Question 1

Crowding out would most likely occur when:

Accepted Answer

A) workers lose jobs as a result of anti-inflationary fiscal policies. 
B) the federal government engages in bond sales to finance its budget deficit. 
C) Congress enacts budget cuts to balance the budget. 
D) tax receipts rise more slowly than anticipated, resulting in the need to cut government spending. 
A) workers lose jobs as a result of anti-inflationary fiscal policies. 
B) the federal government engages in bond sales to finance its budget deficit. 
C) Congress enacts budget cuts to balance the budget. 
D) tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.

Question 2

Which of the following best describes most economists' approach to economic stabilization until the 1930s?

Accepted Answer

A) Maintain a balanced budget at all times, under the principle of sound finance. 
B) Use a sound finance approach during normal economic times, and a functional finance approach during a recession or a boom. 
C) Run larger deficits during recessions and smaller deficits during economic booms, counting on economic growth to be high enough to keep the debt-to-GDP ratio low. 
D) Economists were wholly concerned with microeconomics and had ignored problems of government deficits, debt, recessions, and economic growth. 
A) Maintain a balanced budget at all times, under the principle of sound finance. 
B) Use a sound finance approach during normal economic times, and a functional finance approach during a recession or a boom. 
C) Run larger deficits during recessions and smaller deficits during economic booms, counting on economic growth to be high enough to keep the debt-to-GDP ratio low. 
D) Economists were wholly concerned with microeconomics and had ignored problems of government deficits, debt, recessions, and economic growth.

Question 3

According to a Classical, sound finance perspective on macroeconomics, if an economy is on an inflationary path, the government should run:

Accepted Answer

A) a budget deficit and increase spending, which will reduce output. 
B) a budget surplus and decrease spending, which will reduce 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 reduce output. 
B) a budget surplus and decrease spending, which will reduce 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 4

According to most economists, fiscal policy is:

Accepted Answer

A) not an effective tool for fine-tuning the economy. 
B) least useful in a serious economic crisis. 
C) always ineffective because of crowding out. 
D) effective only when potential output is perfectly known. 
A) not an effective tool for fine-tuning the economy. 
B) least useful in a serious economic crisis. 
C) always ineffective because of crowding out. 
D) effective only when potential output is perfectly known.

Question 5

The view that the government budget should always be balanced except in wartime refers to:

Accepted Answer

A) public finance. 
B) fiscal policy. 
C) the Ricardian equivalence. 
D) sound finance. 
A) public finance. 
B) fiscal policy. 
C) the Ricardian equivalence. 
D) sound finance.

Question 6

Economists who believe in sound finance would say that in a recession, the government should:

Accepted Answer

A) run a budget deficit because the Ricardian equivalence theorem is true both in theory and in practice. 
B) run a budget deficit despite the truth of the Ricardian equivalence theorem. 
C) maintain a balanced budget because the Ricardian equivalence theorem is true in practice. 
D) maintain a balanced budget for political and moral reasons. 
A) run a budget deficit because the Ricardian equivalence theorem is true both in theory and in practice. 
B) run a budget deficit despite the truth of the Ricardian equivalence theorem. 
C) maintain a balanced budget because the Ricardian equivalence theorem is true in practice. 
D) maintain a balanced budget for political and moral reasons.

Question 7

During an economic contraction, automatic stabilizers:

Accepted Answer

A) reduce both budget surpluses and deficits. 
B) reduce a budget surplus or increase a deficit. 
C) reduce a budget deficit or increase a surplus. 
D) increase both budget surpluses and deficits. 
A) reduce both budget surpluses and deficits. 
B) reduce a budget surplus or increase a deficit. 
C) reduce a budget deficit or increase a surplus. 
D) increase both budget surpluses and deficits.

Question 8

Which of the following is most representative of the functional finance view of the macroeconomy?

Accepted Answer

A) The economy is self-regulating and the best thing the government can do to enhance stability is to stay out of the way. 
B) Budgets should be balanced. Doing otherwise is morally wrong. 
C) The government should decide on tax and spending plans based on their effects on the economy. 
D) Crowding out almost completely cancels out any deficit spending, so fiscal policy is likely to be ineffective. 
A) The economy is self-regulating and the best thing the government can do to enhance stability is to stay out of the way. 
B) Budgets should be balanced. Doing otherwise is morally wrong. 
C) The government should decide on tax and spending plans based on their effects on the economy. 
D) Crowding out almost completely cancels out any deficit spending, so fiscal policy is likely to be ineffective.

Question 9

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 in an attempt to pull the economy out of the recession. Not considering shifts in aggregate supply, an economist with a functional finance view, who also believes in a full 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 10

The application of Keynesian economics to public finance and fiscal policy by Abba Lerner, and its incorporation into Paul Samuelson's economic principles textbook, was known as procyclical finance.

Accepted Answer

A) True 
 B)False

Question 11

The elimination of automatic stabilizers would decrease the need for other fiscal policies.

