What Is Fiscal Policy?

1.Which are the tools of fiscal policy? Select all that apply.

Several answers can be correct.

Fiscal policy is how a government uses spending and taxes to influence the economy.

2.Who usually runs monetary policy, as opposed to fiscal policy?

Roughly: governments decide taxes and spending, central banks steer money and interest rates.

3.A government spends more or taxes less to lift demand. What is that called?

Expansionary: spend more or tax less. Contractionary: spend less or tax more.

4.True or false: spending less or taxing more to cool things down is called contractionary.

Contractionary fiscal policy cools things down by spending less or taxing more.

5.What do automatic stabilizers do?

Tax revenue and social spending shift with the economy without a vote. These are automatic stabilizers.

6.What is the debt, as opposed to the deficit?

A deficit is one year: spending is bigger than revenue. The debt is the running total of past borrowing.

7.True or false: a deficit can shrink while the debt still grows.

The deficit is the tap, the debt is the water level.

8.In the toy model, the government pays Marge 1,000. Each round, half is spent again. After three rounds, what is the total spending?

1,000 + 500 + 250 = 1,750 after three rounds. It is a made-up example.

9.If every round spends half, near what limit does the total spending stop in the toy model?

The limit is 1,000 / (1 - 0.5) = 2,000. The ratio 2,000 out of 1,000 is the multiplier in this model.

10.True or false: real-world multipliers are the same everywhere and always equal the toy model's factor of 2.

Some money is saved, some goes to taxes and some buys goods from abroad, so the multipliers you read about are estimates.

11.From 1930 to 1933, the US money supply fell by nearly 30 percent. Which kind of policy side is that?

The money supply is a monetary lever. A new tax or a spending program would be fiscal.