Question

Complete each statement by selecting the appropriate type of fiscal policy.

Answer 1

Answer:

a) Lowering inflation and increasing unemployment is a goal of Contractionary fiscal policy.

b) Lowering unemployment and prices is a goal of Supply-side fiscal policy.

c) Lowering unemployment and increasing inflation is a goal of Expansionary fiscal policy.

d) Supply-side fiscal policy focuses on reducing regulations on businesses.

e) Expansionary fiscal policy involves more government spending money on anything.

f) Supply-side fiscal policy encourages human and capital development.

Explanation:

The goal of contractionary fiscal policy is to reduce inflation. Therefore the tools would be an decrease in government spending and an increase in taxes. This would shift the aggregate demand curve to the left decreasing inflation, but it may also cause some unemployment.

Expansionary fiscal policy is done by increasing government spending or decreasing taxes. It is intended to boost growth to a healthy economic level by reducing regulations on business (reducing taxes).

Expansionary fiscal policy can increase government spending on goods and services, which boosts aggregate demand and leads to increased economic output. Spending on education and on scientific research improve human capital in the form of worker productivity.

Traditional fiscal policy calls for manipulating the government's budget (tax revenues and expenditures) to shift aggregate demand (AD) and return the economy to full‑employment equilibrium.

Contractionary fiscal policy is used to lower inflation by decreasing AD through higher taxes, lower government spending, or both. The unfortunate side effect is that it also lowers real GDP, which increases unemployment.

Expansionary fiscal policy is used during a recession to increase AD through lower taxes, higher government spending, or both, which increases real GDP and lowers unemployment. In this view, what the government actually spends money on is somewhat irrelevant. The idea is to just increase spending, which provides someone with new income, which kicks off the multiplier process. The unfortunate side effect is higher prices.

Supply‑side policies are designed to affect aggregate supply, not aggregate demand. If there is an increase in aggregate supply, the economy will come to a new equilibrium position with both lower unemployment, because real GDP increases, and lower inflation. The unfortunate reality here is that supply‑side policies are not clearly defined and work in the long run, not in the short run.

Specific supply‑side policies include reducing disincentives to work hard and invest, such as reducing income taxes and removing government regulations that lower firms' ability to produce. Education and grants for research and development can also help increase productivity.