Question

q11. A contractionary fiscal policy by a government may result in which of the following?

• An increased trade deficit
• a reduction in government borrowing
• crowding out of private investment
• lower interest rates

q12. How federal government taxing and spending affects aggregate demand is

• the point of corporate policies.
• the point of fiscal policy.
• the point of monetary policy.

Answer 1

11.

Fiscal policy is used by the government and for fiscal policy government either change government expenditure or change in the taxes.

In Contractionary fiscal policy, therefore government either decreases the government spending or increase tax.

Hence in case of contractionary fiscal policy government either decreases its spending or increase tax rate. In both the case, government budget will be in surplus because government revenue will increase. Hence government borrowing will decrease.

Hence option second is the correct answer.

12.

Fiscal policy is used by the government and for fiscal policy government either change government expenditure or change in the taxes.

In Contractionary fiscal policy, therefore government either decreases the government spending or increase tax.

Since the expansionary fiscal policy means either an increase in the government expenditure or decrease in the tax. This policy is used for increasing aggregate demand.

· Hence it can be said that how federal government taxing and spending affects aggregate demand is the point of fiscal policy.

· Hence option second is the correct answer.