Question 1

The provisions in state constitutions requiring them to balance their budgets mean that:

Accepted Answer

A) state governments often behave procyclically because lower revenues during recessions means lower state spending. 
B) state government spending acts as an automatic stabilizer for the national economy. 
C) state governments can follow a functional finance approach with greater consistency than the federal government, which has no such requirement. 
D) state governments can only use monetary policy to affect their economies. 
A) state governments often behave procyclically because lower revenues during recessions means lower state spending. 
B) state government spending acts as an automatic stabilizer for the national economy. 
C) state governments can follow a functional finance approach with greater consistency than the federal government, which has no such requirement. 
D) state governments can only use monetary policy to affect their economies.

Question 2

Unemployment compensation is:

Accepted Answer

A) an automatic stabilizer because it rises as income increases, slowing an economic expansion. 
B) an automatic stabilizer because it falls as income increases, slowing an economic expansion. 
C) an automatic stabilizer because it falls as income decreases, slowing an economic contraction. 
D) not an automatic stabilizer. 
A) an automatic stabilizer because it rises as income increases, slowing an economic expansion. 
B) an automatic stabilizer because it falls as income increases, slowing an economic expansion. 
C) an automatic stabilizer because it falls as income decreases, slowing an economic contraction. 
D) not an automatic stabilizer.

Question 3

Procyclical fiscal policies:

Accepted Answer

A) reduce cyclical fluctuations in the economy, but not as effectively as countercyclical fiscal policies. 
B) reduce cyclical fluctuations in the economy more effectively than countercyclical fiscal policies. 
C) reduce cyclical fluctuations in the economy about as effectively as countercyclical fiscal policies. 
D) increase cyclical fluctuations in the economy. 
A) reduce cyclical fluctuations in the economy, but not as effectively as countercyclical fiscal policies. 
B) reduce cyclical fluctuations in the economy more effectively than countercyclical fiscal policies. 
C) reduce cyclical fluctuations in the economy about as effectively as countercyclical fiscal policies. 
D) increase cyclical fluctuations in the economy.

Question 4

Property taxes are:

Accepted Answer

A) not an automatic stabilizer because they do not vary with income. 
B) not an automatic stabilizer because they vary with income. 
C) an automatic stabilizer because they do not vary with income. 
D) an automatic stabilizer because they vary with income. 
A) not an automatic stabilizer because they do not vary with income. 
B) not an automatic stabilizer because they vary with income. 
C) an automatic stabilizer because they do not vary with income. 
D) an automatic stabilizer because they vary with income.

Question 5

Consider the following quote from your text,"Some economists argue that crowding out can totally offset the expansionary effect of fiscal policy..." Demonstrate graphically the case where the crowding out effect does "completely negate" the effect of expansionary fiscal policy.Explain your diagram,making sure to define the crowding out effect in your answer.

Accepted Answer

Crowding out refers to the offsetting ef

Question 6

Why is unemployment insurance an automatic stabilizer and how does it work? How does the decline in the percentage of unemployed who receive unemployment insurance in the 2000s impact the effectiveness of unemployment insurance as an automatic stabilizer?

Accepted Answer

An automatic stabilizer is any governmen

Question 7

Fiscal policy is typically:

Accepted Answer

A) extremely flexible because most government spending is discretionary. 
B) extremely flexible provided policy lags are short. 
C) flexible despite the presence of implementation problems. 
D) difficult to implement quickly. 
A) extremely flexible because most government spending is discretionary. 
B) extremely flexible provided policy lags are short. 
C) flexible despite the presence of implementation problems. 
D) difficult to implement quickly.

Question 8

If the government knew the precise values of the multiplier and potential income, fine-tuning the economy would:

Accepted Answer

A) be possible. 
B) be much easier, but mistakes would still occur occasionally. 
C) still be very difficult. 
D) be more difficult. 
A) be possible. 
B) be much easier, but mistakes would still occur occasionally. 
C) still be very difficult. 
D) be more difficult.

Question 9

Reducing the budget deficit by cutting government spending could conceivably:

Accepted Answer

A) increase income if interest rates fall enough and private investment is more productive than government spending. 
B) increase income if interest rates rise enough and government spending is more productive than private investment. 
C) decrease income if interest rates fall too much and private investment is more productive than government investment. 
D) decrease income if interest rates rise enough and private investment is more productive than government investment. 
A) increase income if interest rates fall enough and private investment is more productive than government spending. 
B) increase income if interest rates rise enough and government spending is more productive than private investment. 
C) decrease income if interest rates fall too much and private investment is more productive than government investment. 
D) decrease income if interest rates rise enough and private investment is more productive than government investment.

Question 10

In practice, economists:

Accepted Answer

A) agree about what the level of potential output is but disagree about what policies are appropriate. 
B) disagree about what the level of potential output is but agree about what policies are appropriate. 
C) agree about what the level of potential output is and about what policies are appropriate. 
D) disagree about what the level of potential output is and about what policies are appropriate. 
A) agree about what the level of potential output is but disagree about what policies are appropriate. 
B) disagree about what the level of potential output is but agree about what policies are appropriate. 
C) agree about what the level of potential output is and about what policies are appropriate. 
D) disagree about what the level of potential output is and about what policies are appropriate.

Question 11

The income tax is:

Accepted Answer

A) an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion. 
B) an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion. 
C) an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion. 
D) not an automatic stabilizer. 
A) an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion. 
B) an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion. 
C) an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion. 
D) not an automatic stabilizer.

