Fill in the blank: Expansionary fiscal policy aims to ___ economic activity during periods of recession.

Boost

True or False: Classical economists believed that government intervention was essential for economic stability.

False; classical economists argued that the market could self-regulate without government intervention.

What is the difference between current expenditures and capital expenditures in government spending?

Current vs Capital Expenditures

• Day-to-day operational costs

• Investments in infrastructure

• Long-term project funding

Explain the impact of contractionary fiscal policy on aggregate demand.

Contractionary fiscal policy reduces aggregate demand.

• Lowers government spending significantly.

• Increases taxes, reducing disposable income.

• Decreases consumer spending overall.

Fill in the blank: Fiscal policy primarily influences the level of ___ through government spending and taxation.

Aggregate demand

What role does public debt play in fiscal policy?

Public debt affects fiscal policy.

• Funds government spending needs.

• Can raise interest rates.

• May crowd out private investment.

True or False: Increasing taxes during a recession is a typical measure of expansionary fiscal policy.

False; expansionary fiscal policy typically involves tax cuts to stimulate demand.

Describe how fiscal policy can be used to address income inequality.

Fiscal policy reduces income inequality.

• Progressive taxation taxes higher incomes.

• Public spending aids disadvantaged groups.

• Promotes social welfare and equity.

What is crowding out in the context of fiscal policy?

Crowding out occurs when government borrowing leads to higher interest rates, which in turn reduces private sector investment and consumer spending.

What are the potential limitations of fiscal policy?

Limitations of fiscal policy exist.

• Time lags delay action.

• Crowding out harms investment.

• Assessing conditions is tricky.