Los 14.a

Question 1

What is fiscal policy, and how do budget balances (deficit, surplus) affect GDP?

Answer 1

Fiscal policy is the government’s use of spending and taxation to influence economic activity.

A balanced budget occurs when tax revenues equal expenditures.

A budget surplus occurs when tax revenues exceed expenditures.

A budget deficit occurs when expenditures exceed tax revenues.

Increasing a deficit (or decreasing a surplus) is expansionary and tends to increase GDP.

Decreasing a deficit (or increasing a surplus) is contractionary and tends to decrease GDP.
Fiscal policy can also be used to redistribute income and wealth.

Question 2

What is monetary policy, and what are the differences between expansionary and contractionary monetary policy?

Answer 2

Monetary policy refers to central bank actions that affect the quantity of money and credit to influence economic activity.

Expansionary (accommodative/easy) policy: The central bank increases the quantity of money and credit to stimulate economic activity.

Contractionary (restrictive/tight) policy: The central bank decreases the quantity of money and credit to slow economic activity.
The main goals of monetary policy are to maintain stable prices and promote positive economic growth.