Question 1

The Laffer curve shows that increasing ________ increases ________ when ________ low.

Accepted Answer

A) tax revenue;potential GDP;tax revenue is 
B) the tax rate;tax revenue;the tax rate is 
C) potential GDP;tax revenue;tax revenue is 
D) government outlays;the budget deficit;government expenditure is 
E) investment;potential GDP;the interest rate is 
A) tax revenue;potential GDP;tax revenue is 
B) the tax rate;tax revenue;the tax rate is 
C) potential GDP;tax revenue;tax revenue is 
D) government outlays;the budget deficit;government expenditure is 
E) investment;potential GDP;the interest rate is

Question 2

Which of the following is not a source of government revenues?

Accepted Answer

A) personal income taxes 
B) transfer payments 
C) corporate income taxes 
D) indirect taxes 
E) investment income 
A) personal income taxes 
B) transfer payments 
C) corporate income taxes 
D) indirect taxes 
E) investment income

Question 3

If real GDP is less than potential GDP,which of the following fiscal policies would increase real GDP?

Accepted Answer

A) a decrease in taxes 
B) an increase in government expenditures 
C) a fall in the interest rate 
D) Both A and B are correct 
E) Both B and C are correct. 
A) a decrease in taxes 
B) an increase in government expenditures 
C) a fall in the interest rate 
D) Both A and B are correct 
E) Both B and C are correct.

Question 4

The government increases the tax rate on labour income.At the equilibrium level of employment,the before-tax wage rate ________ and the after-tax wage rate ________.Potential GDP ________.

Accepted Answer

A) rises;falls;decreases 
B) falls;rises;does not change 
C) rises;falls;does not change 
D) falls;rises;decreases 
E) rises;falls;increases 
A) rises;falls;decreases 
B) falls;rises;does not change 
C) rises;falls;does not change 
D) falls;rises;decreases 
E) rises;falls;increases

Question 5

Which of the following policies shifts the AD curve the farthest leftward?

Accepted Answer

A) a decrease in government expenditure of $10 billion 
B) an increase in taxes of $10 billion 
C) a decrease in taxes of $10 billion 
D) an increase in government expenditure of $10 billion 
E) a simultaneous increase in government expenditure of $10 billion and taxes of $10 billion 
A) a decrease in government expenditure of $10 billion 
B) an increase in taxes of $10 billion 
C) a decrease in taxes of $10 billion 
D) an increase in government expenditure of $10 billion 
E) a simultaneous increase in government expenditure of $10 billion and taxes of $10 billion

Question 6

Which of the following would not increase an existing budget deficit?

Accepted Answer

A) an increase in interest on the government debt 
B) an increase in government expenditures on goods and services 
C) an increase in government transfer payments 
D) an increase in indirect taxes 
E) a decrease in investment income 
A) an increase in interest on the government debt 
B) an increase in government expenditures on goods and services 
C) an increase in government transfer payments 
D) an increase in indirect taxes 
E) a decrease in investment income

Question 7

The cyclical deficit

Accepted Answer

A) is a persistent economic phenomenon. 
B) occurs when the economy is at full employment. 
C) arises purely because real GDP does not equal potential GDP. 
D) is an accumulation of the government debt. 
E) none of the above. 
A) is a persistent economic phenomenon. 
B) occurs when the economy is at full employment. 
C) arises purely because real GDP does not equal potential GDP. 
D) is an accumulation of the government debt. 
E) none of the above.

Question 8

The use of fiscal policy is limited because

Accepted Answer

A) of recognition lag. 
B) of law-making lag. 
C) of impact lag. 
D) all of the above 
E) none of the above 
A) of recognition lag. 
B) of law-making lag. 
C) of impact lag. 
D) all of the above 
E) none of the above

Question 9

If the nominal interest rate is 11%,the inflation rate is 4% and the tax rate is 25%,what is the real after-tax interest rate?

Accepted Answer

A) -1.25% 
B) 4.25% 
C) 5.25% 
D) 8% 
E) 10% 
A) -1.25% 
B) 4.25% 
C) 5.25% 
D) 8% 
E) 10%

Question 10

When real GDP equals potential GDP of $12 trillion,the budget deficit is $1 trillion.Real GDP actually equals $14 trillion and the budget surplus is $3 trillion.The economy has a structural ________ and a cyclical ________.

