Question 1

What is "crowding-in" effect? Explain the factors which determine the strength of the crowding in effect.

Accepted Answer

Crowding-in occurs when government spending, by raising real GDP, induces increases in private investment spending.As the economy expands, businesses find it more profitable to add to their capacity in order to meet the greater consumer demands.Because of this induced investment, any increase in G may increase investment, rather than decrease it as the crowding-out hypothesis predicts.
The strength of the crowding-in effect depends on how much additional real GDP is stimulated by government spending and on how sensitive investment spending is to the improved business opportunities that accompany rapid growth.

Question 2

Budget surpluses can stimulate capital formation and spur economic growth.

Accepted Answer

A) True 
 B)False  True

Question 3

The crowding-out effect of higher interest rates can be avoided by

Accepted Answer

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

Question 4

A chart of the ratio of national debt to GDP from 1915 to 2014 would show

Accepted Answer

A) significant increases from 1945 to 1975. 
B) significant increases during World Wars I and II. 
C) a larger value in 1975 compared to 1945. 
D) significant increases from 1995 to 2003. 
A) significant increases from 1945 to 1975. 
B) significant increases during World Wars I and II. 
C) a larger value in 1975 compared to 1945. 
D) significant increases from 1995 to 2003.

Question 5

If the aggregate supply curve has its normal shape, deficit spending will increase

Accepted Answer

A) both GDP and the price level at about the same rate. 
B) the price level before it increases real GDP. 
C) the price level but decrease real GDP. 
D) real GDP before it increases the price level. 
A) both GDP and the price level at about the same rate. 
B) the price level before it increases real GDP. 
C) the price level but decrease real GDP. 
D) real GDP before it increases the price level.

Question 6

Suppose that the economy is currently at full employment.All other things being equal, if the government implements restrictive policies then the appropriate monetary policy is

Accepted Answer

A) no change from the current policy. 
B) reduce the growth of the money supply. 
C) constant growth of the money supply. 
D) increase the growth of the money supply. 
A) no change from the current policy. 
B) reduce the growth of the money supply. 
C) constant growth of the money supply. 
D) increase the growth of the money supply.

Question 7

In actual practice, does the Fed monetize the debt?

Accepted Answer

A) No, it did not do so even with large deficits in the 1980s and early 2000s. 
B) No longer, although it monetized much of the deficit in the 1980s. 
C) Yes, although it monetizes less now than in the 1980s. 
D) Yes, it has monetized the deficit steadily since the early 1970s. 
A) No, it did not do so even with large deficits in the 1980s and early 2000s. 
B) No longer, although it monetized much of the deficit in the 1980s. 
C) Yes, although it monetizes less now than in the 1980s. 
D) Yes, it has monetized the deficit steadily since the early 1970s.

Question 8

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

Accepted Answer

A) crowding-in. 
B) structural deficit. 
C) crowding-out. 
D) monetary policy ineffectiveness. 
A) crowding-in. 
B) structural deficit. 
C) crowding-out. 
D) monetary policy ineffectiveness.

Question 9

Surge in government demand (G) discourages some private demand (I) and this is a major reason as to why the oversimplified formula: 1/(1-MPC) ____________ the size of the multiplier.

Accepted Answer

A) exaggerates 
B) underestimates 
C) has no impact on 
D) none of these 
A) exaggerates 
B) underestimates 
C) has no impact on 
D) none of these

Question 10

The structural deficit is defined as

Accepted Answer

A) that part of the deficit that is so hard to remove that it is never reduced. 
B) the portion of the budget deficit that occurs because the economy is not at full employment. 
C) the hypothetical deficit the economy would have under current fiscal policies if the economy were operating near full employment. 
D) the actual budget deficit that exists in the economy. 
A) that part of the deficit that is so hard to remove that it is never reduced. 
B) the portion of the budget deficit that occurs because the economy is not at full employment. 
C) the hypothetical deficit the economy would have under current fiscal policies if the economy were operating near full employment. 
D) the actual budget deficit that exists in the economy.

Question 11

The main reason that the deficit grows in a recession is that

Accepted Answer

A) the government reacts quickly and adjusts taxes to compensate. 
B) monetary policy that targets interest rates causes the costs of borrowing to fall. 
C) the deficit causes the recession, and reducing the deficit cures the recession. 
D) many forms of taxes act as automatic stabilizers. 
A) the government reacts quickly and adjusts taxes to compensate. 
B) monetary policy that targets interest rates causes the costs of borrowing to fall. 
C) the deficit causes the recession, and reducing the deficit cures the recession. 
D) many forms of taxes act as automatic stabilizers.

