IGCSE Economics Monetary and Fiscal Policy

What is fiscal policy and how does it impact the economy?

• Fiscal policy is the government's use of taxation and spending to influence the economy.

• Fiscal policy is the government's use of foreign aid to influence the economy.

• Fiscal policy is the government's use of exchange rates to influence the economy.

• Fiscal policy is the government's use of interest rates to influence the economy.

Answer explanation

Fiscal policy is the government's use of taxation and spending to influence the economy. It helps regulate economic growth, employment, and inflation.

Explain the difference between expansionary and contractionary fiscal policy.

• Expansionary fiscal policy increases government spending and/or increases taxes

• Expansionary fiscal policy increases government spending and/or decreases taxes, while contractionary fiscal policy decreases government spending and/or increases taxes.

• Expansionary fiscal policy decreases government spending and/or decreases taxes

• Contractionary fiscal policy increases government spending and/or decreases taxes

Answer explanation

Expansionary fiscal policy increases government spending and/or decreases taxes, while contractionary fiscal policy decreases government spending and/or increases taxes. This is the correct choice because it accurately describes the difference between the two policies.

What are the tools used by the government to implement fiscal policy?

• Taxation, government spending, and borrowing

• Privatization of government assets

• Raising interest rates

• Printing new currency

Answer explanation

The government uses taxation, government spending, and borrowing as tools to implement fiscal policy.

How does the central bank use monetary policy to control inflation?

• By adjusting interest rates, and ease of borrowing to influence the money supply and aggregate (total) demand in the economy.

• By controlling the exchange rate

• By reducing taxes

• By increasing government spending

Answer explanation

The central bank controls inflation by adjusting interest rates, how easy it is to borrow to influence the money supply and aggregate (total) demand in the economy.

What is the role of interest rates in monetary policy?

• Interest rates have no impact on the money supply

• Interest rates are only used for controlling inflation

• Interest rates are used to control the money supply and influence economic activity.

• Interest rates have no effect on economic activity

Answer explanation

Interest rates are used to control the money supply and influence economic activity.

How do environmental policies impact businesses and consumers?

• Environmental policies have no impact on businesses and consumers

• Environmental policies can impose regulations and costs for compliance on businesses, while also creating opportunities for innovation and sustainable practices. Consumers may experience changes in prices, availability of products, and environmental impact of their purchases.

• Environmental policies lead to decreased innovation and higher costs for businesses, while consumers experience no changes

• Environmental policies only benefit businesses and consumers

Answer explanation

Environmental policies impose regulations and costs on businesses, while creating opportunities for innovation. Consumers experience changes in prices, availability, and environmental impact of purchases.

What are the main objectives of environmental policies?

• Protect the environment, conserve natural resources, and promote sustainable development

• Destroy the environment, deplete natural resources, and encourage unsustainable development

Answer explanation

The main objectives of environmental policies are to protect the environment, conserve natural resources, and promote sustainable development.

If a government wishes to increase economic growth it would ________________interest rates.

Answer explanation

A decrease in interest rates makes it easier to borrow, more attractive to spend and less attractive to save (depending upon the size of the interest rate).

An increase in government spending on education would ____________________ economic growth.

• Decrease

• Increase

Answer explanation

An increase in spending on education would mean that more jobs may be created in education. This may lead to an increase in economic growth and employment. In the long term, the workforce would be more skilled and educated which may lead to greater productivity and economic growth in the future.

An example of expansionary fiscal policy is a ________________ in direct tax rates.

Answer explanation

A decrease in direct tax rates leads to more disposable income, which may lead to increased spending by consumers and investment by businesses. This may lead to economic growth, all other things being equal (ceteris paribus).