Fiscal and Monetary Policy Tools and Application 2025

What is the primary goal of fiscal policy?

To regulate economic growth through taxation and government spending.

If the economy is in a recession, which fiscal policy action should the government take?

Increase government spending and/or reduce taxes.

Which fiscal policy action would most likely slow economic growth?

Increasing taxes and reducing government spending.

How can government regulations benefit the economy?

They prevent unfair business practices and protect consumers.

What is a potential downside of increasing government regulations?

It may reduce corporate profits and slow economic growth.

If inflation is high, what fiscal policy tool should the government use?

Increase taxes and decrease government spending.

Which of the following is an example of expansionary fiscal policy?

Lowering income tax rates.

What happens when the government increases spending on infrastructure projects?

It stimulates economic growth by creating jobs and increasing demand.

If the economy is experiencing rapid inflation, what action should the government take?

Reduce government spending.

A government surplus occurs when:

Tax revenue exceeds government spending.

What is the main purpose of monetary policy?

To regulate the money supply and stabilize the economy.

If the Federal Reserve wants to slow down economic growth, which action should it take?

Increase the reserve requirement for banks.

What action by the Federal Reserve would help encourage economic growth?

Buying government bonds.

If unemployment is rising, what action might the Federal Reserve take?

Lower interest rates to encourage borrowing and investment.

How does raising interest rates affect the economy?

It discourages borrowing and slows down economic growth.

When the Federal Reserve sells bonds, what effect does it have on the economy?

It removes money from circulation, slowing economic growth.

What happens when the Federal Reserve lowers the reserve requirement for banks?

Banks can lend more money, increasing economic growth.

The Federal Reserve's decision to lower interest rates is an example of:

Expansionary monetary policy.

If inflation is rising too quickly, what is the best monetary policy response?

Increase interest rates.

Which monetary policy tool directly impacts how much banks can lend?

Reserve requirements.

A recession has caused unemployment to rise. What combination of fiscal and monetary policies would best address the issue?

Lower taxes, increase government spending, and reduce interest rates.

The economy is growing too fast, causing inflation. What combination of policies should be used to slow down growth?

Raise taxes, decrease government spending, and increase interest rates.

A business owner is considering expanding but is worried about borrowing costs. What monetary policy action would encourage them to take a loan?

The Federal Reserve lowers interest rates.

Consumers are borrowing and spending too much, fueling inflation. What should the Federal Reserve do?

Sell bonds to reduce the money supply.

The stock market is declining, and businesses are hesitant to invest. What fiscal policy action could help stimulate the economy?

Increase government spending on public projects.