Accepted Answer

A) True 
 B)False

Question 12

Crowding out is the offsetting effect on private expenditures caused by the government's sale of bonds to finance expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 13

As the economy contracts, tax revenues:

Accepted Answer

A) fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers. 
B) rise and transfer payments rise, causing the economy to contract by more than it would in the absence of automatic stabilizers. 
C) fall and transfer payments fall, causing the economy to contract by more than it would in the absence of automatic stabilizers. 
D) rise and transfer payments fall, causing the economy to contract by less than it would in the absence of automatic stabilizers. 
A) fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers. 
B) rise and transfer payments rise, causing the economy to contract by more than it would in the absence of automatic stabilizers. 
C) fall and transfer payments fall, causing the economy to contract by more than it would in the absence of automatic stabilizers. 
D) rise and transfer payments fall, causing the economy to contract by less than it would in the absence of automatic stabilizers.

Question 14

The crowding out effect would be lower if:

Accepted Answer

A) consumption was sensitive to changes in prices. 
B) the government always ran budget deficits. 
C) the interest rate was greatly affected by shifts in the demand of loanable funds. 
D) investment was not sensitive to changes in the interest rates. 
A) consumption was sensitive to changes in prices. 
B) the government always ran budget deficits. 
C) the interest rate was greatly affected by shifts in the demand of loanable funds. 
D) investment was not sensitive to changes in the interest rates.

Question 15

Functional finance is:

Accepted Answer

A) based on empirical evidence that fiscal policy can be effective in smoothing business cycles. 
B) based on the political realities of voters wanting their government to respond to recessions. 
C) a theoretical proposition, not a moral proposition. 
D) a proposition supported by public choice economists. 
A) based on empirical evidence that fiscal policy can be effective in smoothing business cycles. 
B) based on the political realities of voters wanting their government to respond to recessions. 
C) a theoretical proposition, not a moral proposition. 
D) a proposition supported by public choice economists.

Question 16

If state governments began using a five-year rolling-average budgeting procedure as opposed to the current practice of no rolling average, which would the likely result be?

Accepted Answer

A) State financing would become more procyclical 
B) Balanced-budget requirements in state constitutions would be much less procyclical 
C) The need for automatic stabilizers at the federal level would increase 
D) State governments would run a greater risk of running short of funds during recessions 
A) State financing would become more procyclical 
B) Balanced-budget requirements in state constitutions would be much less procyclical 
C) The need for automatic stabilizers at the federal level would increase 
D) State governments would run a greater risk of running short of funds during recessions

Question 17

When the government runs a deficit, the interest rate tends to:

Accepted Answer

A) rise. 
B) fall. 
C) remain unchanged. 
D) rise or fall, depending on how the deficit is financed. 
A) rise. 
B) fall. 
C) remain unchanged. 
D) rise or fall, depending on how the deficit is financed.

Question 18

According to the Ricardian equivalence theorem, people increase savings today when the government increases deficits because they recognize that:

Accepted Answer

A) government deficits imply higher future taxes. 
B) government deficits imply lower future taxes. 
C) consumption reduces future taxes. 
D) consumption increases future taxes. 
A) government deficits imply higher future taxes. 
B) government deficits imply lower future taxes. 
C) consumption reduces future taxes. 
D) consumption increases future taxes.

Question 19

If income increases, a budget deficit will:

Accepted Answer

A) tend to increase. 
B) tend to decrease. 
C) change unpredictably. 
D) not change. 
A) tend to increase. 
B) tend to decrease. 
C) change unpredictably. 
D) not change.

Question 20

If the economy falls into a recession, automatic stabilizers will cause:

Accepted Answer

A) tax receipts to fall and government spending to rise. 
B) tax receipts to rise and government spending to fall. 
C) both tax receipts and government spending to rise. 
D) both tax receipts and government spending to fall. 
A) tax receipts to fall and government spending to rise. 
B) tax receipts to rise and government spending to fall. 
C) both tax receipts and government spending to rise. 
D) both tax receipts and government spending to fall.

Exam 32: The Fiscal Policy Dilemma

Crowding out would most likely occur when:

Which of the following best describes most economists' approach to economic stabilization until the 1930s?

According to a Classical, sound finance perspective on macroeconomics, if an economy is on an inflationary path, the government should run:

According to most economists, fiscal policy is:

The view that the government budget should always be balanced except in wartime refers to:

Economists who believe in sound finance would say that in a recession, the government should:

During an economic contraction, automatic stabilizers:

Which of the following is most representative of the functional finance view of the macroeconomy?

The application of Keynesian economics to public finance and fiscal policy by Abba Lerner, and its incorporation into Paul Samuelson's economic principles textbook, was known as procyclical finance.

The elimination of automatic stabilizers would decrease the need for other fiscal policies.

Crowding out is the offsetting effect on private expenditures caused by the government's sale of bonds to finance expansionary fiscal policy.

As the economy contracts, tax revenues:

The crowding out effect would be lower if:

Functional finance is:

If state governments began using a five-year rolling-average budgeting procedure as opposed to the current practice of no rolling average, which would the likely result be?

When the government runs a deficit, the interest rate tends to:

According to the Ricardian equivalence theorem, people increase savings today when the government increases deficits because they recognize that:

If income increases, a budget deficit will:

If the economy falls into a recession, automatic stabilizers will cause:

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