Question 1

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

Accepted Answer

A) Because they expand government revenues, higher marginal tax rates will lead to a reduction in the budget deficit and to lower interest rates. 
B) Because they encourage investors to undertake low-productivity projects with substantial tax-avoidance benefits, higher marginal tax rates promote economic inefficiency. 
C) Because they do not consume resources directly, income redistribution payments will exert little impact on real aggregate supply. 
D) The primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus. 
A) Because they expand government revenues, higher marginal tax rates will lead to a reduction in the budget deficit and to lower interest rates. 
B) Because they encourage investors to undertake low-productivity projects with substantial tax-avoidance benefits, higher marginal tax rates promote economic inefficiency. 
C) Because they do not consume resources directly, income redistribution payments will exert little impact on real aggregate supply. 
D) The primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.

Question 2

If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result?

Accepted Answer

A) an inflow of capital and an appreciation in the foreign exchange value of the dollar 
B) an outflow of capital and a depreciation in the foreign exchange value of the dollar 
C) an inflow of capital and a depreciation in the foreign exchange value of the dollar 
D) an outflow of capital and an appreciation in the foreign exchange value of the dollar 
A) an inflow of capital and an appreciation in the foreign exchange value of the dollar 
B) an outflow of capital and a depreciation in the foreign exchange value of the dollar 
C) an inflow of capital and a depreciation in the foreign exchange value of the dollar 
D) an outflow of capital and an appreciation in the foreign exchange value of the dollar

Question 3

According to new classical economists, the most appropriate policy during a recession would be for the government to

Accepted Answer

A) increase the minimum wage. 
B) impose wage and price controls. 
C) cut taxes and increase the budget deficit. 
D) do nothing. 
A) increase the minimum wage. 
B) impose wage and price controls. 
C) cut taxes and increase the budget deficit. 
D) do nothing.

Question 4

The political incentive structure tends to

Accepted Answer

A) encourage a balanced budget regardless of economic conditions. 
B) discourage budget deficits during recessions. 
C) encourage budget surpluses during both recessions and expansions. 
D) encourage budget deficits during both recessions and expansions. 
A) encourage a balanced budget regardless of economic conditions. 
B) discourage budget deficits during recessions. 
C) encourage budget surpluses during both recessions and expansions. 
D) encourage budget deficits during both recessions and expansions.

Question 5

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Accepted Answer

Crowding out refers to the relationship

Question 6

Public choice analysis indicates that elected political officials will find debt financing

Accepted Answer

A) unattractive because voters will recognize that excessive debt will lead to the future collapse of the economy. 
B) attractive because countries with a higher debt to GDP ratio generally grow more rapidly. 
C) unattractive because both politicians and voters will recognize that a larger outstanding debt will mean higher future taxes. 
D) attractive because current spending can provide voters with highly visible goods, services, and transfer payments, while borrowing will push the most visible cost of this spending into the future. 
A) unattractive because voters will recognize that excessive debt will lead to the future collapse of the economy. 
B) attractive because countries with a higher debt to GDP ratio generally grow more rapidly. 
C) unattractive because both politicians and voters will recognize that a larger outstanding debt will mean higher future taxes. 
D) attractive because current spending can provide voters with highly visible goods, services, and transfer payments, while borrowing will push the most visible cost of this spending into the future.

Question 7

The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when

Accepted Answer

A) marginal tax rates are high. 
B) marginal tax rates are low. 
C) the inflation rate is low and relatively stable. 
D) This is a trick question: the consumption of tax-deductible goods is not affected by marginal tax rates. 
A) marginal tax rates are high. 
B) marginal tax rates are low. 
C) the inflation rate is low and relatively stable. 
D) This is a trick question: the consumption of tax-deductible goods is not affected by marginal tax rates.

Question 8

The most effective fiscal stimulus will

Accepted Answer

A) create jobs, even if the employment is on unproductive projects. 
B) substantially change the composition of aggregate demand. 
C) encourage interest groups to lobby more intensely and make larger political contributions. 
D) direct the economy to full employment and direct resources toward economically productive projects. 
A) create jobs, even if the employment is on unproductive projects. 
B) substantially change the composition of aggregate demand. 
C) encourage interest groups to lobby more intensely and make larger political contributions. 
D) direct the economy to full employment and direct resources toward economically productive projects.

