Question 1

The supply-side effects of a reduction in taxes are the result of

Accepted Answer

A) increases in the disposable income of households accompanying reductions in tax rates. 
B) the stimulus effects of increases in government expenditures. 
C) increased attractiveness of productive activity relative to leisure and tax avoidance. 
D) reductions in interest rates that generally accompany expansionary fiscal policy. 
A) increases in the disposable income of households accompanying reductions in tax rates. 
B) the stimulus effects of increases in government expenditures. 
C) increased attractiveness of productive activity relative to leisure and tax avoidance. 
D) reductions in interest rates that generally accompany expansionary fiscal policy.

Question 2

Shaniqua sells life insurance and is considering buying a $60,000 Lexus for business purposes (thus, the expense reduces her taxable income). If Shaniqua is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Lexus?

Accepted Answer

A) $24,000 
B) $36,000 
C) $30,000 
D) $84,000 
A) $24,000 
B) $36,000 
C) $30,000 
D) $84,000

Question 3

Which of the following most accurately indicates the political incentive to spend and/or tax?

Accepted Answer

A) Politicians will find tax increases more attractive than increases in government expenditures. 
B) Voters will generally support higher taxes in order to eliminate budget deficits. 
C) Politicians are rewarded for raising taxes and punished for providing programs that benefit their constituents. 
D) Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes. 
A) Politicians will find tax increases more attractive than increases in government expenditures. 
B) Voters will generally support higher taxes in order to eliminate budget deficits. 
C) Politicians are rewarded for raising taxes and punished for providing programs that benefit their constituents. 
D) Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes.

Question 4

Government spending programs that create jobs are often popular because

Accepted Answer

A) the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible. 
B) if a spending program is approved by Congress, it means that the value of what is produced is greater than the value of the resources used to produce it. 
C) the benefits of job creation are always greater than the costs. Jobs are the key to economic progress. 
D) when spending programs are funded by the government there are no secondary effects. 
A) the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible. 
B) if a spending program is approved by Congress, it means that the value of what is produced is greater than the value of the resources used to produce it. 
C) the benefits of job creation are always greater than the costs. Jobs are the key to economic progress. 
D) when spending programs are funded by the government there are no secondary effects.

Question 5

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Accepted Answer

A) stimulate aggregate demand and employment. 
B) retard aggregate demand and employment. 
C) increase the real rate of interest. 
D) exert little or no impact on the real interest rate, aggregate demand, and employment. 
A) stimulate aggregate demand and employment. 
B) retard aggregate demand and employment. 
C) increase the real rate of interest. 
D) exert little or no impact on the real interest rate, aggregate demand, and employment.

Question 6

Which is more likely to stimulate aggregate demand in a timely manner?

Accepted Answer

A) a tax cut, because households will increase their consumption by the full amount of their tax reduction 
B) a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years 
C) a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years 
D) a spending increase, because it can be easily reversed once the economy has recovered 
A) a tax cut, because households will increase their consumption by the full amount of their tax reduction 
B) a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years 
C) a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years 
D) a spending increase, because it can be easily reversed once the economy has recovered

Question 7

According to the Keynesian view, government spending will have its greatest impact during a severe recession because

Accepted Answer

A) automatic stabilizers will shift the budget toward a surplus during a severe recession. 
B) underemployed resources will be widespread and the crowding out of private spending will be minimal. 
C) budget deficits will reduce interest rates and thereby stimulate private investment. 
D) increases in the government's outstanding debt will lead to lower future taxes. 
A) automatic stabilizers will shift the budget toward a surplus during a severe recession. 
B) underemployed resources will be widespread and the crowding out of private spending will be minimal. 
C) budget deficits will reduce interest rates and thereby stimulate private investment. 
D) increases in the government's outstanding debt will lead to lower future taxes.

Question 8

Use the figure below to answer the following question(s).
Figure 12-1  
-Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a Keynesian economist be most likely to favor?

Accepted Answer

A) a reduction in government expenditures 
B) an increase in government expenditures 
C) an increase in taxes 
D) continuation of the current tax and expenditure policies 
A) a reduction in government expenditures 
B) an increase in government expenditures 
C) an increase in taxes 
D) continuation of the current tax and expenditure policies

Question 9

Public choice analysis indicates that it will be politically more attractive to

Accepted Answer

A) enact restrictive fiscal policy during an economic expansion than to enact expansionary fiscal policy during a recession. 
B) enact expansionary fiscal policy during an economic expansion than to enact restrictive fiscal policy during a recession. 
C) enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion. 
D) raise taxes than to increase spending. 
A) enact restrictive fiscal policy during an economic expansion than to enact expansionary fiscal policy during a recession. 
B) enact expansionary fiscal policy during an economic expansion than to enact restrictive fiscal policy during a recession. 
C) enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion. 
D) raise taxes than to increase spending.

