Podcast
Questions and Answers
What is the primary objective of a government's stabilization intervention?
What is the primary objective of a government's stabilization intervention?
- To eliminate macroeconomic fluctuations (correct)
- To increase interest rates
- To increase the money supply
- To reduce government spending
What is the role of fiscal policy in the stabilization function?
What is the role of fiscal policy in the stabilization function?
- To set interest rates
- To allocate resources to state and local governments
- To control the money supply
- To change aggregate demand through government spending and taxes (correct)
Why should redistribution policies be accomplished with minimal efficiency costs?
Why should redistribution policies be accomplished with minimal efficiency costs?
- Because they are ineffective
- Because they may have deadweight losses (correct)
- Because they are complex to implement
- Because they are expensive
What is the relationship between fiscal federalism and the division of governmental functions?
What is the relationship between fiscal federalism and the division of governmental functions?
Which level of government is responsible for the allocation of resources?
Which level of government is responsible for the allocation of resources?
What is the role of the central government in fiscal federalism?
What is the role of the central government in fiscal federalism?
What is the primary goal of stabilization policies?
What is the primary goal of stabilization policies?
How does monetary policy work in the stabilization function?
How does monetary policy work in the stabilization function?
What is the primary objective of expansionary fiscal policy?
What is the primary objective of expansionary fiscal policy?
What happens to aggregate demand when the government increases its expenditure?
What happens to aggregate demand when the government increases its expenditure?
What is the effect of taxes on disposable income?
What is the effect of taxes on disposable income?
What type of fiscal policy is adopted to control high inflation?
What type of fiscal policy is adopted to control high inflation?
What is the effect of a deficit budget on economic activity?
What is the effect of a deficit budget on economic activity?
What is the outcome of a surplus budget on economic activity?
What is the outcome of a surplus budget on economic activity?
During a recession, what does the government usually do to stimulate demand?
During a recession, what does the government usually do to stimulate demand?
What is the primary tool used in monetary policy to control the economy?
What is the primary tool used in monetary policy to control the economy?
What is the likely response of the government to high inflation?
What is the likely response of the government to high inflation?
What is the challenge in designing an effective budgetary policy?
What is the challenge in designing an effective budgetary policy?
Who introduced the concept of fiscal federalism?
Who introduced the concept of fiscal federalism?
What is the primary responsibility of the central government according to fiscal federalism?
What is the primary responsibility of the central government according to fiscal federalism?
What is the name of the list that classifies the powers of the union and the state governments?
What is the name of the list that classifies the powers of the union and the state governments?
What is the purpose of an independent judiciary in a federal system?
What is the purpose of an independent judiciary in a federal system?
What is the likely response of the government to high unemployment?
What is the likely response of the government to high unemployment?
What is the fundamental principle of federalism?
What is the fundamental principle of federalism?
Study Notes
Macroeconomic Stability and Fiscal Policy
- The 2008 economic crisis and COVID-19 pandemic have highlighted the importance of macroeconomic stability and countercyclical fiscal policy.
- Government intervention can be through monetary policy (controlling money supply and interest rate) or fiscal policy (expenditure and taxation decisions).
Fiscal Policy for Stabilization
- During recession, the government increases expenditure or cuts taxes to stimulate demand and stabilize aggregate demand.
- To control high inflation, the government cuts expenditure or raises taxes.
- Expansionary fiscal policy alleviates recession, while contractionary fiscal policy controls high inflation.
Budget and Economic Activity
- Deficit budgets stimulate economic activity, while surplus budgets slow it down.
Redistribution Policy
- Redistribution policies aim to balance equity and efficiency objectives with minimal efficiency costs.
Stabilization Function of Fiscal Policy
- The stabilization function aims to eliminate macroeconomic fluctuations arising from suboptimal allocation.
- It concerns the performance of the aggregate economy in terms of labor employment, capital utilization, output, income, price levels, economic growth, and balance of international payments.
Fiscal Federalism
- Fiscal federalism deals with the division of governmental functions and financial relations among different levels of government.
- The central government should focus on economic stabilization and income redistribution, while state and local governments should allocate resources.
Government Intervention in Economy
- In high inflation, the government may decrease spending, raise taxes, and/or reduce money supply.
- In high unemployment, the government may increase spending, reduce taxes, and/or increase money supply.
Challenges of Budgetary Policy
- There is often a conflict between the different goals and functions of budgetary policy.
- Effective policy design to meet diverse goals of government is difficult to conceive and implement.
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Description
This quiz covers the importance of macroeconomic stability and the role of fiscal policy in maintaining stability, particularly in the context of economic crises. It explores the relationship between monetary and fiscal policy and their effects on the economy.
