Question 1

What did the sound finance approach to fiscal policy use to support its view?

Accepted Answer

A) Keynesian economics 
B) A history of successful procyclical fiscal policy 
C) The functional finance view 
D) The Ricardian equivalence theorem 
A) Keynesian economics 
B) A history of successful procyclical fiscal policy 
C) The functional finance view 
D) The Ricardian equivalence theorem

Question 2

Between 1999 and 2009, the U.S. federal budget deficit moved from a record surplus to a record deficit. Other things being equal, the most likely effect of this shift would be:

Accepted Answer

A) higher interest rates and increased investment. 
B) higher interest rates and decreased investment. 
C) lower interest rates and increased investment. 
D) lower interest rates and decreased investment. 
A) higher interest rates and increased investment. 
B) higher interest rates and decreased investment. 
C) lower interest rates and increased investment. 
D) lower interest rates and decreased investment.

Question 3

Suppose the government never borrows, so that it always finances its expenditures with taxes. Suppose further that government spending does not depend on income. In this case:

Accepted Answer

A) both government spending and taxes are automatic stabilizers. 
B) government spending is an automatic stabilizer, but taxes are not. 
C) taxes are an automatic stabilizer but government spending is not. 
D) neither government spending nor taxes are automatic stabilizers. 
A) both government spending and taxes are automatic stabilizers. 
B) government spending is an automatic stabilizer, but taxes are not. 
C) taxes are an automatic stabilizer but government spending is not. 
D) neither government spending nor taxes are automatic stabilizers.

Question 4

The theoretical proposition that government deficits do not affect the level of output because individuals realize that they have to pay the deficits in the future, and therefore increase their savings now, is called:

Accepted Answer

A) purchasing power parity. 
B) functional finance. 
C) the Ricardian equivalence theorem. 
D) sound finance. 
A) purchasing power parity. 
B) functional finance. 
C) the Ricardian equivalence theorem. 
D) sound finance.

Question 5

Activist fiscal policies:

Accepted Answer

A) generally produce balanced budgets. 
B) usually produce budget surpluses. 
C) usually produce budget deficits. 
D) do not have any systematic effect on budget surpluses or deficits. 
A) generally produce balanced budgets. 
B) usually produce budget surpluses. 
C) usually produce budget deficits. 
D) do not have any systematic effect on budget surpluses or deficits.

Question 6

The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary sound finance.

Accepted Answer

A) True 
 B)False

Question 7

In contrast to the functional finance view, Classical sound finance macroeconomics assumes that individuals:

Accepted Answer

A) do not adjust their spending to account for future tax payments. 
B) adjust their spending to account for future tax payments. 
C) do not adjust their spending to account for future incomes. 
D) adjust their spending to account for future incomes. 
A) do not adjust their spending to account for future tax payments. 
B) adjust their spending to account for future tax payments. 
C) do not adjust their spending to account for future incomes. 
D) adjust their spending to account for future incomes.

Question 8

Many economists argue that certain rules must guide the use of economic policies.What are the benefits and costs of economic policies conducted by rules?

Accepted Answer

The main benefit of a policy rule is the

Question 9

What fiscal policy was implemented in response to the financial crisis of 2008? How does this fit into the broader discussion of sound versus functional finance?

Accepted Answer

The U.S.economy was entering a severe re

Question 10

What is the Ricardian equivalence theorem? What is the significance of this theorem for government deficit financing?

Accepted Answer

The theoretical proposition that deficit

Question 11

The Ricardian equivalence theorem is correct if two assumptions are true. These assumptions are that people have:

Accepted Answer

A) access to savings instruments and recognize the link between deficits and future taxes. 
B) no access to savings instruments and recognize the link between deficits and future taxes. 
C) access to savings instruments but cannot recognize the link between deficits and future taxes. 
D) no access to savings instruments and cannot recognize the link between deficits and taxes. 
A) access to savings instruments and recognize the link between deficits and future taxes. 
B) no access to savings instruments and recognize the link between deficits and future taxes. 
C) access to savings instruments but cannot recognize the link between deficits and future taxes. 
D) no access to savings instruments and cannot recognize the link between deficits and taxes.

Question 12

In 2009, output was beneath potential. At the same time, the budget deficit hit a record high of over $1 trillion. If President Obama were to have pursued budget cuts, given the state of the economy, these spending cuts would have:

Accepted Answer

A) been procyclical. 
B) been countercyclical. 
C) increased interest rates. 
D) crowded out investment. 
A) been procyclical. 
B) been countercyclical. 
C) increased interest rates. 
D) crowded out investment.

Question 13

Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD0 to AD1 in an attempt to pull the economy out of the recession. Not taking into account shifts in aggregate supply, an economist with a functional finance view who believes there will be no crowding out effect would conclude that the economy will end up at point:

Accepted Answer

A) A. 
B) B. 
C) C. 
D) D. 
A) A. 
B) B. 
C) C. 
D) D.