Question 9

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,

Accepted Answer

A) there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline. 
B) there will be an outflow of foreign capital, which will cause the dollar to depreciate and net exports to increase. 
C) there will be an inflow of foreign capital, which will cause the dollar to depreciate and net exports to increase. 
D) there will be an outflow of foreign capital, which will cause the dollar to appreciate and net exports to decline. 
A) there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline. 
B) there will be an outflow of foreign capital, which will cause the dollar to depreciate and net exports to increase. 
C) there will be an inflow of foreign capital, which will cause the dollar to depreciate and net exports to increase. 
D) there will be an outflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.

Question 10

If there is an increase in foreign financial investment in the United States as the result of large U.S. budget deficits and attractive interest yields,

Accepted Answer

A) fiscal policy will be more expansionary since there will be no crowding-out effect. 
B) fiscal policy will be more expansionary since U.S.residents will increase their savings, so they can repay the foreigners in the future. 
C) foreign exchange value of the dollar will depreciate, which will lead to an increase in net exports and aggregate demand. 
D) foreign exchange value of the dollar will appreciate, which will lead to a decrease in net exports and aggregate demand. 
A) fiscal policy will be more expansionary since there will be no crowding-out effect. 
B) fiscal policy will be more expansionary since U.S.residents will increase their savings, so they can repay the foreigners in the future. 
C) foreign exchange value of the dollar will depreciate, which will lead to an increase in net exports and aggregate demand. 
D) foreign exchange value of the dollar will appreciate, which will lead to a decrease in net exports and aggregate demand.

Question 11

Which of the following would be most likely to maintain that spending increases and larger budget deficits would help promote recovery from the recession of 2008-2009?

Accepted Answer

A) supply-side economists 
B) new classical economists 
C) Keynesian economists 
D) proponents of the crowding-out theory 
A) supply-side economists 
B) new classical economists 
C) Keynesian economists 
D) proponents of the crowding-out theory

Question 12

The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause

Accepted Answer

A) a higher interest rate and depreciation of the U.S.dollar. 
B) a higher interest rate and appreciation of the U.S.dollar. 
C) a lower interest rate and depreciation of the U.S.dollar. 
D) a lower interest rate and appreciation of the U.S.dollar. 
E) no change in the interest rate and depreciation of the U.S.dollar. 
A) a higher interest rate and depreciation of the U.S.dollar. 
B) a higher interest rate and appreciation of the U.S.dollar. 
C) a lower interest rate and depreciation of the U.S.dollar. 
D) a lower interest rate and appreciation of the U.S.dollar. 
E) no change in the interest rate and depreciation of the U.S.dollar.

Question 13

During 2001-2012, the federal budget deficit

Accepted Answer

A) expanded and real government spending increased rapidly, indicating that fiscal policy was restrictive. 
B) expanded and real government spending increased rapidly, indicating that fiscal policy was expansionary. 
C) declined and real government spending fell, indicating that fiscal policy was restrictive. 
D) declined and real government spending fell, indicating that fiscal policy was expansionary. 
A) expanded and real government spending increased rapidly, indicating that fiscal policy was restrictive. 
B) expanded and real government spending increased rapidly, indicating that fiscal policy was expansionary. 
C) declined and real government spending fell, indicating that fiscal policy was restrictive. 
D) declined and real government spending fell, indicating that fiscal policy was expansionary.

Question 14

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Accepted Answer

A) decrease consumption spending. 
B) increase consumption spending. 
C) decrease investment spending. 
D) increase export sales. 
A) decrease consumption spending. 
B) increase consumption spending. 
C) decrease investment spending. 
D) increase export sales.

Question 15

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Accepted Answer

A) An increase in the budget deficit relative to GDP 
B) A reduction in the budget deficit relative to GDP 
C) An increase in the budget surplus relative to GDP 
D) An increase in the nominal (dollar) size of the budget deficit 
A) An increase in the budget deficit relative to GDP 
B) A reduction in the budget deficit relative to GDP 
C) An increase in the budget surplus relative to GDP 
D) An increase in the nominal (dollar) size of the budget deficit

Question 16

Are jobs the key to economic progress and the achievement of high income levels?