Question 12

The Fed and the government are working against each other if, as the government cuts taxes to promote economic growth, the Fed

Accepted Answer

A) sells government securities. 
B) buys government securities. 
C) lowers the discount rate. 
D) lowers the prime rate. 
A) sells government securities. 
B) buys government securities. 
C) lowers the discount rate. 
D) lowers the prime rate.

Question 13

Smaller budget deficits and looser monetary policy lead to a larger investment share and faster growth.

Accepted Answer

A) True 
 B)False

Question 14

Deficit spending boosts aggregate demand.

Accepted Answer

A) True 
 B)False

Question 15

A budget deficit is best defined as the

Accepted Answer

A) shortage of spending power created by a government spending cut. 
B) shortage of spending power created by a tax increase. 
C) accumulation of past debt that has not been covered by taxes. 
D) amount by which a government's expenditures exceed receipts during a specific time period. 
A) shortage of spending power created by a government spending cut. 
B) shortage of spending power created by a tax increase. 
C) accumulation of past debt that has not been covered by taxes. 
D) amount by which a government's expenditures exceed receipts during a specific time period.

Question 16

Monetizing the debt has what effect on the economy?

Accepted Answer

A) Slow increase in AS with steady inflation 
B) Rapid increase in AD with an increase in inflation 
C) Rapid increase in AS with a drop in inflation 
D) Decrease in AD with an increase in inflation 
A) Slow increase in AS with steady inflation 
B) Rapid increase in AD with an increase in inflation 
C) Rapid increase in AS with a drop in inflation 
D) Decrease in AD with an increase in inflation

Question 17

The official fiscal year budget deficits disappeared from 1998 to 2001.

Accepted Answer

A) True 
 B)False

Question 18

What does it mean to "monetize the deficit"? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.

Accepted Answer

If the Fed wishes to keep interest rates

Question 19

A chart of the ratio of national debt to GDP from 1915 to 2014 would show

Accepted Answer

A) a continuous decline. 
B) sharp increases from 1945 to 1975. 
C) significant increases from 1983 to 1994. 
D) significant decreases from 2003 to 2010. 
A) a continuous decline. 
B) sharp increases from 1945 to 1975. 
C) significant increases from 1983 to 1994. 
D) significant decreases from 2003 to 2010.

Question 20

Analysis indicates that the economy is in a recessionary gap.Which of the following is the most appropriate policy mix in this situation?

Accepted Answer

A) A budget surplus and expansionary monetary policy 
B) A budget deficit and expansionary monetary policy 
C) A budget deficit and contractionary monetary policy 
D) A budget surplus and contractionary monetary policy 
A) A budget surplus and expansionary monetary policy 
B) A budget deficit and expansionary monetary policy 
C) A budget deficit and contractionary monetary policy 
D) A budget surplus and contractionary monetary policy

Exam 32: Budget Deficits in the Short and Long Run

What is "crowding-in" effect? Explain the factors which determine the strength of the crowding in effect.

Budget surpluses can stimulate capital formation and spur economic growth.

The crowding-out effect of higher interest rates can be avoided by

A chart of the ratio of national debt to GDP from 1915 to 2014 would show

If the aggregate supply curve has its normal shape, deficit spending will increase

Suppose that the economy is currently at full employment.All other things being equal, if the government implements restrictive policies then the appropriate monetary policy is

In actual practice, does the Fed monetize the debt?

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

Surge in government demand (G) discourages some private demand (I) and this is a major reason as to why the oversimplified formula: 1/(1-MPC) ____________ the size of the multiplier.

The structural deficit is defined as

The main reason that the deficit grows in a recession is that

The Fed and the government are working against each other if, as the government cuts taxes to promote economic growth, the Fed

Smaller budget deficits and looser monetary policy lead to a larger investment share and faster growth.

Deficit spending boosts aggregate demand.

A budget deficit is best defined as the

Monetizing the debt has what effect on the economy?

The official fiscal year budget deficits disappeared from 1998 to 2001.

What does it mean to "monetize the deficit"? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.

A chart of the ratio of national debt to GDP from 1915 to 2014 would show

Analysis indicates that the economy is in a recessionary gap.Which of the following is the most appropriate policy mix in this situation?

What Is Economics

The Economony: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: the Importance of Marginal Analysis

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

The Case for Free Markets: the Price System

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

The Shortcomings of Free Markets

The Economics of the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: the Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation

Bringing in the Supply Side: Unemployment and Inflation

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate Over Monetary and Fiscal Policy

The Trade-Off Between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder

Exchange Rates and the Macroeconomy

Contemporary Issues in the Useconomy

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