Fiscal Policy

Question 1

Who enacts fiscal policy?

Answer 1

the government, through G and T

Question 2

To increase G - expansionary fiscal policy, govt buys/sells treasure bills?

Answer 2

Sells, in exchange for funds

Question 3

what does effectiveness of expansionary fiscal policy depend on?

Answer 3

MPC

Question 4

when is contractionary fiscal policy used?

Answer 4

when spending too high, too much money in economy, avoid inflation

Question 5

What is crowding out?

Answer 5

when G increases by borrowing, demand for loanable funds increases - upward pressure on interest rates - private investment decreases

Question 6

what is crowding in?

Answer 6

when G increases - GDP increases - investor confidence increases - private investment increases

Question 7

Crowding out/crowding in dominates in short run?

Answer 7

Crowding IN

Question 8

3 mechanisms through which govt can close inflationary/recessionary gaps?
(fiscal policy mechanisms)

Answer 8

• increase govt spending G
• decrease taxes (tax cuts)
• increase transfer payments

Question 9

downside to expansionary fiscal policy?

Answer 9

mitigates recessions but increases govt deficit

Question 10

why are supply side tax cuts preferred?

Answer 10

they push supply outwards and reduce inflation simultaneously