Question 12

Refer to the graph shown. Expansionary fiscal policy is most likely to shift the aggregate demand curve from:

Accepted Answer

A) AD0 to AD2 if crowding out does not occur and from AD0 to AD1 if crowding out does occur. 
B) AD0 to AD2 if crowding out does not occur and from AD0 to AD3 if crowding out does occur. 
C) AD2 to AD0 if crowding out does not occur and from AD1 to AD2 if crowding out does occur. 
D) AD2 to AD0 if crowding out does not occur and from AD1 to AD3 if crowding out does occur. 
A) AD0 to AD2 if crowding out does not occur and from AD0 to AD1 if crowding out does occur. 
B) AD0 to AD2 if crowding out does not occur and from AD0 to AD3 if crowding out does occur. 
C) AD2 to AD0 if crowding out does not occur and from AD1 to AD2 if crowding out does occur. 
D) AD2 to AD0 if crowding out does not occur and from AD1 to AD3 if crowding out does occur.

Question 13

What is meant by "sound finance"?

Accepted Answer

Sound finance is a view of pub

Question 14

If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:

Accepted Answer

A) not shift. 
B) shift out - but not as much as it would if crowding out didn't occur. 
C) shift out by the same amount regardless of whether crowding out occurs. 
D) shift out more if crowding out occurs. 
A) not shift. 
B) shift out - but not as much as it would if crowding out didn't occur. 
C) shift out by the same amount regardless of whether crowding out occurs. 
D) shift out more if crowding out occurs.

Question 15

Fine tuning the economy with fiscal policy is:

Accepted Answer

A) relatively simple because the government has access to the best information available. 
B) difficult because the government lacks important information about the economy. 
C) relatively simple because the political process usually works smoothly and without significant lags. 
D) difficult because economists have not developed any theoretical models of the macroeconomy. 
A) relatively simple because the government has access to the best information available. 
B) difficult because the government lacks important information about the economy. 
C) relatively simple because the political process usually works smoothly and without significant lags. 
D) difficult because economists have not developed any theoretical models of the macroeconomy.

Question 16

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to potential output, an economist with a typical functional finance view, who acknowledges partial crowding out, would conclude that the AD curve:

Accepted Answer

A) shifts to the right due to higher government spending. 
B) shifts to the left due to higher government spending. 
C) does not shift since the higher government spending is offset by higher private consumption. 
D) does not shift since the higher government spending is offset by lower private consumption. 
A) shifts to the right due to higher government spending. 
B) shifts to the left due to higher government spending. 
C) does not shift since the higher government spending is offset by higher private consumption. 
D) does not shift since the higher government spending is offset by lower private consumption.

Question 17

When inflation and unemployment are both higher than desired, most economists believe that the government should:

Accepted Answer

A) adopt contractionary monetary policies that reduce both inflation and unemployment. 
B) adopt expansionary fiscal policies that reduce both inflation and unemployment. 
C) determine whether reducing inflation is more or less important than reducing unemployment and adopt a policy that targets the more important goal. 
D) not act as it is impossible to reduce either inflation or unemployment under these circumstances. 
A) adopt contractionary monetary policies that reduce both inflation and unemployment. 
B) adopt expansionary fiscal policies that reduce both inflation and unemployment. 
C) determine whether reducing inflation is more or less important than reducing unemployment and adopt a policy that targets the more important goal. 
D) not act as it is impossible to reduce either inflation or unemployment under these circumstances.

Question 18

According to Ricardian equivalence advocates, if the government announces a plan to balance the budget by reducing its deficits to zero, then the private sector will:

Accepted Answer

A) decrease consumption. 
B) decrease savings. 
C) decrease investment. 
D) increase savings. 
A) decrease consumption. 
B) decrease savings. 
C) decrease investment. 
D) increase savings.

Question 19

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to the potential output, a sound finance economist with a Classical view, who holds the Ricardian equivalence theorem to be practically true, would conclude that the AD curve:

Accepted Answer

A) shifts to the right due to higher government spending. 
B) shifts to the left due to higher government spending. 
C) does not shift since the higher government spending is offset by higher private consumption. 
D) does not shift since the higher government spending is offset by lower private consumption. 
A) shifts to the right due to higher government spending. 
B) shifts to the left due to higher government spending. 
C) does not shift since the higher government spending is offset by higher private consumption. 
D) does not shift since the higher government spending is offset by lower private consumption.

Question 20

Define the crowding out effect.

Accepted Answer

The crowding out effect is the offsettin

Exam 32: The Fiscal Policy Dilemma

The provisions in state constitutions requiring them to balance their budgets mean that:

Unemployment compensation is:

Procyclical fiscal policies:

Property taxes are:

Why is unemployment insurance an automatic stabilizer and how does it work? How does the decline in the percentage of unemployed who receive unemployment insurance in the 2000s impact the effectiveness of unemployment insurance as an automatic stabilizer?

Fiscal policy is typically:

If the government knew the precise values of the multiplier and potential income, fine-tuning the economy would:

Reducing the budget deficit by cutting government spending could conceivably:

In practice, economists:

The income tax is:

Refer to the graph shown. Expansionary fiscal policy is most likely to shift the aggregate demand curve from:

What is meant by "sound finance"?

If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:

Fine tuning the economy with fiscal policy is:

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to potential output, an economist with a typical functional finance view, who acknowledges partial crowding out, would conclude that the AD curve:

When inflation and unemployment are both higher than desired, most economists believe that the government should:

According to Ricardian equivalence advocates, if the government announces a plan to balance the budget by reducing its deficits to zero, then the private sector will:

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to the potential output, a sound finance economist with a Classical view, who holds the Ricardian equivalence theorem to be practically true, would conclude that the AD curve:

Define the crowding out effect.

Economics and Economic Reasoning

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Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

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Who Gets What the Distribution of Income

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Thinking Like a Modern Economist

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Deficits and Debt: the Austerity Debate

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