Fiscal Policy and Economic Impacts

The video tutorial covers fiscal policy tools, focusing on taxes and government spending, and their application in different economic situations. It explains expansionary and contractionary fiscal policies, their effects on government deficits, and the concept of crowding out. The tutorial highlights how government borrowing can increase interest rates, affecting private investment and aggregate demand. The video concludes with a summary of key points, emphasizing the importance of understanding fiscal policy and its economic implications.

What are the two main tools of fiscal policy?

• Taxes and interest rates

• Taxes and government spending

• Government spending and exports

• Interest rates and government spending

During a recessionary gap, what fiscal policy does the government typically engage in?

• Monetary policy

• Expansionary fiscal policy

• Neutral fiscal policy

• Contractionary fiscal policy

What happens to the government budget when expansionary fiscal policy is implemented?

• It moves towards a surplus

• It remains balanced

• It moves towards a deficit

• It becomes irrelevant

What is the government's goal during an expansionary gap?

• Increase demand and inflation

• Decrease demand and lower inflation

• Maintain current demand levels

• Increase government spending

How does contractionary fiscal policy affect the budget over time?

• It remains unchanged

• It becomes unpredictable

• It moves towards a deficit

• It moves towards a surplus

What is 'crowding out' in the context of fiscal policy?

• A decrease in government spending

• An increase in exports

• An increase in private investment

• A reduction in private investment due to increased government borrowing

What effect does government borrowing have on the demand for loanable funds?

• It increases the demand

• It stabilizes the demand

• It decreases the demand

• It has no effect

How does an increase in interest rates affect business investments?

• It leads to more government spending

• It discourages investments

• It has no effect

• It encourages more investments

Which component of aggregate demand is directly affected by crowding out?

• Exports

• Government spending

• Consumption

• Investment

What is a potential consequence of higher interest rates due to crowding out?

• Decreased private sector borrowing

• Increased private sector borrowing

• Stable private sector borrowing

• Unchanged private sector borrowing