Question 10

The crowding-out effect refers to the tendency of

Accepted Answer

A) the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending. 
B) higher future taxes accompanying budget deficits to reduce private consumption. 
C) the inflation rate to rise when the unemployment rate is low. 
D) increases in private savings to reduce interest rates and, thereby, crowd-out government expenditures. 
A) the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending. 
B) higher future taxes accompanying budget deficits to reduce private consumption. 
C) the inflation rate to rise when the unemployment rate is low. 
D) increases in private savings to reduce interest rates and, thereby, crowd-out government expenditures.

Question 11

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

Accepted Answer

A) fallen sharply from the level of years prior to 1981. 
B) increased sharply during the Clinton administration, but declined substantially during the administration of George W.Bush. 
C) been virtually unchanged from the level of years prior to 1981. 
D) increased substantially from the level of years prior to 1981. 
A) fallen sharply from the level of years prior to 1981. 
B) increased sharply during the Clinton administration, but declined substantially during the administration of George W.Bush. 
C) been virtually unchanged from the level of years prior to 1981. 
D) increased substantially from the level of years prior to 1981.

Question 12

Budget projections for 2014-2020 indicate both higher levels of government spending and large budget deficits. According to the Keynesian view, this will lead to

Accepted Answer

A) an increase in aggregate supply during that decade. 
B) weak aggregate demand and a continuation of recessionary conditions. 
C) an increase in aggregate demand and real output. 
D) higher interest rates and taxes that will retard future growth. 
A) an increase in aggregate supply during that decade. 
B) weak aggregate demand and a continuation of recessionary conditions. 
C) an increase in aggregate demand and real output. 
D) higher interest rates and taxes that will retard future growth.

Question 13

Other things being constant, countries with higher rates of saving

Accepted Answer

A) will have smaller GDPs than countries with lower rates of saving. 
B) will have higher rates of investment, but slower growth. 
C) will have higher rates of investment and growth. 
D) will be operating at less than full employment and potential output. 
A) will have smaller GDPs than countries with lower rates of saving. 
B) will have higher rates of investment, but slower growth. 
C) will have higher rates of investment and growth. 
D) will be operating at less than full employment and potential output.

Question 14

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Accepted Answer

A) savings, in anticipation of future taxes. 
B) output and consumption, stimulated by the additional government spending. 
C) consumer spending, in anticipation of lower future taxes. 
D) aggregate demand, because the additional spending was financed by borrowing rather than current taxation. 
A) savings, in anticipation of future taxes. 
B) output and consumption, stimulated by the additional government spending. 
C) consumer spending, in anticipation of lower future taxes. 
D) aggregate demand, because the additional spending was financed by borrowing rather than current taxation.

Question 15

Measured as a share of GDP, the total federal debt

Accepted Answer

A) increased during the 1990s, but it has declined substantially during the most recent decade. 
B) increased substantially during the recession of 2008-2009, but it is still well below the levels of the 1960s and 1970s. 
C) has steadily trended downward during both the 1990s and the most recent decade. 
D) is now approximately 100 percent of GDP, which is higher than at any time since the years immediately following World War II. 
A) increased during the 1990s, but it has declined substantially during the most recent decade. 
B) increased substantially during the recession of 2008-2009, but it is still well below the levels of the 1960s and 1970s. 
C) has steadily trended downward during both the 1990s and the most recent decade. 
D) is now approximately 100 percent of GDP, which is higher than at any time since the years immediately following World War II.

Question 16

During 1960-1980, those with the highest incomes confronted federal marginal tax rates between 70 and 90 percent. Since 1986, the highest federal income tax rate has been less than 40 percent. Since 1986, the share of the personal income tax collected from the top one-half of one percent of earners has been

Accepted Answer

A) substantially lower than during the 1960s and 1970s. 
B) only slightly lower than during the 1960s and 1970s. 
C) virtually the same as during the 1960s and 1970s. 
D) higher than during the 1960s and 1970s. 
A) substantially lower than during the 1960s and 1970s. 
B) only slightly lower than during the 1960s and 1970s. 
C) virtually the same as during the 1960s and 1970s. 
D) higher than during the 1960s and 1970s.

