Taxes and fiscal policy MCQs

A budget deficit occurs when the government spends more money than it brings in for a fiscal year. This means that the government is spending beyond its means and is unable to balance its budget. It can lead to an increase in government debt and may require borrowing or other measures to cover the deficit.

The Federal Reserve System is primarily responsible for managing the money supply. As the central bank of the United States, it has the authority to regulate and control the nation's monetary policy. This includes actions such as setting interest rates, conducting open market operations, and controlling the reserve requirements of banks. By managing the money supply, the Federal Reserve aims to promote economic stability, control inflation, and support the overall health of the economy.

Monetary policy refers to the actions taken by a central bank to control and regulate the money supply in an economy. By altering the size of the money supply, the central bank can influence the price and accessibility of credit. Contractionary monetary policy aims to decrease the money supply, which in turn increases interest rates and reduces borrowing and spending. This helps to control inflation. On the other hand, expansionary monetary policy involves increasing the money supply, which lowers interest rates, encourages borrowing and spending, and stimulates economic growth.

Fiscal stimulus, stimulus cheques, decreased reserve requirements, lower interest rates, and reduced taxes are all examples of measures taken to stimulate economic growth and increase aggregate demand. These policies are typically implemented during times of economic downturn or recession to boost consumer spending, investment, and overall economic activity. Expansionary policy is aimed at increasing the money supply, reducing taxes, and increasing government spending to stimulate economic growth.

When the Federal Reserve purchases government bonds and securities, it injects money into the economy. This increases the money supply as there is more money available in the market. With an increase in money supply, individuals and businesses have more funds to spend and invest, leading to an increase in aggregate demand. Therefore, both the money supply and aggregate demand increase as a result of the Federal Reserve's purchase of government bonds and securities.

The Federal Reserve is responsible for implementing monetary policies to regulate the economy. These policies include raising the discount rate, which is the interest rate at which banks borrow money from the central bank. The Fed can also buy government bonds to inject money into the economy and lower the reserve requirement, which determines the amount of money banks must hold in reserve. However, raising personal income tax rates is not a monetary policy tool used by the Federal Reserve. It falls under fiscal policy, which is the responsibility of the government, not the central bank.

Money loses its value when it becomes too plentiful. When there is an excessive amount of money in circulation, it leads to inflation. This means that the value of each unit of money decreases, as there is more money available to purchase the same amount of goods and services. As a result, prices increase and the purchasing power of money decreases, causing it to lose its value.

The correct answer is Traditional, Command, Mixed, & Market. The four major types of economic systems are traditional, command, mixed, and market. Traditional economic systems are based on customs and traditions, where economic decisions are determined by cultural norms and values. Command economic systems are characterized by centralized planning and government control over resources and production. Mixed economic systems combine elements of both command and market systems, with a mix of government intervention and private enterprise. Market economic systems are based on supply and demand, where prices and production are determined by the interactions of buyers and sellers in the marketplace.

Buying bonds is a monetary policy tool used by the Federal Reserve to expand the economy. When the Federal Reserve buys bonds, it injects money into the economy, increasing the money supply. This stimulates economic activity by making more funds available for lending and investment. It also helps to lower interest rates, making borrowing cheaper and encouraging consumer spending and business investment. Overall, buying bonds is a way for the Federal Reserve to provide a boost to the economy and promote growth.

The correct answer is "Discount rate". The discount rate is the interest rate that the Federal Reserve charges banks for short-term loans. This rate is set by the Federal Reserve and is used as a tool to control the money supply and influence the overall economy. By adjusting the discount rate, the Federal Reserve can encourage or discourage borrowing and spending by banks, which in turn affects interest rates and economic activity.