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Expansionary Fiscal Policy: Definition and Objectives

Description: This quiz is designed to assess your understanding of Expansionary Fiscal Policy, its definition, and objectives. Answer the following questions to test your knowledge.
Number of Questions: 15
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Tags: indian economics fiscal policy government budget expansionary fiscal policy
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What is the primary objective of an expansionary fiscal policy?

  1. To increase aggregate demand

  2. To decrease aggregate demand

  3. To maintain a balanced budget

  4. To reduce government spending


Correct Option: A
Explanation:

The primary objective of an expansionary fiscal policy is to stimulate economic growth by increasing aggregate demand, which is the total demand for goods and services in an economy.

During an economic recession, which fiscal policy is typically implemented?

  1. Expansionary fiscal policy

  2. Contractionary fiscal policy

  3. Neutral fiscal policy

  4. Balanced budget fiscal policy


Correct Option: A
Explanation:

During an economic recession, an expansionary fiscal policy is typically implemented to increase aggregate demand and stimulate economic growth.

Which of the following is a common tool used in expansionary fiscal policy?

  1. Increased government spending

  2. Increased taxes

  3. Decreased government spending

  4. Decreased taxes


Correct Option: A
Explanation:

Increased government spending is a common tool used in expansionary fiscal policy to inject money into the economy and stimulate economic activity.

What is the impact of an expansionary fiscal policy on interest rates?

  1. Interest rates increase

  2. Interest rates decrease

  3. Interest rates remain unchanged

  4. Interest rates become volatile


Correct Option: B
Explanation:

An expansionary fiscal policy typically leads to a decrease in interest rates, as the government's increased borrowing to finance its spending can put downward pressure on interest rates.

Which sector of the economy is directly impacted by an expansionary fiscal policy?

  1. Private sector

  2. Public sector

  3. Both private and public sectors

  4. Neither private nor public sector


Correct Option: C
Explanation:

An expansionary fiscal policy directly impacts both the private and public sectors, as increased government spending can lead to increased demand for goods and services from both sectors.

What is the potential impact of an expansionary fiscal policy on inflation?

  1. Inflation increases

  2. Inflation decreases

  3. Inflation remains unchanged

  4. Inflation becomes unpredictable


Correct Option: A
Explanation:

An expansionary fiscal policy can potentially lead to an increase in inflation, as increased government spending and borrowing can put upward pressure on prices.

Which of the following is NOT a potential risk associated with an expansionary fiscal policy?

  1. Increased government debt

  2. Increased economic growth

  3. Increased inflation

  4. Increased unemployment


Correct Option: B
Explanation:

Increased economic growth is not a potential risk associated with an expansionary fiscal policy, as it is the primary objective of this policy.

How does an expansionary fiscal policy affect the government budget?

  1. Government budget deficit increases

  2. Government budget deficit decreases

  3. Government budget remains balanced

  4. Government budget surplus increases


Correct Option: A
Explanation:

An expansionary fiscal policy typically leads to an increase in the government budget deficit, as the government's increased spending exceeds its revenue.

Which of the following is a potential benefit of an expansionary fiscal policy?

  1. Reduced unemployment

  2. Increased government debt

  3. Increased inflation

  4. Reduced economic growth


Correct Option: A
Explanation:

A potential benefit of an expansionary fiscal policy is reduced unemployment, as increased government spending can lead to increased demand for labor.

What is the primary focus of an expansionary fiscal policy in the short term?

  1. Reducing government debt

  2. Stimulating economic growth

  3. Balancing the budget

  4. Controlling inflation


Correct Option: B
Explanation:

In the short term, an expansionary fiscal policy primarily focuses on stimulating economic growth by increasing aggregate demand.

Which of the following is a potential challenge associated with implementing an expansionary fiscal policy?

  1. Increased government revenue

  2. Increased economic growth

  3. Increased government debt

  4. Reduced unemployment


Correct Option: C
Explanation:

A potential challenge associated with implementing an expansionary fiscal policy is the risk of increasing government debt, as the government's increased spending can lead to a budget deficit.

How does an expansionary fiscal policy impact the overall level of economic activity?

  1. Increases economic activity

  2. Decreases economic activity

  3. Has no impact on economic activity

  4. Makes economic activity unpredictable


Correct Option: A
Explanation:

An expansionary fiscal policy is designed to increase economic activity by stimulating aggregate demand and boosting overall economic growth.

Which of the following is a potential consequence of an expansionary fiscal policy in the long term?

  1. Reduced government debt

  2. Increased economic growth

  3. Increased inflation

  4. Reduced unemployment


Correct Option: C
Explanation:

In the long term, an expansionary fiscal policy can potentially lead to increased inflation if the government's increased spending and borrowing put upward pressure on prices.

What is the typical response of central banks to an expansionary fiscal policy?

  1. Increase interest rates

  2. Decrease interest rates

  3. Maintain interest rates

  4. Raise and lower interest rates alternately


Correct Option: B
Explanation:

Central banks may respond to an expansionary fiscal policy by decreasing interest rates to complement the government's efforts to stimulate economic growth.

Which of the following is NOT a potential impact of an expansionary fiscal policy on the private sector?

  1. Increased investment

  2. Increased consumer spending

  3. Increased government spending

  4. Increased business confidence


Correct Option: C
Explanation:

Increased government spending is not a potential impact of an expansionary fiscal policy on the private sector, as it is a direct action taken by the government.

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