Question 1

If the budget deficit is $50 billion and the structural deficit is $10 billion,the cyclical deficit is

Accepted Answer

A) $10 billion. 
B) $40 billion. 
C) $60 billion. 
D) $50 billion 
E) $20 billion. 
A) $10 billion. 
B) $40 billion. 
C) $60 billion. 
D) $50 billion 
E) $20 billion. B

Question 2

A cyclical deficit occurs when

Accepted Answer

A) government outlays are greater than revenues. 
B) government outlays are less than revenues. 
C) there is a deficit due to the fact real GDP is greater than potential GDP. 
D) there is a deficit due to the fact real GDP is less than potential GDP. 
E) there is a deficit even when real GDP equals potential GDP. 
A) government outlays are greater than revenues. 
B) government outlays are less than revenues. 
C) there is a deficit due to the fact real GDP is greater than potential GDP. 
D) there is a deficit due to the fact real GDP is less than potential GDP. 
E) there is a deficit even when real GDP equals potential GDP. D

Question 3

If the economy has a structural deficit of $25 billion and a cyclical deficit of $75,we can conclude that the current budget deficit is ________ billion.

Accepted Answer

A) $25 
B) $50 
C) $75 
D) $100 
E) $125 
A) $25 
B) $50 
C) $75 
D) $100 
E) $125 D

Question 4

Choose the correct statement.

Accepted Answer

A) Tax cuts increase aggregate supply and aggregate demand. 
B) Tax cuts strengthen the incentive to work and to invest. 
C) The tax multiplier becomes smaller as time passes. 
D) According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending increases. 
E) Both A and B are correct. 
A) Tax cuts increase aggregate supply and aggregate demand. 
B) Tax cuts strengthen the incentive to work and to invest. 
C) The tax multiplier becomes smaller as time passes. 
D) According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending increases. 
E) Both A and B are correct.

Question 5

Choose the correct statement

Accepted Answer

A) The federal government debt was 5 percent of GDP in 1970. 
B) The debt-to-GDP ratio increased slightly during the 2008-2009 recession. 
C) The debt-to-GDP ratio increased from 1974 through 1997, and then began to decrease. 
D) The government debt increases when the government has a budget deficit. 
E) All of the above. 
A) The federal government debt was 5 percent of GDP in 1970. 
B) The debt-to-GDP ratio increased slightly during the 2008-2009 recession. 
C) The debt-to-GDP ratio increased from 1974 through 1997, and then began to decrease. 
D) The government debt increases when the government has a budget deficit. 
E) All of the above.

Question 6

Currently the government of Ricardia has outlays equal to $100 billion,and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP).What is the real GDP when the government has a balanced budget?

Accepted Answer

A) $100 
B) $250 
C) $1,250 billion 
D) $750 billion 
E) $1,000 billion 
A) $100 
B) $250 
C) $1,250 billion 
D) $750 billion 
E) $1,000 billion

Question 7

The effect of a change in taxes is less than the same sized change in government expenditure because

Accepted Answer

A) the amount by which consumption initially changes is equal to MPC times the tax change. 
B) some people do not pay their taxes. 
C) changes in government expenditure do not directly affect consumption. 
D) tax rates are the same regardless of income levels. 
E) none of the above. 
A) the amount by which consumption initially changes is equal to MPC times the tax change. 
B) some people do not pay their taxes. 
C) changes in government expenditure do not directly affect consumption. 
D) tax rates are the same regardless of income levels. 
E) none of the above.

Question 8

If the economy is in a recession and the federal government is running a deficit,then an expansion would

Accepted Answer

A) automatically balance the budget. 
B) automatically increase the deficit. 
C) automatically decrease the deficit. 
D) leave the deficit unchanged. 
E) increase the deficit only if the interest rate rises. 
A) automatically balance the budget. 
B) automatically increase the deficit. 
C) automatically decrease the deficit. 
D) leave the deficit unchanged. 
E) increase the deficit only if the interest rate rises.

