FISCAL POLICY

1. Question: What is fiscal policy? Answer: Fiscal policy refers to the use of government spending and
taxation to influence the economy. It aims to achieve macroeconomic objectives such as economic growth, full
employment, and price stability.

2. Question: What are the main objectives of fiscal policy? Answer: The primary objectives of fiscal policy
include promoting economic stability, achieving high employment, controlling inflation, and fostering economic
growth.

3. Question: How does fiscal policy differ from monetary policy? Answer: Fiscal policy involves government
actions related to spending and taxation, while monetary policy involves the control of money supply and
interest rates by a central bank.

4. Question: What are the two main components of fiscal policy? Answer: The two main components of
fiscal policy are government spending and taxation.

5. Question: Explain expansionary fiscal policy. Answer: Expansionary fiscal policy involves increasing
government spending and/or reducing taxes to stimulate economic growth during periods of economic
downturn or recession.

6. Question: What is contractionary fiscal policy? Answer: Contractionary fiscal policy involves decreasing
government spending and/or increasing taxes to cool down an overheated economy and control inflation.

7. Question: Can you give examples of automatic stabilizers in fiscal policy? Answer: Automatic stabilizers
are features of fiscal policy that automatically help stabilize the economy during economic fluctuations.
Examples include unemployment benefits and progressive income taxes.

8. Question: How does fiscal policy impact aggregate demand? Answer: Fiscal policy affects aggregate
demand by influencing the levels of government spending and taxation, which in turn impact consumer
spending, investment, and net exports.

9. Question: Discuss the limitations of fiscal policy. Answer: Limitations of fiscal policy include time lags,
political considerations, crowding out, and the potential for unintended consequences.

10. Question: Can fiscal policy be used to address income inequality? Answer: Yes, fiscal policy can be used
to address income inequality by implementing progressive tax policies, social welfare programs, and targeted
spending in education and healthcare.