Fiscal Policy and Stimulus

Question 1

Recessionary Gap

Answer 1

Actual GDP is below it’s potential
Workers unemployed
Factories not being utilized

Question 2

Inflationary Gap

Answer 2

Actual GDP a bit higher than potential
Unsustainable
Eventually producers bid up prices thus leading inflation

Question 3

Fiscal Policy

Answer 3

The way a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy

Question 4

Expansionary Fiscal Policy

Answer 4

Stimulating the economy when it’s slow (contracting)
Increase government spending
Cut taxes

Question 5

Contractionary Fiscal Policy

Answer 5

Enacted by a government to reduce the money supply thus the spending in a country

Question 6

Deficit Spending

Answer 6

Government borrows money and purposely goes into debt, spending more money than is collected in taxes in order to stimulate the economy. Happens with Expansionary Fiscal Policy.

Question 7

Crowding out

Answer 7

When increased public sector spending replaces or drives down private sector spending

Question 8

Austerity

Answer 8

Raising taxes and cutting government spending to reduce debt