Fiscal policy

In this episode, we explore fiscal policy, the second major tool governments use to manage their economies. Building on our understanding of monetary policy, you'll learn how the government, rather than a central bank, uses its powers of spending and taxation to influence GDP, unemployment, and inflation. We will break down the two main stances—expansionary policy to stimulate growth and contractionary policy to curb inflation—and see how they are implemented. Discover the difference between deliberate discretionary actions, like passing a new spending bill, and the 'automatic stabilizers' like unemployment benefits that work without new legislation, providing a crucial buffer for the economy.

Check your understanding

These are the same multiple-choice questions you will see in the Quiz section after you listen to the episode. Use them here to preview or review the answers.

Which entity is primarily responsible for conducting a nation's fiscal policy?

  1. The central bank
  2. Private corporations
  3. The government (i.e., the legislative and/or executive branches)
  4. The international monetary fund
  5. The stock market

What are the two primary tools or levers of fiscal policy?

  1. Interest rates and money supply
  2. Government spending and taxation
  3. Imports and exports
  4. Stock prices and bond yields
  5. Wages and prices

A government decides to fund a major new high-speed rail network to create jobs and stimulate the economy. This is an example of what type of policy?

  1. Contractionary monetary policy
  2. Expansionary fiscal policy
  3. Contractionary fiscal policy
  4. Expansionary monetary policy
  5. A corporate merger

Under which economic condition would a government most likely implement contractionary fiscal policy, such as raising taxes or cutting spending?

  1. High unemployment
  2. High inflation
  3. Low economic growth
  4. A stock market crash
  5. A trade surplus

During an economic downturn, more people automatically begin to receive unemployment benefits, while government tax revenues fall. This is an example of:

  1. A discretionary fiscal policy
  2. An automatic stabilizer
  3. A monetary policy action
  4. A change in international trade law
  5. A supply-side shock

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