Question

Which of the following could cause a decrease in the budget surplus? Check all that apply.

-Restrictive fiscal policy

-Expansionary fiscal policy

-An economic expansion

-An economic recession

True or False: Keynesian economists argue that the government can fight inflation by implementing restrictive fiscal policy.

-False

-True

Keynesian theory stresses the importance of (expansionary policy, countercyclical policy, or restrictive policy) _______ to offset fluctuations in (aggregate demand, short run aggregate supply, or long run aggregate supply)__________.

Answer 1

Any factors which increase government expenditure reduce the budget surplus.

1.An expansionary fiscal policy like increase in public expenditure and reduction in tax reduce the surplus of the government.

An economic expansion necessitates the creation of more public utility services (provision for basic public goods) by the government and thus the government expenditure increase and surplus decrease.

During times of recession the transfer payments of the government increase which lowers the government surplus.

Answer: Expansionary fiscal policy

An economic expansion

An economic recession.

2. J.M Keynes supports the use of fiscal policy to stabilize the economy. He recommends an expansionary fiscal policy during recession and restrictive fiscal policy during inflation.

Answer: True

3. According to Keynes the basic fluctuation in an economy is caused by fluctuation in aggregate demand. Thus the fiscal policy to be cyclical in nature meaning that an expansionary fiscal policy during recession and contractionary fiscal policy during the times of inflation.

Answer: Keynesian theory stresses the importance of countercyclical policy to offset fluctuations in aggregate demand.