Question 1

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

Accepted Answer

A) the higher taxes lead workers to seek out a second job. 
B) the higher taxes cause workers to work less. 
C) the government purchases goods with the additional revenue. 
D) the government uses the additional revenue to retire some of the federal debt. 
E) the higher taxes cause people to save less. 
A) the higher taxes lead workers to seek out a second job. 
B) the higher taxes cause workers to work less. 
C) the government purchases goods with the additional revenue. 
D) the government uses the additional revenue to retire some of the federal debt. 
E) the higher taxes cause people to save less.

Question 2

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

Accepted Answer

A) cause real output to expand $200 billion if the marginal propensity to consume is three-fourths. 
B) exert little impact on real output because higher real interest rates will crowd out private spending. 
C) stimulate aggregate demand, causing prices to rise (inflation). 
D) be largely offset by a reduction in private spending because individuals will anticipate higher future taxes. 
A) cause real output to expand $200 billion if the marginal propensity to consume is three-fourths. 
B) exert little impact on real output because higher real interest rates will crowd out private spending. 
C) stimulate aggregate demand, causing prices to rise (inflation). 
D) be largely offset by a reduction in private spending because individuals will anticipate higher future taxes.

Question 3

The persistence of budget deficits during the last several decades is not surprising because politicians will find

Accepted Answer

A) budget surpluses more attractive than budget deficits. 
B) tax increases more attractive than increases in government expenditures. 
C) budget deficits more attractive than budget surpluses. 
D) reductions in government expenditures more attractive than tax reductions. 
A) budget surpluses more attractive than budget deficits. 
B) tax increases more attractive than increases in government expenditures. 
C) budget deficits more attractive than budget surpluses. 
D) reductions in government expenditures more attractive than tax reductions.

Question 4

Which of the following most clearly states the "paradox of thrift"?

Accepted Answer

A) If households simultaneously attempt to increase their savings, the result may be a reduction in demand, output, and total savings. 
B) A strong, healthy economy can be achieved if most households are heavily in debt. 
C) A high savings rate will provide the funds for investment, which is a driving force of long-term economic growth. 
D) A reduction in savings and an increase in consumption will expand output and employment. 
A) If households simultaneously attempt to increase their savings, the result may be a reduction in demand, output, and total savings. 
B) A strong, healthy economy can be achieved if most households are heavily in debt. 
C) A high savings rate will provide the funds for investment, which is a driving force of long-term economic growth. 
D) A reduction in savings and an increase in consumption will expand output and employment.

Question 5

Use the figure below to answer the following question(s).
Figure 12-1  
-Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

Accepted Answer

A) a tax increase to balance the budget 
B) restrictive fiscal policy 
C) expansionary fiscal policy 
D) continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment) 
A) a tax increase to balance the budget 
B) restrictive fiscal policy 
C) expansionary fiscal policy 
D) continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)

Question 6

What is supply-side economics, and how does it differ from the Keynesian emphasis on fiscal policy?

Accepted Answer

Supply-side economics focuses on reducti

Question 7

Between 1986 and 2010, the top marginal personal income tax rate was 40 percent or less compared to 70 percent or more prior to 1981. Compared to the earlier time period, in recent years the share of personal income taxes paid by high income taxpayers

Accepted Answer

A) has been lower. 
B) has been virtually unchanged. 
C) has been higher. 
D) increased in the late 1980s, but has been falling ever since. 
A) has been lower. 
B) has been virtually unchanged. 
C) has been higher. 
D) increased in the late 1980s, but has been falling ever since.

Question 8

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

Accepted Answer

A) government borrowing drives interest rates upward. 
B) taxes are not also increased. 
C) business decision makers and consumers become more optimistic as the result of the fiscal stimulus. 
D) the economy is operating well below its full-employment capacity. 
A) government borrowing drives interest rates upward. 
B) taxes are not also increased. 
C) business decision makers and consumers become more optimistic as the result of the fiscal stimulus. 
D) the economy is operating well below its full-employment capacity.

Question 9

Measured as a share of GDP, the net federal debt

Accepted Answer

A) increased during the 1990s, but fell sharply during 2001-2011. 
B) fell during most of the 1990s, but rose sharply during 2001-2011. 
C) was virtually unchanged during the 1990s, but fell sharply during 2001-2011. 
D) fell during the 1990s, but was virtually unchanged during 2001-2011. 
A) increased during the 1990s, but fell sharply during 2001-2011. 
B) fell during most of the 1990s, but rose sharply during 2001-2011. 
C) was virtually unchanged during the 1990s, but fell sharply during 2001-2011. 
D) fell during the 1990s, but was virtually unchanged during 2001-2011.

