Question 1

The AD curve shifts to the right with an increase in taxes or a decrease in government purchases.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 11-4
  
-Refer to Exhibit 11-4. If a person's taxable income is $20,000, how much does he pay in taxes?

Accepted Answer

A) $600 
B) $34,000 
C) $3,400 
D) $3,000 
A) $600 
B) $34,000 
C) $3,400 
D) $3,000

Question 3

Suppose that in a certain nation, the flat income tax rate of 70 percent falls to 65 percent and as a result the tax base rises from $500 billion to $575 billion. As a result, tax revenues __________, indicating the nation is on the __________ portion of its Laffer curve.

Accepted Answer

A) rise; upward-sloping 
B) rise; downward-sloping 
C) fall; upward-sloping 
D) fall; downward-sloping 
A) rise; upward-sloping 
B) rise; downward-sloping 
C) fall; upward-sloping 
D) fall; downward-sloping

Question 4

An example of contractionary fiscal policy is

Accepted Answer

A) increasing government spending. 
B) increasing taxes. 
C) decreasing government spending. 
D) decreasing taxes. 
E) b and c 
A) increasing government spending. 
B) increasing taxes. 
C) decreasing government spending. 
D) decreasing taxes. 
E) b and c

Question 5

Smith says that if government purchases rise by $100 billion, the AD curve will shift to the right. Jones says that if government purchases rise by $100 billion, the AD curve will not shift to the right. It follows that

Accepted Answer

A) Smith believes there will be zero or complete crowding out and Jones believes there will be complete crowding out. 
B) Smith believes there will be incomplete or zero crowding out and Jones believes there will be complete crowding out. 
C) Smith believes there will be complete crowding out and Jones believes there will be zero crowding out. 
D) Both Smith and Jones believe there will be incomplete crowding out, although Jones believes there will be more incomplete crowding out than Smith believes there will be. 
E) none of the above 
A) Smith believes there will be zero or complete crowding out and Jones believes there will be complete crowding out. 
B) Smith believes there will be incomplete or zero crowding out and Jones believes there will be complete crowding out. 
C) Smith believes there will be complete crowding out and Jones believes there will be zero crowding out. 
D) Both Smith and Jones believe there will be incomplete crowding out, although Jones believes there will be more incomplete crowding out than Smith believes there will be. 
E) none of the above

Question 6

An example of expansionary fiscal policy is

Accepted Answer

A) increasing government expenditures. 
B) increasing taxes. 
C) decreasing government expenditures. 
D) decreasing taxes. 
E) a and d 
A) increasing government expenditures. 
B) increasing taxes. 
C) decreasing government expenditures. 
D) decreasing taxes. 
E) a and d

Question 7

A federal budget surplus occurs when government expenditures exceed tax revenues.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 11-4
  
-Refer to Exhibit 11-4. If a person's taxable income is $50,000, how much does he pay in taxes?

Accepted Answer

A) $9,250 
B) $10,110 
C) $15,000 
D) $12,500 
A) $9,250 
B) $10,110 
C) $15,000 
D) $12,500

Question 9

Some economists argue that a rise in the interest rate, brought about by a rise in government borrowing in the loanable funds market to finance a budget deficit, brings in foreign funds in search of the higher interest rate return. This, in turn, dampens the rise in the interest rate. If this is true as far as it goes, there will be __________ crowding out than there would be if foreign funds did not flow into the country.

Accepted Answer

A) more 
B) less 
C) the same amount of 
D) none of the above 
A) more 
B) less 
C) the same amount of 
D) none of the above

Question 10

Suppose aggregate demand is too high to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this inflationary gap.

Accepted Answer

A) increase in government spending 
B) decrease in government spending 
C) increase in taxes 
D) decrease in taxes 
E) b or c 
A) increase in government spending 
B) decrease in government spending 
C) increase in taxes 
D) decrease in taxes 
E) b or c

Question 11

The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?

Accepted Answer

A) No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit. 
B) Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues. 
C) No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit. 
D) Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending. 
A) No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) increases tax revenues, and if the increase in tax revenues equals the increase in government purchases there is no deficit. 
B) Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) lowers tax revenues. 
C) No, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) decreases tax revenues, and if the decrease in tax revenues is less than the increase in government purchases there is no deficit. 
D) Yes, because a cut in tax rates (on the upward-sloping portion of the Laffer curve) raises interest rates, and higher interest rates discourage investment spending.

Question 12

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.

Accepted Answer

A) effectiveness 
B) transmission 
C) legislative 
D) data 
A) effectiveness 
B) transmission 
C) legislative 
D) data

Question 13

Which piece of evidence is consistent with zero crowding out?

Accepted Answer

A) Government purchases rise and Real GDP does not change. 
B) Government purchases rise and investment spending declines. 
C) Government purchases rise and net exports decline. 
D) Government purchases rise and consumption declines. 
E) none of the above 
A) Government purchases rise and Real GDP does not change. 
B) Government purchases rise and investment spending declines. 
C) Government purchases rise and net exports decline. 
D) Government purchases rise and consumption declines. 
E) none of the above

Question 14

Suppose Congress decreases income taxes. This is an example of

Accepted Answer

A) expansionary fiscal policy. 
B) expansionary monetary policy. 
C) contractionary fiscal policy. 
D) contractionary monetary policy. 
A) expansionary fiscal policy. 
B) expansionary monetary policy. 
C) contractionary fiscal policy. 
D) contractionary monetary policy.

Question 15

Between the data lag and the legislative lag falls the __________ lag.

