Question 1

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

Accepted Answer

A)  consumption 
B)  gross private investment 
C)  government purchases 
D)  public investment 
A)  consumption 
B)  gross private investment 
C)  government purchases 
D)  public investment

Question 2

An expansionary fiscal policy
I. includes an increase in government spending.
II. includes tax cuts.
III. increases a government budget deficit or reduces a government budget surplus.

Accepted Answer

A)  I, II, and III 
B)  I and II only 
C)  I and III only 
D)  II and III only 
A)  I, II, and III 
B)  I and II only 
C)  I and III only 
D)  II and III only

Question 3

An example of an automatic stabilizer is

Accepted Answer

A)  personal income taxes. 
B)  inheritance taxes. 
C)  veterans' benefits. 
D)  corporate dividends. 
A)  personal income taxes. 
B)  inheritance taxes. 
C)  veterans' benefits. 
D)  corporate dividends.

Question 4

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Accepted Answer

A)  change in consumption * marginal propensity to consume. 
B)  change in government purchases * money multiplier. 
C)  change in government purchases *spending multiplier. 
D)  change in the spending multiplier * change in government purchases. 
A)  change in consumption * marginal propensity to consume. 
B)  change in government purchases * money multiplier. 
C)  change in government purchases *spending multiplier. 
D)  change in the spending multiplier * change in government purchases.

Question 5

Both monetary policy and fiscal policy encounter the problems of lags. Discuss the kinds of lags they encounter and the degree of difficulties they present to policymakers.

Accepted Answer

Monetary policy and fiscal policy both e

Question 6

Use the following to answer questions .
Exhibit: Supply-Side Economics  
-(Exhibit: Supply-Side Economics) If the economy's long-run aggregate supply curve is LRAS1, then at
Price level P1 and real GDP level YP1, there is

Accepted Answer

A)  an inflationary gap. 
B)  an opportunity to use discretionary fiscal or monetary policy to improve the economy. 
C)  no gap, but the economy is not at its natural level of employment. 
D)  no gap, and the economy is at its natural level of employment. 
A)  an inflationary gap. 
B)  an opportunity to use discretionary fiscal or monetary policy to improve the economy. 
C)  no gap, but the economy is not at its natural level of employment. 
D)  no gap, and the economy is at its natural level of employment.

Question 7

Suppose the economy is in long-run equilibrium. If the federal government cuts government
Spending, which of the following is likely to result?

Accepted Answer

A)  an increase in real GDP and an increase in the price level 
B)  an increase in unemployment and an increase in the price level 
C)  a decrease in unemployment and a decrease in the price level 
D)  a decrease in the price level and an increase in unemployment 
A)  an increase in real GDP and an increase in the price level 
B)  an increase in unemployment and an increase in the price level 
C)  a decrease in unemployment and a decrease in the price level 
D)  a decrease in the price level and an increase in unemployment

Question 8

Expansionary fiscal policy leads to

Accepted Answer

A)  lower exchange rates, increased exports, and increased imports. 
B)  higher exchange rates, decreased exports, and decreased imports. 
C)  lower exchange rates, decreased exports, and decreased imports. 
D)  higher exchange rates, decreased exports, and increased imports. 
A)  lower exchange rates, increased exports, and increased imports. 
B)  higher exchange rates, decreased exports, and decreased imports. 
C)  lower exchange rates, decreased exports, and decreased imports. 
D)  higher exchange rates, decreased exports, and increased imports.

Question 9

Contractionary fiscal policy will lead to an increase in government borrowing.

Accepted Answer

A) True 
 B)False

Question 10

An expansionary fiscal policy increases a government budget deficit or reduces a government budget surplus, increases borrowing by the Treasury, which will sell more bonds.

Accepted Answer

A) True 
 B)False

Question 11

Suppose a country's debt rises by 6% and its GDP rises by 5%. What happens to the debt-GDP ratio?

Accepted Answer

A)  It rises if there is a budget deficit that period. 
B)  It falls. 
C)  It rises. 
D)  There is insufficient information to answer the question. 
A)  It rises if there is a budget deficit that period. 
B)  It falls. 
C)  It rises. 
D)  There is insufficient information to answer the question.