Accepted Answer

A) deficit of $1 trillion;surplus of $4 trillion 
B) deficit of $1 trillion;surplus of $2 trillion 
C) surplus of $4 trillion;deficit of $1 trillion 
D) surplus of $3 trillion;surplus of $2 trillion 
E) deficit of $4 trillion;surplus of $1 trillion 
A) deficit of $1 trillion;surplus of $4 trillion 
B) deficit of $1 trillion;surplus of $2 trillion 
C) surplus of $4 trillion;deficit of $1 trillion 
D) surplus of $3 trillion;surplus of $2 trillion 
E) deficit of $4 trillion;surplus of $1 trillion

Question 11

A tax cut on capital income

Accepted Answer

A) does not affect potential GDP because the interest rate affects aggregate expenditure only. 
B) does not affect potential GDP because it has no impact on the supply of labour. 
C) increases potential GDP because workers have greater incentives to work. 
D) increases potential GDP because the supply of loanable funds increases. 
E) increases potential GDP because households have more disposable income to spend. 
A) does not affect potential GDP because the interest rate affects aggregate expenditure only. 
B) does not affect potential GDP because it has no impact on the supply of labour. 
C) increases potential GDP because workers have greater incentives to work. 
D) increases potential GDP because the supply of loanable funds increases. 
E) increases potential GDP because households have more disposable income to spend.

Question 12

All of the following statements are true except

Accepted Answer

A) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. 
B) debt interest has been steadily increasing since 1960. 
C) expenditures on goods and services have a downward trend. 
D) outlays increased steadily from 1971 through 1985. 
E) transfer payments decreased sharply during the 1990s. 
A) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. 
B) debt interest has been steadily increasing since 1960. 
C) expenditures on goods and services have a downward trend. 
D) outlays increased steadily from 1971 through 1985. 
E) transfer payments decreased sharply during the 1990s.

Question 13

During the 1980s and 1990s in Canada,

Accepted Answer

A) investment income as a percentage of GDP increased. 
B) indirect taxes as a percentage of GDP increased steadily. 
C) personal income taxes as a percentage of GDP decreased. 
D) total revenues as a percentage of GDP increased by over 5 percent. 
E) none of the above. 
A) investment income as a percentage of GDP increased. 
B) indirect taxes as a percentage of GDP increased steadily. 
C) personal income taxes as a percentage of GDP decreased. 
D) total revenues as a percentage of GDP increased by over 5 percent. 
E) none of the above.

Question 14

The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal income taxes,$15 million in corporate income taxes,$5 million in indirect taxes,$2 million in investment income,$30 million in transfer payments,$12 million in government expenditure,and $8 million in debt interest.Ricardia has a government budget

Accepted Answer

A) surplus of $3 million. 
B) surplus of $57 million. 
C) surplus of $13 million. 
D) deficit of $13 million. 
E) deficit of $3 million. 
A) surplus of $3 million. 
B) surplus of $57 million. 
C) surplus of $13 million. 
D) deficit of $13 million. 
E) deficit of $3 million.

Question 15

A tax on labour income ________.

Accepted Answer

A) decreases the demand for labour but does not change the real wage rate 
B) increases the demand for labour and raises the real wage rate 
C) increases the supply of labour and lowers the real wage rate 
D) decreases the supply of labour and has no influence on the real wage rate 
E) has no effect on the demand for labour 
A) decreases the demand for labour but does not change the real wage rate 
B) increases the demand for labour and raises the real wage rate 
C) increases the supply of labour and lowers the real wage rate 
D) decreases the supply of labour and has no influence on the real wage rate 
E) has no effect on the demand for labour

Question 16

All of the following statements are true except

Accepted Answer

A) total revenues have no strong trends. 
B) revenues include corporate income taxes, personal income taxes;indirect taxes and investment income. 
C) the main source of fluctuations in revenues is corporate income taxes. 
D) indirect taxes decreased during the 1990s due to the introduction of the GST. 
E) total revenues increased through the 1960s and 1980s. 
A) total revenues have no strong trends. 
B) revenues include corporate income taxes, personal income taxes;indirect taxes and investment income. 
C) the main source of fluctuations in revenues is corporate income taxes. 
D) indirect taxes decreased during the 1990s due to the introduction of the GST. 
E) total revenues increased through the 1960s and 1980s.

Question 17

Which of the following is an example of a fiscal policy designed to counter a recessionary gap?

