Question 1

There is an inverse relationship between the budget deficit and real GDP because

Accepted Answer

A) of adjustments in inflation. 
B) of the inverse relationship between interest payments on the debt and real GDP. 
C) as real GDP increases, tax revenue increases and transfer payments decline. 
D) as real GDP declines, taxes increase and transfer programs decline. 
E) as real GDP increases, taxes decline and spending on transfer programs increases. 
A) of adjustments in inflation. 
B) of the inverse relationship between interest payments on the debt and real GDP. 
C) as real GDP increases, tax revenue increases and transfer payments decline. 
D) as real GDP declines, taxes increase and transfer programs decline. 
E) as real GDP increases, taxes decline and spending on transfer programs increases.

Question 2

A decrease in tax rates

Accepted Answer

A) has no effect on the AD curve. 
B) causes the AD curve to shift left. 
C) causes the AD curve to shift right. 
D) has only a short-term effect on real GDP. 
E) usually leads to a reduction in potential GDP. 
A) has no effect on the AD curve. 
B) causes the AD curve to shift left. 
C) causes the AD curve to shift right. 
D) has only a short-term effect on real GDP. 
E) usually leads to a reduction in potential GDP.

Question 3

In the United States, the fiscal year runs from May to May.

Accepted Answer

A) True 
 B)False

Question 4

The largest share of expenditures by state and local governments is for

Accepted Answer

A) purchases of goods and services. 
B) national defense. 
C) transfer payments. 
D) interest payments. 
E) law enforcement. 
A) purchases of goods and services. 
B) national defense. 
C) transfer payments. 
D) interest payments. 
E) law enforcement.

Question 5

What are the three classes of federal expenditures? Of these, what is the largest?

Accepted Answer

The three classes are purchase

Question 6

Exhibit 26-1  
-If real GDP equals C in Exhibit 26-1,

Accepted Answer

A) the structural surplus is equal to S2 - S1. 
B) the cyclical surplus is equal to S2. 
C) the cyclical surplus is equal to S2 - S1. 
D) there is no structural surplus. 
E) there is a balanced budget. 
A) the structural surplus is equal to S2 - S1. 
B) the cyclical surplus is equal to S2. 
C) the cyclical surplus is equal to S2 - S1. 
D) there is no structural surplus. 
E) there is a balanced budget.

Question 7

Budget deficits have occurred every year for the past three decades.

Accepted Answer

A) True 
 B)False

Question 8

Interest rate payments are what the federal government pays every year on its debt. Total interest payments equal the interest rate multiplied by the amount of government debt outstanding.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true about the relationship between the federal budget deficit and the federal debt?

Accepted Answer

A) Whenever a country has a positive amount of federal debt, it must run a federal budget deficit in that year. 
B) As discussed in the textbook, the federal budget deficit represents a real variable, while the federal debt represents a nominal variable. 
C) As discussed in the textbook, the federal budget deficit represents a flow variable, while the federal debt represents a stock variable. 
D) All of the above are true. 
E) None of the above are true. 
A) Whenever a country has a positive amount of federal debt, it must run a federal budget deficit in that year. 
B) As discussed in the textbook, the federal budget deficit represents a real variable, while the federal debt represents a nominal variable. 
C) As discussed in the textbook, the federal budget deficit represents a flow variable, while the federal debt represents a stock variable. 
D) All of the above are true. 
E) None of the above are true.

Question 10

A change in taxes can affect potential GDP.

Accepted Answer

A) True 
 B)False

Question 11

There were federal budget surpluses between 1998 and 2001 because income grew very rapidly as the economy expanded during that time period.

Accepted Answer

A) True 
 B)False

Question 12

What is the difference between a structural surplus and a cyclical surplus?

Accepted Answer

A structural surplus is the bu

Question 13

Which of the following would cause the AD curve to shift to the right?

Accepted Answer

A) An increase in sales taxes 
B) An increase in potential GDP 
C) A decrease in unemployment compensation 
D) An increase in social security payments 
E) A decrease in military purchases 
A) An increase in sales taxes 
B) An increase in potential GDP 
C) A decrease in unemployment compensation 
D) An increase in social security payments 
E) A decrease in military purchases

Question 14

To say that fiscal policy is countercyclical means that

Accepted Answer

A) it is used only during a recession. 
B) cyclical movements in the economy can be offset by fiscal policy. 
C) it is not very effective as a policy tool. 
D) government spending and real GDP are negatively correlated. 
E) it is used only every other year. 
A) it is used only during a recession. 
B) cyclical movements in the economy can be offset by fiscal policy. 
C) it is not very effective as a policy tool. 
D) government spending and real GDP are negatively correlated. 
E) it is used only every other year.

Question 15

Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.

Accepted Answer

If the government reduces spending befor

Question 16

Tax cuts as part of a countercyclical policy have

Accepted Answer

A) in most cases been able to offset the effects of a recession. 
B) always been successful. 
C) been able at best to speed up the recovery from recession. 
D) rarely had any positive long-run effect. 
E) never been used. 
A) in most cases been able to offset the effects of a recession. 
B) always been successful. 
C) been able at best to speed up the recovery from recession. 
D) rarely had any positive long-run effect. 
E) never been used.

Question 17

Name two reasons why the actual budget may differ from the budget enacted at the start of the fiscal year.

Accepted Answer

Possible reasons are

Question 18

Suppose, for a hypothetical economy, potential GDP equals $9,200 billion. If real GDP equals $9,400 billion, then according to the table below, the cyclical surplus equals   
A)$320 billion.
B)$40 billion.
C)-$40 billion.
D)$20 billion.
E)$360 billion.

Accepted Answer

The answer of Suppose, for a hypothetical economy, potential GDP...

Question 19

In practice, discretionary changes in fiscal policy have offset booms and recessions.

Accepted Answer

A) True 
 B)False

Question 20

The Economic Growth and Tax Reconciliation Act of 2001 is a recent example of discretionary fiscal policy.

Accepted Answer

A) True 
 B)False

Exam 26: Fiscal Policy

There is an inverse relationship between the budget deficit and real GDP because

A decrease in tax rates

In the United States, the fiscal year runs from May to May.

The largest share of expenditures by state and local governments is for

What are the three classes of federal expenditures? Of these, what is the largest?

Exhibit 26-1 -If real GDP equals C in Exhibit 26-1,

Budget deficits have occurred every year for the past three decades.

Interest rate payments are what the federal government pays every year on its debt. Total interest payments equal the interest rate multiplied by the amount of government debt outstanding.

Which of the following is true about the relationship between the federal budget deficit and the federal debt?

A change in taxes can affect potential GDP.

There were federal budget surpluses between 1998 and 2001 because income grew very rapidly as the economy expanded during that time period.

What is the difference between a structural surplus and a cyclical surplus?

Which of the following would cause the AD curve to shift to the right?

To say that fiscal policy is countercyclical means that

Tax cuts as part of a countercyclical policy have

Name two reasons why the actual budget may differ from the budget enacted at the start of the fiscal year.

Suppose, for a hypothetical economy, potential GDP equals $9,200 billion. If real GDP equals $9,400 billion, then according to the table below, the cyclical surplus equals A)$320 billion. B)$40 billion. C)-$40 billion. D)$20 billion. E)$360 billion.

In practice, discretionary changes in fiscal policy have offset booms and recessions.

The Economic Growth and Tax Reconciliation Act of 2001 is a recent example of discretionary fiscal policy.

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

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