Question 12

A contractionary fiscal policy negates some of the leftward shift of the aggregate demand curve because the resulting fall in interest rates

Accepted Answer

A)  increases the quantity of investment, raises the exchange rate and boosts net exports. 
B)  discourages savings, decreases the quantity of investment, raises the exchange rate, and reduces net exports. 
C)  increases the quantity of investment, lowers the exchange rate, and boosts net exports. 
D)  discourages savings, increases consumption, and reduces the quantity of investment and imports. 
A)  increases the quantity of investment, raises the exchange rate and boosts net exports. 
B)  discourages savings, decreases the quantity of investment, raises the exchange rate, and reduces net exports. 
C)  increases the quantity of investment, lowers the exchange rate, and boosts net exports. 
D)  discourages savings, increases consumption, and reduces the quantity of investment and imports.

Question 13

The provision of aid to an individual who is not required to provide anything in exchange is called a transfer payment.

Accepted Answer

A) True 
 B)False

Question 14

In 2003, Congress passed a substantial cut in income taxes. The Federal Reserve also lowered interest rates. How can these two actions be categorized?

Accepted Answer

A)  Both actions can be categorized as fiscal policy. 
B)  Both actions can be categorized as monetary policy. 
C)  The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy. 
D)  The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy. 
A)  Both actions can be categorized as fiscal policy. 
B)  Both actions can be categorized as monetary policy. 
C)  The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy. 
D)  The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy.

Question 15

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that

Accepted Answer

A)  the multiplier effect of fiscal policy is much less than that for monetary policy. 
B)  temporary fiscal policy financed through government borrowing implies a multiplier value between 0.8 and 1.5. 
C)  fiscal policy has little effect on the economy and that the multiplier value is effectively zero. 
D)  statistical models are inadequate to determine the multiplier and the multiplier value likely varies based on the state of the economy. 
A)  the multiplier effect of fiscal policy is much less than that for monetary policy. 
B)  temporary fiscal policy financed through government borrowing implies a multiplier value between 0.8 and 1.5. 
C)  fiscal policy has little effect on the economy and that the multiplier value is effectively zero. 
D)  statistical models are inadequate to determine the multiplier and the multiplier value likely varies based on the state of the economy.

Question 16

Use the following to answer questions .
Exhibit: Fiscal Policy 1  
-(Exhibit: Fiscal Policy 1) If discretionary fiscal policy is used to eliminate the gap, policy actions will

Accepted Answer

A)  shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. 
B)  shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. 
C)  shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P2 and output level, Yp. 
D)  shift the aggregate demand curve and the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level corresponding to point d and output level, Yp. 
A)  shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. 
B)  shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, P1 and output level, Yp. 
C)  shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P2 and output level, Yp. 
D)  shift the aggregate demand curve and the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level corresponding to point d and output level, Yp.

Question 17

Expansionary fiscal policy leads to

Accepted Answer

A)  lower interest rates which reduce the demand for a nation's currency, and causes its exchange rate to fall. 
B)  higher interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise. 
C)  higher interest rates which reduce the demand for a nation's currency, and causes its exchange rate to rise. 
D)  lower interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise. 
A)  lower interest rates which reduce the demand for a nation's currency, and causes its exchange rate to fall. 
B)  higher interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise. 
C)  higher interest rates which reduce the demand for a nation's currency, and causes its exchange rate to rise. 
D)  lower interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise.

Question 18

If there is a recessionary gap, the appropriate fiscal policy would be contractionary.

Accepted Answer

A) True 
 B)False

Question 19

Suppose the economy experiences a recessionary gap. Policymakers who believe that
Government is too big would favor which of the following policies to close the gap?

