Question 1

A higher U.S. federal budget deficit may act to raise future U.S. interest payments to foreigners.

Accepted Answer

A) True 
 B)False

Question 2

The higher the level of inflation, the stronger the impact of reductions in the personal income tax on real GDP .

Accepted Answer

A) True 
 B)False

Question 3

A balanced budget would not affect income because an increase in government spending is exactly matched by an increase in taxes.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is true of fiscal policy before the Great Depression of the 1930s?

Accepted Answer

A)  Fiscal policy was made at the federal level. 
B)  Policies associated with national defense were made at the state level. 
C)  Foreign policy was made at the State level. 
D)  The federal budget was determined mostly by economists and not by politicians. 
E)  National defense and foreign trade were the focus areas of the federal government while other areas of government policy were dealt by the individual states. 
A)  Fiscal policy was made at the federal level. 
B)  Policies associated with national defense were made at the state level. 
C)  Foreign policy was made at the State level. 
D)  The federal budget was determined mostly by economists and not by politicians. 
E)  National defense and foreign trade were the focus areas of the federal government while other areas of government policy were dealt by the individual states.

Question 5

Automatic stabilizers act to moderate business cycles primarily through the personal income and consumption channels.

Accepted Answer

A) True 
 B)False

Question 6

When the price level increases, the effect of a change in government spending on real GDP will be understated.

Accepted Answer

A) True 
 B)False

Question 7

The figure given below shows the macroeconomic equilibria of a country.
Figure 11.1
  
-Refer to Figure 11.1. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will:

Accepted Answer

A)  decrease the price level. 
B)  lower real GDP and leave the price level unchanged. 
C)  lower real GDP and increase the price level. 
D)  increase the price level and leave real GDP unchanged. 
E)  have no effect on real GDP or the price level. 
A)  decrease the price level. 
B)  lower real GDP and leave the price level unchanged. 
C)  lower real GDP and increase the price level. 
D)  increase the price level and leave real GDP unchanged. 
E)  have no effect on real GDP or the price level.

Question 8

Identify the correct statement.

Accepted Answer

A)  It is absolutely compulsory for the government to earn a profitable return on the money it earns by selling bonds. 
B)  When government borrowing rises, interest rates decline, thereby driving up private investment. 
C)  When interest rates rise, fewer number of corporations offer new bonds to raise investment funds. 
D)  An increase in interest rate reduces the cost of borrowing by the firms. 
E)  When interest rates fall, the firm's cost of raising funds through bonds increases. 
A)  It is absolutely compulsory for the government to earn a profitable return on the money it earns by selling bonds. 
B)  When government borrowing rises, interest rates decline, thereby driving up private investment. 
C)  When interest rates rise, fewer number of corporations offer new bonds to raise investment funds. 
D)  An increase in interest rate reduces the cost of borrowing by the firms. 
E)  When interest rates fall, the firm's cost of raising funds through bonds increases.

Question 9

Which of the following is depicted in Figure 11.2?

Accepted Answer

A)  The Lorenz curve 
B)  The community indifference curve 
C)  The aggregate labor supply curve 
D)  The Laffer curve 
E)  The Engel curve 
A)  The Lorenz curve 
B)  The community indifference curve 
C)  The aggregate labor supply curve 
D)  The Laffer curve 
E)  The Engel curve

Question 10

If the government wants to close a GDP gap, it should:

Accepted Answer

A)  borrow funds from the public by issuing bonds. 
B)  lower taxes and raise government spending. 
C)  lower government spending on social security. 
D)  raise both direct and indirect tax rates. 
E)  adopt contractionary fiscal policies to control inflation. 
A)  borrow funds from the public by issuing bonds. 
B)  lower taxes and raise government spending. 
C)  lower government spending on social security. 
D)  raise both direct and indirect tax rates. 
E)  adopt contractionary fiscal policies to control inflation.

Question 11

Ceteris paribus, if the U.S. federal government reduces fiscal spending which of the following will be observed?

Accepted Answer

A)  The aggregate demand curve will shift to the right. 
B)  The aggregate expenditure in the economy will decrease. 
C)  The economy will approach potential GDP. 
D)  The marginal propensity to consume will increase. 
E)  The average price level will increase. 
A)  The aggregate demand curve will shift to the right. 
B)  The aggregate expenditure in the economy will decrease. 
C)  The economy will approach potential GDP. 
D)  The marginal propensity to consume will increase. 
E)  The average price level will increase.

Question 12

For which of the following reasons are VATs considered to be very important revenue generators for the government?

Accepted Answer

A)  They are regressive in nature 
B)  They target only individuals in the high income class 
C)  They cannot be avoided by individuals 
D)  They boost a country's exports 
E)  They lower a country's imports 
A)  They are regressive in nature 
B)  They target only individuals in the high income class 
C)  They cannot be avoided by individuals 
D)  They boost a country's exports 
E)  They lower a country's imports

Question 13

According to Ricardian equivalence, taxation and government borrowing have the same effect on spending in the private sector.

Accepted Answer

A) True 
 B)False

Question 14

The reduction in the U.S. government deficit in the early 1990s was the result of strong economic growth.

Accepted Answer

A) True 
 B)False

Question 15

Critics of the supply-side tax cuts proposed by the Reagan administration argued that lower taxes would:

Accepted Answer

A)  increase the budget deficit. 
B)  decrease money supply in the economy. 
C)  reduce the aggregate price level. 
D)  reduce the disposable income of households. 
E)  reduce the volume of international trade. 
A)  increase the budget deficit. 
B)  decrease money supply in the economy. 
C)  reduce the aggregate price level. 
D)  reduce the disposable income of households. 
E)  reduce the volume of international trade.

Question 16

Which of the following can be considered as an automatic stabilizer in the economy?

Accepted Answer

A)  Real exchange rate 
B)  Real interest rate 
C)  Unemployment insurance 
D)  Money supply 
E)  Disposable income 
A)  Real exchange rate 
B)  Real interest rate 
C)  Unemployment insurance 
D)  Money supply 
E)  Disposable income

Question 17

A(n) _____ is an indirect tax imposed on each sale at each stage of production.

Accepted Answer

A)  personal tax 
B)  value-added tax 
C)  excise duty 
D)  sales tax 
E)  ad-valorem tax 
A)  personal tax 
B)  value-added tax 
C)  excise duty 
D)  sales tax 
E)  ad-valorem tax

Question 18

Suppose the real interest rate in the economy is 3% and the nominal interest rate is 6%, what is the current inflation rate?

Accepted Answer

A)  18% 
B)  9% 
C)  2% 
D)  3% 
E)  2.5% 
A)  18% 
B)  9% 
C)  2% 
D)  3% 
E)  2.5%

Question 19

The effect of an increase in government spending on real GDP will be lesser:

Accepted Answer

A)  the smaller the crowding-out effect. 
B)  the smaller the percentage of government spending financed by tax increases. 
C)  the larger the government budget surplus. 
D)  the more rapidly money is converted into goods. 
E)  the steeper the aggregate supply curve. 
A)  the smaller the crowding-out effect. 
B)  the smaller the percentage of government spending financed by tax increases. 
C)  the larger the government budget surplus. 
D)  the more rapidly money is converted into goods. 
E)  the steeper the aggregate supply curve.

Question 20

In the late 1990s, debt-financed government spending decreased in Mexico. Following this decrease, consumption spending increased. Ricardian equivalence would explain this increase in consumption as the result of:

Accepted Answer

A)  people's expectation of higher future taxes required to pay off government debt. 
B)  people's expectation of lower future taxes that induce them to save less. 
C)  automatic stabilization of the economy. 
D)  the crowding out effect. 
E)  an increase in current household disposable income. 
A)  people's expectation of higher future taxes required to pay off government debt. 
B)  people's expectation of lower future taxes that induce them to save less. 
C)  automatic stabilization of the economy. 
D)  the crowding out effect. 
E)  an increase in current household disposable income.

Exam 11: Fiscal Policy

A higher U.S. federal budget deficit may act to raise future U.S. interest payments to foreigners.

The higher the level of inflation, the stronger the impact of reductions in the personal income tax on real GDP .

A balanced budget would not affect income because an increase in government spending is exactly matched by an increase in taxes.

Which of the following is true of fiscal policy before the Great Depression of the 1930s?

Automatic stabilizers act to moderate business cycles primarily through the personal income and consumption channels.

When the price level increases, the effect of a change in government spending on real GDP will be understated.

The figure given below shows the macroeconomic equilibria of a country. Figure 11.1 -Refer to Figure 11.1. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will:

Identify the correct statement.

Which of the following is depicted in Figure 11.2?

If the government wants to close a GDP gap, it should:

Ceteris paribus, if the U.S. federal government reduces fiscal spending which of the following will be observed?

For which of the following reasons are VATs considered to be very important revenue generators for the government?

According to Ricardian equivalence, taxation and government borrowing have the same effect on spending in the private sector.

The reduction in the U.S. government deficit in the early 1990s was the result of strong economic growth.

Critics of the supply-side tax cuts proposed by the Reagan administration argued that lower taxes would:

Which of the following can be considered as an automatic stabilizer in the economy?

A(n) _____ is an indirect tax imposed on each sale at each stage of production.

Suppose the real interest rate in the economy is 3% and the nominal interest rate is 6%, what is the current inflation rate?

The effect of an increase in government spending on real GDP will be lesser:

In the late 1990s, debt-financed government spending decreased in Mexico. Following this decrease, consumption spending increased. Ricardian equivalence would explain this increase in consumption as the result of:

Economics: the World Around You

Choice, Opportunity Costs, and Specialization

Markets, Demand and Supply, and the Price System

The Market System and the Private and Public Sector

National Income Accounting

An Introduction to the Foreign Exchange Market and the Balance of Payments

Unemployment and Inflation

Macroeconomic Equilibrium: Aggregate Demand and Supply

Aggregate Expenditures

Income and Expenditures Equilibrium

Money and Banking

Monetary Policy

Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles

Macroeconomic Viewpoints: New Keynesian, Monetarist, and New Classical

Economic Growth

Development Economics

Globalization

World Trade Equilibrium

International Trade Restrictions

Exchange Rates and Financial Links Between Countries

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