and taxation
Increasing government spending leads to increased demand
Increased taxes reduce demand
Expansionary fiscal policy increases everyone's money
Contractionary fiscal policy reduces the amount of money people have

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Description

Explore the fundamentals of fiscal policy, including the effects of government spending and taxation on demand. This quiz will help you understand the concepts of expansionary and contractionary fiscal policies and their impacts on the economy.