Accepted Answer

A) increasing debt interest payments 
B) increasing taxes 
C) decreasing transfer payments 
D) increasing transfer payments 
E) decreasing government expenditures on goods and services 
A) increasing debt interest payments 
B) increasing taxes 
C) decreasing transfer payments 
D) increasing transfer payments 
E) decreasing government expenditures on goods and services

Question 18

Canada's government debt

Accepted Answer

A) is smaller than the value of the public capital stock so Canada's debt has not financed public consumption expenditure. 
B) is larger than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure. 
C) equals the value of the public capital stock. 
D) has risen every year since 1975. 
E) is smaller than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure. 
A) is smaller than the value of the public capital stock so Canada's debt has not financed public consumption expenditure. 
B) is larger than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure. 
C) equals the value of the public capital stock. 
D) has risen every year since 1975. 
E) is smaller than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure.

Question 19

Discretionary fiscal policy

Accepted Answer

A) requires action by Parliament. 
B) is triggered by the state of the economy. 
C) involves only a change in government outlays and no change in revenues. 
D) involves only a change in personal income tax rates. 
E) occurs during recessions but not during expansions. 
A) requires action by Parliament. 
B) is triggered by the state of the economy. 
C) involves only a change in government outlays and no change in revenues. 
D) involves only a change in personal income tax rates. 
E) occurs during recessions but not during expansions.

Question 20

The government is proposing to increase the tax rate on labour income and asks you to report on the supply-side effects of such an action.According to the research of Edward C.Prescott,cross-country evidence for Canada,the United States,the United Kingdom,and France shows all of the following except ________.

Accepted Answer

A) the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP 
B) potential GDP per person in France is 14 percent below that of the United States (per person)and the entire difference can be attributed to the difference in the tax wedge in the two countries 
C) potential GDP per person in the United Kingdom is 41 percent below that of the United States (per person)and about a third of the difference arises from the different tax wedges 
D) between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP 
E) potential GDP per person in Canada is 16 percent below that of the United States but this difference is due to different productivities 
A) the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP 
B) potential GDP per person in France is 14 percent below that of the United States (per person)and the entire difference can be attributed to the difference in the tax wedge in the two countries 
C) potential GDP per person in the United Kingdom is 41 percent below that of the United States (per person)and about a third of the difference arises from the different tax wedges 
D) between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP 
E) potential GDP per person in Canada is 16 percent below that of the United States but this difference is due to different productivities

Exam 29: Fiscal Policy

The Laffer curve shows that increasing ________ increases ________ when ________ low.

Which of the following is not a source of government revenues?

If real GDP is less than potential GDP,which of the following fiscal policies would increase real GDP?

The government increases the tax rate on labour income.At the equilibrium level of employment,the before-tax wage rate ________ and the after-tax wage rate ________.Potential GDP ________.

Which of the following policies shifts the AD curve the farthest leftward?

Which of the following would not increase an existing budget deficit?

The cyclical deficit

The use of fiscal policy is limited because

If the nominal interest rate is 11%,the inflation rate is 4% and the tax rate is 25%,what is the real after-tax interest rate?

When real GDP equals potential GDP of $12 trillion,the budget deficit is $1 trillion.Real GDP actually equals $14 trillion and the budget surplus is $3 trillion.The economy has a structural ________ and a cyclical ________.

A tax cut on capital income

All of the following statements are true except

During the 1980s and 1990s in Canada,

A tax on labour income ________.

All of the following statements are true except

Which of the following is an example of a fiscal policy designed to counter a recessionary gap?

Canada's government debt

Discretionary fiscal policy

What Is Economics?

The Economic Problem

Demand and Supply

Elasticity

Efficiency and Equity

Government Actions in Markets

Global Markets in Action

Utility and Demand

Possibilities, Preferences, and Choices

Organizing Production

Output and Costs

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Externalities

Public Goods and Common Resources

Markets for Factors of Production

Economic Inequality

Measuring GDP and Economic Growth

Monitoring Jobs and Inflation

Economic Growth

Finance, Saving, and Investment

Money, the Price Level, and Inflation

The Exchange Rate and the Balance of Payments

Aggregate Supply and Aggregate Demand

Expenditure Multipliers: The Keynesian Model

Canadian Inflation, Unemployment, and Business Cycle

Monetary Policy

International Trade Policy

Filters

The Laffer curve shows that increasing increases when low.

The government increases the tax rate on labour income.At the equilibrium level of employment,the before-tax wage rate and the after-tax wage rate .Potential GDP .

When real GDP equals potential GDP of $12 trillion,the budget deficit is $1 trillion.Real GDP actually equals $14 trillion and the budget surplus is $3 trillion.The economy has a structural and a cyclical .