Accepted Answer

A) effectiveness 
B) wait-and-see 
C) expansionary 
D) transmission 
A) effectiveness 
B) wait-and-see 
C) expansionary 
D) transmission

Question 16

According to Buchanan and Wagner, why is there a political bias toward expansionary fiscal policy rather than contractionary fiscal policy?

Accepted Answer

A) In a democracy, expansionary fiscal policy prescriptions are more politically popular than are the policy prescriptions associated with contractionary fiscal policy. 
B) In a democracy, contractionary fiscal policy prescriptions are more policitally popular than are the policy prescriptions associated with expansionary fiscal policy. 
C) They assert that empirical evidence has shown that Keynesian fiscal policy prescriptions have been successful at closing recessionary gaps, but not inflationary gaps. 
D) ​They assert that empirical evidence has shown that Keynesian fiscal policy prescriptions have been successful at closing inflationary gaps, but not recessioinary gaps. 
E) ​none of the above 
A) In a democracy, expansionary fiscal policy prescriptions are more politically popular than are the policy prescriptions associated with contractionary fiscal policy. 
B) In a democracy, contractionary fiscal policy prescriptions are more policitally popular than are the policy prescriptions associated with expansionary fiscal policy. 
C) They assert that empirical evidence has shown that Keynesian fiscal policy prescriptions have been successful at closing recessionary gaps, but not inflationary gaps. 
D) ​They assert that empirical evidence has shown that Keynesian fiscal policy prescriptions have been successful at closing inflationary gaps, but not recessioinary gaps. 
E) ​none of the above

Question 17

Exhibit 11-1
  
-Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, supply-side economists would most likely propose _______________ to make the price level ______________ and Real GDP ___________.

Accepted Answer

A) cutting marginal tax rates; fall; rise 
B) raising marginal tax rates; fall; rise 
C) raising government spending; fall; rise 
D) cutting government spending; rise; fall 
E) cutting marginal tax rates; rise; fall 
A) cutting marginal tax rates; fall; rise 
B) raising marginal tax rates; fall; rise 
C) raising government spending; fall; rise 
D) cutting government spending; rise; fall 
E) cutting marginal tax rates; rise; fall

Question 18

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

Accepted Answer

A) data 
B) wait-and-see 
C) legislative 
D) transmission 
A) data 
B) wait-and-see 
C) legislative 
D) transmission

Question 19

Describe the fiscal policy remedies that a Keynesian economist might prescribe to close a recessionary gap. How might the issue of crowding out impact the effectiveness of these policies?

Accepted Answer

To close a recessionary gap, a Keynesian

Question 20

The marginal tax rate is equal to the

Accepted Answer

A) total amount of a person's tax payment divided by the total amount of the person's taxable income. 
B) total amount of a person's tax payment divided by the change in the person's taxable income. 
C) change in the person's tax payment divided by the total amount of the person's taxable income. 
D) change in the person's tax payment divided by the change in the person's taxable income. 
A) total amount of a person's tax payment divided by the total amount of the person's taxable income. 
B) total amount of a person's tax payment divided by the change in the person's taxable income. 
C) change in the person's tax payment divided by the total amount of the person's taxable income. 
D) change in the person's tax payment divided by the change in the person's taxable income.

Exam 11: Fiscal Policy and the Federal Budget

The AD curve shifts to the right with an increase in taxes or a decrease in government purchases.

Exhibit 11-4 -Refer to Exhibit 11-4. If a person's taxable income is $20,000, how much does he pay in taxes?

Suppose that in a certain nation, the flat income tax rate of 70 percent falls to 65 percent and as a result the tax base rises from $500 billion to $575 billion. As a result, tax revenues __________, indicating the nation is on the __________ portion of its Laffer curve.

An example of contractionary fiscal policy is

Smith says that if government purchases rise by $100 billion, the AD curve will shift to the right. Jones says that if government purchases rise by $100 billion, the AD curve will not shift to the right. It follows that

An example of expansionary fiscal policy is

A federal budget surplus occurs when government expenditures exceed tax revenues.

Exhibit 11-4 -Refer to Exhibit 11-4. If a person's taxable income is $50,000, how much does he pay in taxes?

Suppose aggregate demand is too high to bring about the Natural Real GDP level. A Keynesian policy prescription would call for a(n) _____________________ to close this inflationary gap.

The federal budget is balanced and the economy is on the upward-sloping portion of the Laffer curve. Then, tax rates are cut and government purchases are increased. Is a budget deficit inevitable?

The lag between an increase in government spending and the impact of this increased spending on the economy is called the __________ lag.

Which piece of evidence is consistent with zero crowding out?

Suppose Congress decreases income taxes. This is an example of

Between the data lag and the legislative lag falls the __________ lag.

According to Buchanan and Wagner, why is there a political bias toward expansionary fiscal policy rather than contractionary fiscal policy?

Exhibit 11-1 -Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, supply-side economists would most likely propose _______________ to make the price level ______________ and Real GDP ___________.

The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is called the __________ lag.

Describe the fiscal policy remedies that a Keynesian economist might prescribe to close a recessionary gap. How might the issue of crowding out impact the effectiveness of these policies?

The marginal tax rate is equal to the

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Suppose that in a certain nation, the flat income tax rate of 70 percent falls to 65 percent and as a result the tax base rises from $500 billion to $575 billion. As a result, tax revenues , indicating the nation is on the portion of its Laffer curve.

Exhibit 11-1 -Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, supply-side economists would most likely propose ___ to make the price level and Real GDP _.