Fiscal Policy Concepts and Effects

The video explains fiscal policy, a macroeconomic tool involving government spending and taxation to influence aggregate demand. It covers expansionary fiscal policy, used to boost economic growth, reduce unemployment, and address income inequality, and contractionary fiscal policy, aimed at cooling an overheating economy, reducing budget deficits, and redistributing income. The video also discusses the multiplier effect and how fiscal policy can inadvertently affect long-run aggregate supply. Examples of tax cuts and government spending are provided, with a focus on their impact on aggregate demand and economic growth.

What is the primary goal of fiscal policy?

• To manage foreign exchange rates

• To control inflation

• To influence aggregate demand

• To regulate interest rates

Which of the following is a reason for a government to use expansionary fiscal policy?

• To reduce economic growth

• To boost aggregate demand

• To decrease inflation

• To increase unemployment

How can expansionary fiscal policy affect unemployment?

• It stabilizes unemployment

• It reduces unemployment

• It has no effect on unemployment

• It increases unemployment

What is a key objective of contractionary fiscal policy?

• To increase the budget deficit

• To boost inflation

• To reduce aggregate demand

• To increase government spending

How does contractionary fiscal policy help in reducing a budget deficit?

• By reducing government spending

• By lowering interest rates

• By increasing aggregate demand

• By increasing government borrowing

Which tax policy is an example of expansionary fiscal policy?

• Reducing corporation tax

• Increasing income tax

• Introducing new tariffs

• Raising VAT

Why might a government reduce regressive taxes as part of expansionary fiscal policy?

• To boost consumption among lower-income groups

• To reduce government revenue

• To decrease disposable income

• To increase the tax burden on the poor

What is the effect of cutting income tax on aggregate demand?

• It stabilizes aggregate demand

• It increases aggregate demand

• It has no effect on aggregate demand

• It decreases aggregate demand

What is a potential side effect of expansionary fiscal policy on long-run aggregate supply?

• Reduced economic potential

• Increased capital investment

• Lowered quality of labor

• Decreased labor productivity

What is a potential benefit of increased government spending on infrastructure?

• Improved long-run aggregate supply

• Reduced quantity of capital

• Increased quality of labor

• Decreased productive efficiency