Question 14

If a fiscal expansion financed by government bond sales does not affect interest rates, then:

Accepted Answer

A) no crowding out will occur. 
B) crowding out will be relatively small. 
C) crowding out will be relatively large. 
D) crowding out will be so great that output will decline. 
A) no crowding out will occur. 
B) crowding out will be relatively small. 
C) crowding out will be relatively large. 
D) crowding out will be so great that output will decline.

Question 15

Automatic stabilizers cause:

Accepted Answer

A) deeper recessions and more rapid expansions. 
B) deeper recessions and slower expansions. 
C) shallower recessions and slower expansions. 
D) shallower recessions and more rapid expansions. 
A) deeper recessions and more rapid expansions. 
B) deeper recessions and slower expansions. 
C) shallower recessions and slower expansions. 
D) shallower recessions and more rapid expansions.

Question 16

Because reducing both unemployment and inflation simultaneously are conflicting goals:

Accepted Answer

A) there is a policy that will allow policymakers to achieve either objective. 
B) aggregate demand policy will allow policymakers to achieve one of these objectives, but not both. 
C) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is expansionary. 
D) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is contractionary. 
A) there is a policy that will allow policymakers to achieve either objective. 
B) aggregate demand policy will allow policymakers to achieve one of these objectives, but not both. 
C) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is expansionary. 
D) aggregate demand policy will allow policymakers to achieve both objectives, but only if it is contractionary.

Question 17

According to the Classical advocates of sound finance, if an economy is in a recession, the government should run:

Accepted Answer

A) a budget deficit and increase spending, which will increase output. 
B) a budget surplus and decrease spending, which will increase output. 
C) neither a surplus nor a deficit since changes in deficit spending do not affect output. 
D) neither a surplus nor a deficit since changes in spending affect output. 
A) a budget deficit and increase spending, which will increase output. 
B) a budget surplus and decrease spending, which will increase output. 
C) neither a surplus nor a deficit since changes in deficit spending do not affect output. 
D) neither a surplus nor a deficit since changes in spending affect output.

Question 18

When interest rates go up, it is:

Accepted Answer

A) more expensive for businesses to borrow, so investment falls. 
B) more expensive for businesses to borrow, so investment increases. 
C) cheaper for businesses to borrow, so investment falls. 
D) cheaper for businesses to borrow, so investment increases. 
A) more expensive for businesses to borrow, so investment falls. 
B) more expensive for businesses to borrow, so investment increases. 
C) cheaper for businesses to borrow, so investment falls. 
D) cheaper for businesses to borrow, so investment increases.

Question 19

What is the difference between demand side policies and supply side policies?

Accepted Answer

Demand side policies are short-term poli

Question 20

Which of the following is an automatic stabilizer?

Accepted Answer

A) Military expenditures 
B) Social Security benefits 
C) Unemployment compensation 
D) Property taxes 
A) Military expenditures 
B) Social Security benefits 
C) Unemployment compensation 
D) Property taxes

Exam 32: The Fiscal Policy Dilemma

What did the sound finance approach to fiscal policy use to support its view?

Between 1999 and 2009, the U.S. federal budget deficit moved from a record surplus to a record deficit. Other things being equal, the most likely effect of this shift would be:

Suppose the government never borrows, so that it always finances its expenditures with taxes. Suppose further that government spending does not depend on income. In this case:

The theoretical proposition that government deficits do not affect the level of output because individuals realize that they have to pay the deficits in the future, and therefore increase their savings now, is called:

Activist fiscal policies:

The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary sound finance.

In contrast to the functional finance view, Classical sound finance macroeconomics assumes that individuals:

Many economists argue that certain rules must guide the use of economic policies.What are the benefits and costs of economic policies conducted by rules?

What fiscal policy was implemented in response to the financial crisis of 2008? How does this fit into the broader discussion of sound versus functional finance?

What is the Ricardian equivalence theorem? What is the significance of this theorem for government deficit financing?

The Ricardian equivalence theorem is correct if two assumptions are true. These assumptions are that people have:

In 2009, output was beneath potential. At the same time, the budget deficit hit a record high of over $1 trillion. If President Obama were to have pursued budget cuts, given the state of the economy, these spending cuts would have:

If a fiscal expansion financed by government bond sales does not affect interest rates, then:

Automatic stabilizers cause:

Because reducing both unemployment and inflation simultaneously are conflicting goals:

According to the Classical advocates of sound finance, if an economy is in a recession, the government should run:

When interest rates go up, it is:

What is the difference between demand side policies and supply side policies?

Which of the following is an automatic stabilizer?

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Market Failure Versus Government Failure

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

The Financial Sector and the Economy

Monetary Policy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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