Accepted Answer

A) Yes, as long as people are working, real income levels will be high. 
B) Yes, when full employment is present, income levels will be at their maximum. 
C) No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost. 
D) Uncertain, additional employment will increase real income only when the general level of prices is unchanged. 
A) Yes, as long as people are working, real income levels will be high. 
B) Yes, when full employment is present, income levels will be at their maximum. 
C) No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost. 
D) Uncertain, additional employment will increase real income only when the general level of prices is unchanged.

Question 17

Which of the following about fiscal policy is true?

Accepted Answer

A) Modern forecasting methods make it relatively easy to time fiscal policy changes in a manner that will help stabilize the economy. 
B) Legislative action is necessary if automatic stabilizers are going to smooth the ups and downs of the business cycle. 
C) Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve. 
D) Both the crowding-out and new classical theories indicate that expansionary fiscal policy will exert a powerful impact on aggregate demand. 
A) Modern forecasting methods make it relatively easy to time fiscal policy changes in a manner that will help stabilize the economy. 
B) Legislative action is necessary if automatic stabilizers are going to smooth the ups and downs of the business cycle. 
C) Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve. 
D) Both the crowding-out and new classical theories indicate that expansionary fiscal policy will exert a powerful impact on aggregate demand.

Question 18

If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of

Accepted Answer

A) Laffer curve effect. 
B) structural deficit. 
C) crowding-out. 
D) monetary policy ineffectiveness. 
A) Laffer curve effect. 
B) structural deficit. 
C) crowding-out. 
D) monetary policy ineffectiveness.

Question 19

How will an increase in government expenditures during a recession be reflected in GDP?

Accepted Answer

A) An increase in government spending will reduce aggregate demand and decrease GDP. 
B) An increase in government spending will not affect GDP. 
C) An increase in government spending will increase GDP, but only if it is directed toward economically productive projects. 
D) The government spending will increase GDP even if the spending encourages rent seeking and other unproductive activities. 
A) An increase in government spending will reduce aggregate demand and decrease GDP. 
B) An increase in government spending will not affect GDP. 
C) An increase in government spending will increase GDP, but only if it is directed toward economically productive projects. 
D) The government spending will increase GDP even if the spending encourages rent seeking and other unproductive activities.

Question 20

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

Accepted Answer

A) an increase in government expenditures to provide subsidies for large banks that made bad investment decisions 
B) an increase in government expenditures that changes the composition of aggregate demand 
C) a reduction in tax rates 
D) an increase in payments to unemployed workers financed by borrowing 
A) an increase in government expenditures to provide subsidies for large banks that made bad investment decisions 
B) an increase in government expenditures that changes the composition of aggregate demand 
C) a reduction in tax rates 
D) an increase in payments to unemployed workers financed by borrowing

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result?

According to new classical economists, the most appropriate policy during a recession would be for the government to

The political incentive structure tends to

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Public choice analysis indicates that elected political officials will find debt financing

The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when

The most effective fiscal stimulus will

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,

If there is an increase in foreign financial investment in the United States as the result of large U.S. budget deficits and attractive interest yields,

Which of the following would be most likely to maintain that spending increases and larger budget deficits would help promote recovery from the recession of 2008-2009?

The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause

During 2001-2012, the federal budget deficit

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Are jobs the key to economic progress and the achievement of high income levels?

Which of the following about fiscal policy is true?

If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of

How will an increase in government expenditures during a recession be reflected in GDP?

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

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

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result?

According to new classical economists, the most appropriate policy during a recession would be for the government to

The political incentive structure tends to

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Public choice analysis indicates that elected political officials will find debt financing

The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when

The most effective fiscal stimulus will

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates,

If there is an increase in foreign financial investment in the United States as the result of large U.S. budget deficits and attractive interest yields,

Which of the following would be most likely to maintain that spending increases and larger budget deficits would help promote recovery from the recession of 2008-2009?

The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause

During 2001-2012, the federal budget deficit

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Are jobs the key to economic progress and the achievement of high income levels?

Which of the following about fiscal policy is true?

If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of

How will an increase in government expenditures during a recession be reflected in GDP?

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

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