Understanding Business Cycles and Fiscal Policies

The video explains the business cycle, highlighting the concepts of positive and negative output gaps. It discusses fiscal policy as a tool for managing these gaps, distinguishing between discretionary fiscal policy and automatic stabilizers. Automatic stabilizers, such as taxes and welfare payments, help smooth economic fluctuations without requiring special government action. The video emphasizes the importance of these stabilizers in maintaining economic stability during different phases of the business cycle.

What does the vertical axis represent in the business cycle diagram?

• Time

• Real GDP

• Inflation Rate

• Unemployment Rate

What is a positive output gap?

• When the economy is experiencing deflation

• When the economy is below full employment output

• When the economy is at full employment output

• When the economy is above full employment output

What might a government do to address a positive output gap?

• Increase taxes and reduce spending

• Lower interest rates

• Implement expansionary fiscal policy

• Pass a stimulus package

What is discretionary fiscal policy?

• Policies that do not change with economic conditions

• Government actions taken to address specific economic conditions

• A type of monetary policy

• Automatic adjustments in the economy

How do taxes act as automatic stabilizers during economic expansion?

• They are eliminated

• They decrease to stimulate growth

• They remain constant

• They increase, reducing disposable income

What happens to corporate taxes during a recession?

• They remain unchanged

• They decrease

• They increase

• They are doubled

Why are welfare payments considered automatic stabilizers?

• They increase during economic booms

• They decrease government spending during recessions

• They are unaffected by economic cycles

• They adjust automatically based on economic conditions

What effect do unemployment benefits have during a recession?

• They decrease government spending

• They increase government spending

• They reduce the tax rate

• They have no effect

What is the main difference between discretionary fiscal policy and automatic stabilizers?

• Discretionary policy is active, stabilizers are passive

• Discretionary policy is automatic, stabilizers are not

• Stabilizers require government action, discretionary policy does not

• There is no difference

What role do existing tax policies play in the business cycle?

• They amplify economic fluctuations

• They have no impact

• They help smooth out economic oscillations

• They only affect inflation