Q.1 What is the primary objective of fiscal policy?
To control money supply
To regulate the level of government spending and taxation
To fix interest rates
To control foreign exchange rates
Explanation - Fiscal policy involves government decisions on taxation and spending to influence economic activity, such as controlling inflation or boosting growth.
Correct answer is: To regulate the level of government spending and taxation
Q.2 Which of the following is an example of expansionary fiscal policy?
Increasing taxes
Decreasing government spending
Increasing government spending
Reducing money supply
Explanation - Expansionary fiscal policy is aimed at increasing aggregate demand, usually by increasing government spending or reducing taxes.
Correct answer is: Increasing government spending
Q.3 Which fiscal policy tool is considered automatic?
Government loans
Taxation and transfer payments
New government projects
Printing currency
Explanation - Automatic stabilizers like taxes and unemployment benefits work without new government action to stabilize the economy.
Correct answer is: Taxation and transfer payments
Q.4 Contractionary fiscal policy is used to:
Increase aggregate demand
Decrease inflation
Boost economic growth
Increase government debt
Explanation - Contractionary fiscal policy reduces spending or increases taxes to decrease demand and control inflation.
Correct answer is: Decrease inflation
Q.5 A budget deficit occurs when:
Government spending is less than revenue
Government spending equals revenue
Government spending exceeds revenue
Government collects no taxes
Explanation - A budget deficit happens when the government spends more than it earns, often financed by borrowing.
Correct answer is: Government spending exceeds revenue
Q.6 Which of the following is a limitation of fiscal policy?
Time lag in implementation
It can directly influence interest rates
It automatically balances the economy
It requires no government action
Explanation - Fiscal policy can be slow to implement due to delays in decision-making, legislation, and project execution.
Correct answer is: Time lag in implementation
Q.7 What does a progressive tax system imply in fiscal policy?
Higher taxes on lower incomes
Same taxes for all incomes
Higher taxes on higher incomes
No taxation
Explanation - A progressive tax system collects more from those with higher incomes, helping redistribute wealth.
Correct answer is: Higher taxes on higher incomes
Q.8 Which of the following is a discretionary fiscal policy measure?
Unemployment benefits
Tax rebates announced by the government
Income tax collection
Automatic welfare payments
Explanation - Discretionary fiscal policy involves deliberate government decisions, like introducing new taxes or spending programs.
Correct answer is: Tax rebates announced by the government
Q.9 Fiscal policy can influence the level of:
Inflation, unemployment, and economic growth
Weather patterns
Foreign exchange rates only
Interest rates exclusively
Explanation - By changing spending and taxation, fiscal policy can stabilize prices, employment, and growth.
Correct answer is: Inflation, unemployment, and economic growth
Q.10 Which type of fiscal policy is used during a recession?
Contractionary fiscal policy
Neutral fiscal policy
Expansionary fiscal policy
Automatic fiscal policy
Explanation - During recessions, governments increase spending or reduce taxes to stimulate demand and economic activity.
Correct answer is: Expansionary fiscal policy
Q.11 An increase in taxes generally leads to:
Higher disposable income
Lower disposable income
Increased government borrowing
Automatic stabilization
Explanation - When taxes rise, households have less income to spend, reducing consumption.
Correct answer is: Lower disposable income
Q.12 Which of the following is a supply-side fiscal policy measure?
Reducing corporate taxes to encourage investment
Increasing government borrowing
Reducing unemployment benefits
Raising personal income tax
Explanation - Supply-side measures aim to increase productive capacity and investment by incentivizing production.
Correct answer is: Reducing corporate taxes to encourage investment
Q.13 Public debt increases primarily due to:
Government running a budget surplus
Government running a budget deficit
Balanced budgets
Increase in private savings
Explanation - Continuous deficits accumulate over time, increasing public debt.
Correct answer is: Government running a budget deficit
Q.14 Which fiscal policy action can help control inflation?
Increase government spending
Decrease taxes
Decrease government spending
Increase transfer payments
Explanation - Reducing spending decreases aggregate demand, which can help lower inflation.
Correct answer is: Decrease government spending
Q.15 Which of these is NOT a goal of fiscal policy?
Economic growth
Full employment
Price stability
Controlling stock market trends
Explanation - Fiscal policy targets macroeconomic stability, not stock market movements.
Correct answer is: Controlling stock market trends
Q.16 A government borrowing from the public is an example of:
Monetary policy
Fiscal policy financing
Supply-side policy
Trade policy
Explanation - When a government borrows to cover deficits, it is financing fiscal policy operations.
Correct answer is: Fiscal policy financing
Q.17 Which of the following can be an effect of excessive government borrowing?
Lower interest rates
Crowding out of private investment
Decrease in inflation
Increased foreign investment
Explanation - High government borrowing can raise interest rates, reducing private investment.
Correct answer is: Crowding out of private investment
Q.18 Transfer payments are considered:
Direct government spending on goods
Redistribution of income without goods or services
Taxes on corporations
Loans to businesses
Explanation - Transfer payments, like pensions or unemployment benefits, redistribute income but do not involve purchasing goods or services.
Correct answer is: Redistribution of income without goods or services
Q.19 Which fiscal policy is most likely to reduce unemployment?
Expansionary fiscal policy
Contractionary fiscal policy
Neutral fiscal policy
Supply-side policy only
Explanation - By increasing demand through spending or tax cuts, expansionary fiscal policy can create jobs and reduce unemployment.
Correct answer is: Expansionary fiscal policy
Q.20 Which of the following is a challenge in implementing fiscal policy?
Predicting economic behavior accurately
Deciding interest rates
Managing foreign exchange reserves
Printing money
Explanation - The effectiveness of fiscal policy depends on how individuals and businesses respond to government measures.
Correct answer is: Predicting economic behavior accurately
Q.21 Fiscal stimulus refers to:
Reducing government spending
Increasing taxes
Measures to boost economic activity
Decreasing money supply
Explanation - Fiscal stimulus includes actions like increased spending or tax cuts to encourage growth.
Correct answer is: Measures to boost economic activity
Q.22 Which statement about balanced budgets is correct?
Government spending exceeds revenue
Government revenue exceeds spending
Government revenue equals spending
Government has no debt
Explanation - A balanced budget occurs when government income matches its expenditure.
Correct answer is: Government revenue equals spending
Q.23 Which of the following policies would a government likely adopt during high inflation?
Increase government spending
Cut taxes
Reduce spending and increase taxes
Reduce interest rates
Explanation - Contractionary fiscal policy helps reduce demand and control inflation.
Correct answer is: Reduce spending and increase taxes
Q.24 Which is a long-term goal of fiscal policy?
Stabilizing short-term interest rates
Reducing government debt sustainably
Immediate reduction of unemployment
Fixing exchange rates
Explanation - Long-term fiscal policy aims to maintain sustainable debt levels to avoid future economic problems.
Correct answer is: Reducing government debt sustainably
Q.25 Which of the following is an example of an indirect tax used in fiscal policy?
Income tax
Corporate tax
Sales tax
Wealth tax
Explanation - Indirect taxes like sales tax are collected from consumers when they purchase goods and services.
Correct answer is: Sales tax