Question 10

Why might an expansion in government spending increase the severity of the coordination problem during a recession?

Accepted Answer

A) Increases in government spending will not affect the composition of aggregate demand. 
B) Congress is unlikely to approve increases in government spending during a recession. 
C) Spending increases will be driven by political considerations and will often flow into areas where resources are already fully employed. 
D) Government spending can be counted on to flow toward high productivity projects. 
A) Increases in government spending will not affect the composition of aggregate demand. 
B) Congress is unlikely to approve increases in government spending during a recession. 
C) Spending increases will be driven by political considerations and will often flow into areas where resources are already fully employed. 
D) Government spending can be counted on to flow toward high productivity projects.

Question 11

Supply-side economics stresses that

Accepted Answer

A) budget deficits will stimulate demand, output, and employment. 
B) budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C) an increase in government expenditures financed by higher tax rates will cause real income to rise. 
D) changes in marginal tax rates exert important effects on real output and employment. 
A) budget deficits will stimulate demand, output, and employment. 
B) budget deficits will lead to higher interest rates, which will weaken their expansionary impact. 
C) an increase in government expenditures financed by higher tax rates will cause real income to rise. 
D) changes in marginal tax rates exert important effects on real output and employment.

Question 12

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

Accepted Answer

A) increases in consumption will make it easier for households to deal with unanticipated future expenses. 
B) increases in consumption will provide more loanable funds for investment. 
C) you cannot have a strong economy if all or most households are spending just about everything they earn. 
D) consumer spending is less than two-thirds of GDP. 
A) increases in consumption will make it easier for households to deal with unanticipated future expenses. 
B) increases in consumption will provide more loanable funds for investment. 
C) you cannot have a strong economy if all or most households are spending just about everything they earn. 
D) consumer spending is less than two-thirds of GDP.

Question 13

According to the crowding-out effect, expansionary fiscal policy will lead to

Accepted Answer

A) higher interest rates, an appreciated dollar, and reduced net exports. 
B) higher interest rates, an appreciated dollar, and increased net exports. 
C) reduced interest rates, an appreciated dollar, and reduced net exports. 
D) reduced interest rates, an appreciated dollar, and increased net exports. 
A) higher interest rates, an appreciated dollar, and reduced net exports. 
B) higher interest rates, an appreciated dollar, and increased net exports. 
C) reduced interest rates, an appreciated dollar, and reduced net exports. 
D) reduced interest rates, an appreciated dollar, and increased net exports.

Question 14

Which of the following about fiscal policy is true?

Accepted Answer

A) The expansionary fiscal policy of the 1980s stimulated aggregate demand and led to high rates of inflation during the latter half of the decade. 
B) The restrictive fiscal policy of the 1990s led to sluggish economic growth during the decade. 
C) Even though fiscal policy was highly expansionary during the 1980s, the inflation rate fell and remained at relatively low levels. 
D) Even though fiscal policy was restrictive during the 1990s, the real growth rate of the economy was strong. 
E) Both c and d are true. 
A) The expansionary fiscal policy of the 1980s stimulated aggregate demand and led to high rates of inflation during the latter half of the decade. 
B) The restrictive fiscal policy of the 1990s led to sluggish economic growth during the decade. 
C) Even though fiscal policy was highly expansionary during the 1980s, the inflation rate fell and remained at relatively low levels. 
D) Even though fiscal policy was restrictive during the 1990s, the real growth rate of the economy was strong. 
E) Both c and d are true.

Question 15

An increase in subsidies and other government spending during a recession is likely to result in

Accepted Answer

A) an increase in rent-seeking activity. 
B) an increase in productive projects and a reduction in unproductive projects. 
C) a decrease in the level of future taxes. 
D) greater reliance on profits and losses in the allocation of resources. 
A) an increase in rent-seeking activity. 
B) an increase in productive projects and a reduction in unproductive projects. 
C) a decrease in the level of future taxes. 
D) greater reliance on profits and losses in the allocation of resources.

Question 16

Which of the following will make it more difficult for the United States to control the growth of the federal debt in the decade ahead?

Accepted Answer

A) Debt financing makes it possible for elected political officials to provide voters with highly visible current benefits without having to impose visible current cost in the form of higher taxes. 
B) The movement of the large baby-boom generation into the retirement phase of life will make it more difficult to control federal spending. 
C) The recent growth of the federal debt as a share of GDP will mean higher interest costs in the future. 
D) All of the above. 
A) Debt financing makes it possible for elected political officials to provide voters with highly visible current benefits without having to impose visible current cost in the form of higher taxes. 
B) The movement of the large baby-boom generation into the retirement phase of life will make it more difficult to control federal spending. 
C) The recent growth of the federal debt as a share of GDP will mean higher interest costs in the future. 
D) All of the above.