Accepted Answer

A)  decreases in transfer payment 
B)  decreases in income tax rates 
C)  increases in government purchases 
D)  increases in interest rates 
A)  decreases in transfer payment 
B)  decreases in income tax rates 
C)  increases in government purchases 
D)  increases in interest rates

Question 20

Suppose an economy has an inflationary gap. 
a. Illustrate this using a graph with LRAS, SRAS, and AD curves. Identify the equilibrium price level, real GDP, and the output gap in your diagram. Be sure to label your diagram fully. 
b. Identify two fiscal policy tools which may be used to eliminate the gap. 
c. Explain in words how these tools will affect the aggregate demand, long-run aggregate supply, and short-run aggregate supply curves. 
d. Incorporate into your graph, the relevant shifts in the curves that would take place when expansionary fiscal policy is used to eliminate the recessionary gap.

Accepted Answer

a. In an economy with an inflationary ga

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

An expansionary fiscal policy I. includes an increase in government spending. II. includes tax cuts. III. increases a government budget deficit or reduces a government budget surplus.

An example of an automatic stabilizer is

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Both monetary policy and fiscal policy encounter the problems of lags. Discuss the kinds of lags they encounter and the degree of difficulties they present to policymakers.

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy's long-run aggregate supply curve is LRAS₁, then at Price level P₁ and real GDP level Y_P1, there is

Suppose the economy is in long-run equilibrium. If the federal government cuts government Spending, which of the following is likely to result?

Expansionary fiscal policy leads to

Contractionary fiscal policy will lead to an increase in government borrowing.

An expansionary fiscal policy increases a government budget deficit or reduces a government budget surplus, increases borrowing by the Treasury, which will sell more bonds.

Suppose a country's debt rises by 6% and its GDP rises by 5%. What happens to the debt-GDP ratio?

A contractionary fiscal policy negates some of the leftward shift of the aggregate demand curve because the resulting fall in interest rates

The provision of aid to an individual who is not required to provide anything in exchange is called a transfer payment.

In 2003, Congress passed a substantial cut in income taxes. The Federal Reserve also lowered interest rates. How can these two actions be categorized?

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that

Use the following to answer questions . Exhibit: Fiscal Policy 1 -(Exhibit: Fiscal Policy 1) If discretionary fiscal policy is used to eliminate the gap, policy actions will

Expansionary fiscal policy leads to

If there is a recessionary gap, the appropriate fiscal policy would be contractionary.

Suppose the economy experiences a recessionary gap. Policymakers who believe that Government is too big would favor which of the following policies to close the gap?

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Exam 12: Government and Fiscal Policy

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

An expansionary fiscal policy I. includes an increase in government spending. II. includes tax cuts. III. increases a government budget deficit or reduces a government budget surplus.

An example of an automatic stabilizer is

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Both monetary policy and fiscal policy encounter the problems of lags. Discuss the kinds of lags they encounter and the degree of difficulties they present to policymakers.

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy's long-run aggregate supply curve is LRAS1, then at Price level P1 and real GDP level YP1, there is

Suppose the economy is in long-run equilibrium. If the federal government cuts government Spending, which of the following is likely to result?

Expansionary fiscal policy leads to

Contractionary fiscal policy will lead to an increase in government borrowing.

An expansionary fiscal policy increases a government budget deficit or reduces a government budget surplus, increases borrowing by the Treasury, which will sell more bonds.

Suppose a country's debt rises by 6% and its GDP rises by 5%. What happens to the debt-GDP ratio?

A contractionary fiscal policy negates some of the leftward shift of the aggregate demand curve because the resulting fall in interest rates

The provision of aid to an individual who is not required to provide anything in exchange is called a transfer payment.

In 2003, Congress passed a substantial cut in income taxes. The Federal Reserve also lowered interest rates. How can these two actions be categorized?

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that

Use the following to answer questions . Exhibit: Fiscal Policy 1 -(Exhibit: Fiscal Policy 1) If discretionary fiscal policy is used to eliminate the gap, policy actions will

Expansionary fiscal policy leads to

If there is a recessionary gap, the appropriate fiscal policy would be contractionary.

Suppose the economy experiences a recessionary gap. Policymakers who believe that Government is too big would favor which of the following policies to close the gap?

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy's long-run aggregate supply curve is LRAS₁, then at Price level P₁ and real GDP level Y_P1, there is