Multiple Choice
Smoothing the peaks and troughs of the business cycle with fiscal policy is known as:
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19. Fiscal Policy
Introduction to Fiscal Policy
Multiple Choice
Which of the following is an example of fiscal policy?
A
Congress passes a law to increase government spending on infrastructure projects.
B
The central bank lowers its target interest rate to stimulate borrowing and investment.
C
Banks increase the interest rates they charge on business loans due to higher default risk.
D
A firm raises the price of its products in response to higher input costs.
Verified step by step guidance1
Step 1: Understand the definition of fiscal policy. Fiscal policy involves government decisions about taxation and government spending to influence the economy.
Step 2: Identify which options involve government actions related to spending or taxation. Fiscal policy is typically enacted by legislative bodies like Congress.
Step 3: Recognize that the option 'Congress passes a law to increase government spending on infrastructure projects' directly involves government spending decisions, which is a classic example of fiscal policy.
Step 4: Differentiate fiscal policy from monetary policy, which involves central bank actions such as changing interest rates. For example, 'The central bank lowers its target interest rate' is monetary policy, not fiscal policy.
Step 5: Understand that changes in bank interest rates or firm pricing decisions are market responses and not examples of fiscal policy.
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