Question

By______spending or______taxes, a government can close the GDP gap.

a	decreasing; cutting

b	increasing; cutting

c	increasing; adding

d	decreasing; adding

An element of fiscal policy that changes automatically as income changes.

a	Automatic Stabilizer

b	Discretionary Fiscal Policy

c	Automatic De-Stabilizer

d	none of the above

A system in which banks keep less than 100 percent of their deposits available for withdrawal.

a	Required Reserves

b	Excess Reserves

c	Deposit Expansion

d	Fractional Reserve Banking System

Answer 1

1. Ans: increasing; cutting

Explanation:

GDP gap refers to the difference between an economy's actual total output and its potential output. when actual output is less than potential output, it is called negative GDP gap. This gap can be closed by increasing spending and cutting taxes. Thus, option [b] is correct answer.

2. Ans: Automatic Stabilizer

Explanation:

In an economy if income increases, people will automatically pay more taxes and the Government will spend less on unemployment benefits. The increased Taxes and less Government spending will act as a check on AD. But, in case of recession, the opposite will occur with decreased tax revenue and increased government spending on benefits, which will help to increase AD. Thus, option [a] is correct answer.

3. Ans: Fractional Reserve Banking System

Explanation:

The fractional reserve banking system refers to a system in which banks hold reserves equal to a fraction of their deposit. Thus, option [d] is correct answer.