Question 9

If the economy is in an expansion,and the federal government is running a deficit,then a recession would automatically

Accepted Answer

A) decrease the deficit. 
B) increase taxes. 
C) increase government outlays. 
D) increase the deficit. 
E) C and D. 
A) decrease the deficit. 
B) increase taxes. 
C) increase government outlays. 
D) increase the deficit. 
E) C and D.

Question 10

What are the main categories of the federal government outlays?

Accepted Answer

A) transfer payments, expenditures on goods and services, and debt interest 
B) indirect taxes, farmers' subsidies, and debt interest 
C) personal income taxes, expenditures on goods and services, and debt interest 
D) investment income, debt interest and transfer payments 
E) none of the above 
A) transfer payments, expenditures on goods and services, and debt interest 
B) indirect taxes, farmers' subsidies, and debt interest 
C) personal income taxes, expenditures on goods and services, and debt interest 
D) investment income, debt interest and transfer payments 
E) none of the above

Question 11

The government increases the tax rate on labour income.As a result,the supply of labour ________ and the demand for labour ________.The equilibrium level of employment ________.

Accepted Answer

A) decreases;increases;does not change 
B) does not change;decreases;decreases 
C) increases;does not change;decreases 
D) decreases;decreases;decreases 
A) decreases;increases;does not change 
B) does not change;decreases;decreases 
C) increases;does not change;decreases 
D) decreases;decreases;decreases

Question 12

Choose the correct statement.

Accepted Answer

A) Contractionary fiscal policy can eliminate inflationary pressure. 
B) Eliminating an inflationary gap is very simple - calculate the size of the gap and the size of the multiplier, then change government expenditure for an immediate decrease in real GDP. 
C) When an economy is in an above full-employment equilibrium, an equal decrease in government expenditure and autonomous taxes cannot return the economy to full employment. 
D) When an economy is in an above full-employment equilibrium, an increase in taxes will decrease aggregate demand, but because the autonomous tax multiplier is smaller than the government expenditure multiplier, the economy will not return to potential GDP. 
E) All of the above. 
A) Contractionary fiscal policy can eliminate inflationary pressure. 
B) Eliminating an inflationary gap is very simple - calculate the size of the gap and the size of the multiplier, then change government expenditure for an immediate decrease in real GDP. 
C) When an economy is in an above full-employment equilibrium, an equal decrease in government expenditure and autonomous taxes cannot return the economy to full employment. 
D) When an economy is in an above full-employment equilibrium, an increase in taxes will decrease aggregate demand, but because the autonomous tax multiplier is smaller than the government expenditure multiplier, the economy will not return to potential GDP. 
E) All of the above.

Question 13

Suppose the government starts with a debt of $0.Then in year 1,there is a deficit of $100 billion,in year 2 there is a deficit of $60 billion,in year 3 there is a surplus of $40 billion,and in year 4 there is a deficit of $20 billion.What is government debt at the end of year 4?

Accepted Answer

A) $20 billion. 
B) $140 billion. 
C) $180 billion. 
D) Somewhat greater than $220 billion, depending on the interest rate. 
E) Somewhat greater than $140 billion, depending on the interest rate. 
A) $20 billion. 
B) $140 billion. 
C) $180 billion. 
D) Somewhat greater than $220 billion, depending on the interest rate. 
E) Somewhat greater than $140 billion, depending on the interest rate.

Question 14

Suppose the tax rate on interest income is 25 percent,the real interest rate is 4 percent,and the inflation rate is 4 percent.The real after-tax interest rate is

Accepted Answer

A) 0.5 percent. 
B) 3.5 percent. 
C) 4.0 percent. 
D) 2.0 percent. 
E) -0.5 percent. 
A) 0.5 percent. 
B) 3.5 percent. 
C) 4.0 percent. 
D) 2.0 percent. 
E) -0.5 percent.

Question 15

An increase in the tax on capital income ________ the supply of loanable funds and ________ investment.

