Exam 32: The Fiscal Policy Dilemma

The introduction of "rainy-day funds" by states would:

If taxes and government expenses did not vary with income, then income would:

According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people:

When the economy entered a serious recession in 2008, the response of the U.S. government was to institute a $700 billion bailout plan, pursue other heavy deficit spending, and take on unusually large liabilities through bond and money market fund guarantees. This is an example of:

As the economy expands, tax revenues:

Six key assumptions underlie models of fiscal policy.All of them are likely to be violated in the context of real world macroeconomic problems.Explain how any three of the following assumptions are likely to fail in the real world. (a)Financing the deficit doesn't have any offsetting effects. (b)The government knows what the current situation is. (c)The government knows the economy's potential income level. (d)The government has great flexibility in changing spending and taxes. (e)The size of the government debt doesn't matter. (f)Fiscal policy doesn't negatively affect other government goals.

As income increases during the recovery from a recession, automatic stabilizers will:

Although macroeconomics textbooks have taught the logic of fiscal policy for over half a century, actual use of discretionary fiscal policy has been rare. When President George W. Bush persuaded Congress to enact a large tax cut early in his presidency, it was the first time in several decades that the fiscal policy rationale was taken seriously. Why has fiscal policy been used so infrequently?

Because automatic stabilizers lower transfer payments and raise tax receipts as an economy recovers from a recession, they:

Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time?

During the early 20th century, economists who held that the Ricardian equivalence theorem was theoretically true could support either sound or functional finance.

Crowding out is associated with:

Which of the following would not be considered an automatic stabilizer?

The crowding out effect:

In the early 2000s, car sales in China slowed because the government had been restricting credit growth. This action is consistent with the effects of:

If output is falling, a procyclical fiscal policy will result in:

A key difference between functional finance and sound finance is that in the functional finance approach, the government has the potential for:

Expansionary fiscal policy that raises the budget deficit may:

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then most economists would agree that: