Chapter 16

Question 1

fiscal policy (what is it)

Answer 1

use of government spending and taxation to influence the overall economy by managing aggregate demand, controlling inflation

Question 2

multiplier effect

Answer 2

a measure of how much a change in spending will impact the overall economy

Question 3

flexible rate effect on fiscal policy

Answer 3

more effectiveness as the government can adjust monetary measures without the constraints of a fixed exchange rate

Question 4

fixed rate effect on fiscal policy

Answer 4

limit the effectiveness of fiscal policy as it constrains a government’s ability to adjust monetary measures

Question 5

fiscal policy pro and con

Answer 5

pro - reduces uncertainty. con - long lag

Question 6

automatic stabilizers

Answer 6

fiscal policies that stimulate AD when economy goes in recession, without policy makers getting involved

Question 7

crowding out effect

Answer 7

increased government borrowing reduces private sector borrowing