5.1 Fiscal and Monetary Policy Effects

• What is fiscal policy used to stabilize the economy?

  Aggregate demand and supply
• What is the effect of increasing government spending on aggregate demand?

  Shifts AD to the right
• Effects of expansionary fiscal policy in the short term

  1️⃣ Aggregate demand increases

  2️⃣ Economic output rises

  3️⃣ Inflation increases

  4️⃣ Unemployment decreases
• Expansionary fiscal policy shifts the aggregate demand curve to the right
• The long-term effects of expansionary fiscal policy depend on its impact on productivity
• Expansionary fiscal policy aims to reduce unemployment
• Lowering taxes increases disposable income.
• Sustained investments in education and infrastructure can improve productivity and shift the AS curve to the right.
• Expansionary fiscal policy immediately shifts the aggregate supply curve.

  False
• What are the two primary tools of fiscal policy?

  Government spending and taxation
• To combat inflation, the government might raise taxes
• Lowering taxes increases disposable income
• In the long term, expansionary fiscal policy can increase both aggregate demand and aggregate supply
• Match the effect of expansionary fiscal policy with its time frame:

  Short-Term ↔️ Inflation increases

  Long-Term ↔️ Unemployment decreases further
• Expansionary monetary policy aims to lower interest rates and increase the money supply.


  True
• Expansionary monetary policy aims to reduce inflation by raising interest rates.

  False
• Sustained fiscal policies can influence aggregate supply in the long run.


  True
• Expansionary fiscal policy has an immediate direct impact on aggregate supply.

  False
• In the long run, expansionary fiscal policy may moderate inflationary pressures.


  True
• What happens to inflation in the short term under expansionary fiscal policy?

  Increases
• How does sustained fiscal policy influence aggregate supply in the long run?

  Investments in education and infrastructure
• Lowering taxes encourages consumption and investment.

  True
• What happens to unemployment in the long term under expansionary fiscal policy?

  Decreases
• In the long term, contractionary fiscal policy may increase inflation
• What are central banks such as the Federal Reserve responsible for?

  Managing monetary policy
• Match the type of monetary policy with its tools:

  Expansionary ↔️ Lower reserve requirements

  Contractionary ↔️ Raise discount rate
• During a recession, a central bank may lower interest rates to stimulate borrowing and spending.

  True
• Match the type of fiscal policy with its effects:

  Expansionary ↔️ Increases aggregate demand

  Contractionary ↔️ Decreases aggregate demand
• In the long run, expansionary fiscal policy may reduce inflation if the aggregate supply curve shifts to the right
• Contractionary fiscal policy leads to a decrease in economic output.
• An expansionary monetary policy reduces unemployment
• Lower interest rates from expansionary monetary policy can encourage investment in education and infrastructure.


  True
• The Aggregate Supply (AS) curve is directly affected by contractionary monetary policy in the short term

  False
• What happens to unemployment when economic output falls due to contractionary monetary policy?

  It increases
• What is the potential long-term effect of reduced investment in education, infrastructure, and R&D on the AS curve?

  Shifts left
• Monetary policy primarily influences aggregate demand in the long run

  True
• During a recession, the government might increase spending on infrastructure projects as part of expansionary fiscal policy

  True
• During a recession, governments might increase infrastructure spending to stimulate economic activity


  True
• What is the effect of contractionary fiscal policy on aggregate demand in the long run?

  Decreases AD
• What happens to economic output as aggregate demand (AD) decreases?

  It decreases