Question 17

Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because

Accepted Answer

A) more spending and debt will lead to higher future taxes to cover the cost of government and the interest on the debt. 
B) government spending is directed by political forces, rather than efficient cost-revenue comparisons. 
C) more political spending will lead to more wasteful rent-seeking activities and less production of goods and services that people value. 
D) All of the above are true. 
A) more spending and debt will lead to higher future taxes to cover the cost of government and the interest on the debt. 
B) government spending is directed by political forces, rather than efficient cost-revenue comparisons. 
C) more political spending will lead to more wasteful rent-seeking activities and less production of goods and services that people value. 
D) All of the above are true.

Question 18

Supply-side economics stresses that

Accepted Answer

A) aggregate demand is the major determinant of real output. 
B) marginal tax rates exert important incentive effects that influence real output. 
C) an increase in government expenditures and tax rates will cause real income to rise. 
D) expansionary monetary policy will cause real output to expand without accelerating inflation. 
A) aggregate demand is the major determinant of real output. 
B) marginal tax rates exert important incentive effects that influence real output. 
C) an increase in government expenditures and tax rates will cause real income to rise. 
D) expansionary monetary policy will cause real output to expand without accelerating inflation.

Question 19

When household debt as a share of income is abnormally high,

Accepted Answer

A) rapid growth of consumption is likely to lead the recovery. 
B) the growth prospects of the economy will be excellent because high household debt is the key to a strong economy. 
C) the growth of consumption is likely to remain sluggish even as the economy begins to recover. 
D) consumers will be in a strong position to deal with irregular expenses. 
A) rapid growth of consumption is likely to lead the recovery. 
B) the growth prospects of the economy will be excellent because high household debt is the key to a strong economy. 
C) the growth of consumption is likely to remain sluggish even as the economy begins to recover. 
D) consumers will be in a strong position to deal with irregular expenses.

Question 20

Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?

Accepted Answer

A) Automatic stabilizers help reduce the fluctuations in aggregate demand and output. 
B) It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability. 
C) Fiscal policy is much less potent than the early Keynesian view implied. 
D) Budget deficits are a highly effective tool with which to combat a severe recession. 
A) Automatic stabilizers help reduce the fluctuations in aggregate demand and output. 
B) It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability. 
C) Fiscal policy is much less potent than the early Keynesian view implied. 
D) Budget deficits are a highly effective tool with which to combat a severe recession.

The supply-side effects of a reduction in taxes are the result of

Shaniqua sells life insurance and is considering buying a $60,000 Lexus for business purposes (thus, the expense reduces her taxable income). If Shaniqua is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Lexus?

Which of the following most accurately indicates the political incentive to spend and/or tax?

Government spending programs that create jobs are often popular because

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Which is more likely to stimulate aggregate demand in a timely manner?

According to the Keynesian view, government spending will have its greatest impact during a severe recession because

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-1. If the output of the economy is Y₁, which of the following would a Keynesian economist be most likely to favor?

Public choice analysis indicates that it will be politically more attractive to

The crowding-out effect refers to the tendency of

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

Budget projections for 2014-2020 indicate both higher levels of government spending and large budget deficits. According to the Keynesian view, this will lead to

Other things being constant, countries with higher rates of saving

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Measured as a share of GDP, the total federal debt

Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because

Supply-side economics stresses that

When household debt as a share of income is abnormally high,

Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?

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

The supply-side effects of a reduction in taxes are the result of

Shaniqua sells life insurance and is considering buying a $60,000 Lexus for business purposes (thus, the expense reduces her taxable income). If Shaniqua is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Lexus?

Which of the following most accurately indicates the political incentive to spend and/or tax?

Government spending programs that create jobs are often popular because

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Which is more likely to stimulate aggregate demand in a timely manner?

According to the Keynesian view, government spending will have its greatest impact during a severe recession because

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a Keynesian economist be most likely to favor?

Public choice analysis indicates that it will be politically more attractive to

The crowding-out effect refers to the tendency of

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

Budget projections for 2014-2020 indicate both higher levels of government spending and large budget deficits. According to the Keynesian view, this will lead to

Other things being constant, countries with higher rates of saving

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Measured as a share of GDP, the total federal debt

Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because

Supply-side economics stresses that

When household debt as a share of income is abnormally high,

Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?

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

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-1. If the output of the economy is Y₁, which of the following would a Keynesian economist be most likely to favor?