Accepted Answer

A) increases;increases 
B) increases;decreases 
C) decreases;increases 
D) decreases;decreases 
E) decreases the demand for loanable funds;decreases or increases 
A) increases;increases 
B) increases;decreases 
C) decreases;increases 
D) decreases;decreases 
E) decreases the demand for loanable funds;decreases or increases

Question 16

The largest source of revenues for the federal government is

Accepted Answer

A) transfer payments. 
B) expenditures on goods and services. 
C) personal income taxes. 
D) corporate income taxes. 
E) indirect taxes such as the GST. 
A) transfer payments. 
B) expenditures on goods and services. 
C) personal income taxes. 
D) corporate income taxes. 
E) indirect taxes such as the GST.

Question 17

Expansionary fiscal policy

Accepted Answer

A) increases aggregate demand. 
B) decreases aggregate demand. 
C) increases short-run aggregate supply. 
D) increases long-run aggregate supply. 
E) A, C, and D are correct. 
A) increases aggregate demand. 
B) decreases aggregate demand. 
C) increases short-run aggregate supply. 
D) increases long-run aggregate supply. 
E) A, C, and D are correct.

Question 18

An increase in income taxes

Accepted Answer

A) does not affect potential GDP because potential GDP depends on technology only. 
B) does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged. 
C) increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase. 
D) decreases potential GDP because workers' incentives to work are weakened. 
E) decreases potential GDP because real GDP decreases when households have less disposable income to spend. 
A) does not affect potential GDP because potential GDP depends on technology only. 
B) does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged. 
C) increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase. 
D) decreases potential GDP because workers' incentives to work are weakened. 
E) decreases potential GDP because real GDP decreases when households have less disposable income to spend.

Question 19

Consider all the effects on fiscal policy.A cut in the tax on capital income

Accepted Answer

A) shifts the AD curve rightward. 
B) shifts the SAS curve rightward. 
C) shifts the LAS curve rightward. 
D) all of the above. 
E) only B and C. 
A) shifts the AD curve rightward. 
B) shifts the SAS curve rightward. 
C) shifts the LAS curve rightward. 
D) all of the above. 
E) only B and C.

Question 20

The difference between the before-tax and after-tax rates is the

Accepted Answer

A) tax plug. 
B) deadweight gain. 
C) tax wedge. 
D) taxation penalty. 
E) deadweight loss. 
A) tax plug. 
B) deadweight gain. 
C) tax wedge. 
D) taxation penalty. 
E) deadweight loss.

Exam 29: Fiscal Policy

If the budget deficit is $50 billion and the structural deficit is $10 billion,the cyclical deficit is

A cyclical deficit occurs when

If the economy has a structural deficit of $25 billion and a cyclical deficit of $75,we can conclude that the current budget deficit is ________ billion.

Choose the correct statement.

Choose the correct statement

Currently the government of Ricardia has outlays equal to $100 billion,and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP).What is the real GDP when the government has a balanced budget?

The effect of a change in taxes is less than the same sized change in government expenditure because

If the economy is in a recession and the federal government is running a deficit,then an expansion would

If the economy is in an expansion,and the federal government is running a deficit,then a recession would automatically

What are the main categories of the federal government outlays?

The government increases the tax rate on labour income.As a result,the supply of labour ________ and the demand for labour ________.The equilibrium level of employment ________.

Choose the correct statement.

Suppose the government starts with a debt of $0.Then in year 1,there is a deficit of $100 billion,in year 2 there is a deficit of $60 billion,in year 3 there is a surplus of $40 billion,and in year 4 there is a deficit of $20 billion.What is government debt at the end of year 4?

Suppose the tax rate on interest income is 25 percent,the real interest rate is 4 percent,and the inflation rate is 4 percent.The real after-tax interest rate is

An increase in the tax on capital income ________ the supply of loanable funds and ________ investment.

The largest source of revenues for the federal government is

Expansionary fiscal policy

An increase in income taxes

Consider all the effects on fiscal policy.A cut in the tax on capital income

The difference between the before-tax and after-tax rates is the

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The government increases the tax rate on labour income.As a result,the supply of labour and the demand for labour .The equilibrium level of employment .

An increase in the tax on capital income the supply of loanable funds and investment.