Question 17

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Accepted Answer

A) Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand. 
B) When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand. 
C) The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future. 
D) A 10 percent reduction in tax rates will reduce tax revenues by 10 percent. 
A) Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand. 
B) When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand. 
C) The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future. 
D) A 10 percent reduction in tax rates will reduce tax revenues by 10 percent.

Question 18

A supply-side economist would stress which of the following attributes of fiscal policy?

Accepted Answer

A) the impact of marginal tax rates on the supply and productivity of resources 
B) the impact of government spending on aggregate demand, output, and employment 
C) the impact of budget deficits on interest rates and aggregate demand 
D) the impact of budget deficits on the rate of taxation in the future 
A) the impact of marginal tax rates on the supply and productivity of resources 
B) the impact of government spending on aggregate demand, output, and employment 
C) the impact of budget deficits on interest rates and aggregate demand 
D) the impact of budget deficits on the rate of taxation in the future

Question 19

The crowding-out effect suggests that

Accepted Answer

A) restrictive fiscal policy is an effective weapon against inflation. 
B) expansionary fiscal policy will be a highly effective weapon for fighting a recessionary downturn 
C) a budget surplus will cause the demand for loanable funds to decline, interest rates to rise, and aggregate demand to decrease. 
D) budget deficits that lead to higher interest rates reduce private investment spending. 
A) restrictive fiscal policy is an effective weapon against inflation. 
B) expansionary fiscal policy will be a highly effective weapon for fighting a recessionary downturn 
C) a budget surplus will cause the demand for loanable funds to decline, interest rates to rise, and aggregate demand to decrease. 
D) budget deficits that lead to higher interest rates reduce private investment spending.

Question 20

It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find

Accepted Answer

A) it more attractive to raise taxes than to increase spending. 
B) it attractive to increase taxes during a recession, but they will be reluctant to reduce them during an expansion. 
C) budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion. 
D) budget surpluses attractive during a recession, but they will be reluctant to run budget deficits during an expansion. 
A) it more attractive to raise taxes than to increase spending. 
B) it attractive to increase taxes during a recession, but they will be reluctant to reduce them during an expansion. 
C) budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion. 
D) budget surpluses attractive during a recession, but they will be reluctant to run budget deficits during an expansion.

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

The persistence of budget deficits during the last several decades is not surprising because politicians will find

Which of the following most clearly states the "paradox of thrift"?

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

What is supply-side economics, and how does it differ from the Keynesian emphasis on fiscal policy?

Between 1986 and 2010, the top marginal personal income tax rate was 40 percent or less compared to 70 percent or more prior to 1981. Compared to the earlier time period, in recent years the share of personal income taxes paid by high income taxpayers

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

Measured as a share of GDP, the net federal debt

Why might an expansion in government spending increase the severity of the coordination problem during a recession?

Supply-side economics stresses that

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

According to the crowding-out effect, expansionary fiscal policy will lead to

Which of the following about fiscal policy is true?

An increase in subsidies and other government spending during a recession is likely to result in

Which of the following will make it more difficult for the United States to control the growth of the federal debt in the decade ahead?

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

A supply-side economist would stress which of the following attributes of fiscal policy?

The crowding-out effect suggests that

It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Exam 12: Fiscal Policy, Incentives, and Secondary Effects

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

According to the new classical theory, a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

The persistence of budget deficits during the last several decades is not surprising because politicians will find

Which of the following most clearly states the "paradox of thrift"?

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

What is supply-side economics, and how does it differ from the Keynesian emphasis on fiscal policy?

Between 1986 and 2010, the top marginal personal income tax rate was 40 percent or less compared to 70 percent or more prior to 1981. Compared to the earlier time period, in recent years the share of personal income taxes paid by high income taxpayers

The expansionary effects of an increase in government expenditures will tend to be offset, at least partially, if

Measured as a share of GDP, the net federal debt

Why might an expansion in government spending increase the severity of the coordination problem during a recession?

Supply-side economics stresses that

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

According to the crowding-out effect, expansionary fiscal policy will lead to

Which of the following about fiscal policy is true?

An increase in subsidies and other government spending during a recession is likely to result in

Which of the following will make it more difficult for the United States to control the growth of the federal debt in the decade ahead?

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

A supply-side economist would stress which of the following attributes of fiscal policy?

The crowding-out effect suggests that

It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters