Question 1

Which of the following occurred during and following the 2008-2009 recession?

Accepted Answer

A)  Unemployment benefits were extended from their normal 26 weeks to up to 99 weeks. 
B)  The Federal Reserve more than doubled the size of the monetary base. 
C)  The federal budget deficit expanded to approximately 10 percent of GDP. 
D)  All of the above are true. 
A)  Unemployment benefits were extended from their normal 26 weeks to up to 99 weeks. 
B)  The Federal Reserve more than doubled the size of the monetary base. 
C)  The federal budget deficit expanded to approximately 10 percent of GDP. 
D)  All of the above are true.

Question 2

The crowding-out effect refers to the tendency of

Accepted Answer

A)  the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending. 
B)  higher future taxes accompanying budget deficits to reduce private consumption. 
C)  the inflation rate to rise when the unemployment rate is low. 
D)  increases in private savings to reduce interest rates and, thereby, crowd-out government expenditures. 
A)  the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending. 
B)  higher future taxes accompanying budget deficits to reduce private consumption. 
C)  the inflation rate to rise when the unemployment rate is low. 
D)  increases in private savings to reduce interest rates and, thereby, crowd-out government expenditures.

Question 3

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Accepted Answer

A)  savings, in anticipation of future taxes. 
B)  output and consumption, stimulated by the additional government spending. 
C)  consumer spending, in anticipation of lower future taxes. 
D)  aggregate demand, because the additional spending was financed by borrowing rather than current taxation. 
A)  savings, in anticipation of future taxes. 
B)  output and consumption, stimulated by the additional government spending. 
C)  consumer spending, in anticipation of lower future taxes. 
D)  aggregate demand, because the additional spending was financed by borrowing rather than current taxation.

Question 4

According to the critics of Keynesian economics, the rapid increase in government spending  and large budget deficits in response to the recession of 2008-2009

Accepted Answer

A)  exerted little or no impact on aggregate demand and the growth of real GDP. 
B)  strengthened the recovery process and provided the foundation for strong long-term growth of real GDP. 
C)  stimulated a more rapid recovery, but caused the economy to fall back into a recession shortly thereafter. 
D)  exerted a strong impact on aggregate demand and slowed the growth of real GDP. 
A)  exerted little or no impact on aggregate demand and the growth of real GDP. 
B)  strengthened the recovery process and provided the foundation for strong long-term growth of real GDP. 
C)  stimulated a more rapid recovery, but caused the economy to fall back into a recession shortly thereafter. 
D)  exerted a strong impact on aggregate demand and slowed the growth of real GDP.

Question 5

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Accepted Answer

A)  An increase in the budget deficit relative to GDP 
B)  A reduction in the budget deficit relative to GDP 
C)  An increase in the budget surplus relative to GDP 
D)  An increase in the nominal (dollar) size of the budget deficit 
A)  An increase in the budget deficit relative to GDP 
B)  A reduction in the budget deficit relative to GDP 
C)  An increase in the budget surplus relative to GDP 
D)  An increase in the nominal (dollar) size of the budget deficit

Question 6

Which of the following is a consensus view among economists with regard to fiscal policy?

Accepted Answer

A)  Changes in fiscal policy exert a strong influence on real output, just as the basic Keynesian model suggests. 
B)  Expansionary fiscal policy will not help promote recovery from a recession. 
C)  Restrictive fiscal policy is a potent anti-inflationary weapon. 
D)  Since changes in discretionary policy are difficult to time correctly, fiscal policy should not be altered in response to each minor disturbance. 
A)  Changes in fiscal policy exert a strong influence on real output, just as the basic Keynesian model suggests. 
B)  Expansionary fiscal policy will not help promote recovery from a recession. 
C)  Restrictive fiscal policy is a potent anti-inflationary weapon. 
D)  Since changes in discretionary policy are difficult to time correctly, fiscal policy should not be altered in response to each minor disturbance.

Question 7

The fiscal policy response to the recession of 2008-2009 was

Accepted Answer

A)  a substantial increase in the budget deficit just as Keynesian analysis would recommend. 
B)  a balanced budget, just as Keynesian analysis would recommend. 
C)  a substantial increase in the budget deficit, which was highly inconsistent with Keynesian analysis. 
D)  a shift of the federal budget toward a large surplus, which  reflected the views of the critics of Keynesian economics. 
A)  a substantial increase in the budget deficit just as Keynesian analysis would recommend. 
B)  a balanced budget, just as Keynesian analysis would recommend. 
C)  a substantial increase in the budget deficit, which was highly inconsistent with Keynesian analysis. 
D)  a shift of the federal budget toward a large surplus, which  reflected the views of the critics of Keynesian economics.

Question 8

The supply-side effects of a reduction in taxes are the result of

Accepted Answer

A)  increases in the disposable income of households accompanying reductions in tax rates. 
B)  the stimulus effects of increases in government expenditures. 
C)  increased attractiveness of productive activity relative to leisure and tax avoidance. 
D)  reductions in interest rates that generally accompany expansionary fiscal policy. 
A)  increases in the disposable income of households accompanying reductions in tax rates. 
B)  the stimulus effects of increases in government expenditures. 
C)  increased attractiveness of productive activity relative to leisure and tax avoidance. 
D)  reductions in interest rates that generally accompany expansionary fiscal policy.

Question 9

A substantial decrease in marginal tax rates will encourage individuals to

Accepted Answer

A)  increase their earnings and work effort. 
B)  save a smaller portion of their income. 
C)  take more time off for vacations. 
D)  spend more on tax-deductible items. 
A)  increase their earnings and work effort. 
B)  save a smaller portion of their income. 
C)  take more time off for vacations. 
D)  spend more on tax-deductible items.

Question 10

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

Accepted Answer

A)  Laffer curve effect. 
B)  structural deficit. 
C)  crowding-out. 
D)  monetary policy ineffectiveness. 
A)  Laffer curve effect. 
B)  structural deficit. 
C)  crowding-out. 
D)  monetary policy ineffectiveness.

Question 11

Politicians often instruct households to spend in order to help the economy.  This advice overlooks the fact that

Accepted Answer

A)  increases in consumption will make it easier for households to deal with unanticipated future expenses. 
B)  increases in consumption will provide more loanable funds for investment. 
C)  you cannot have a strong economy if all or most households are spending just about everything they earn. 
D)  consumer spending is less than two-thirds of GDP. 
A)  increases in consumption will make it easier for households to deal with unanticipated future expenses. 
B)  increases in consumption will provide more loanable funds for investment. 
C)  you cannot have a strong economy if all or most households are spending just about everything they earn. 
D)  consumer spending is less than two-thirds of GDP.

Question 12

When the government levies taxes to subsidize the producers of corn-based sugar, the subsidies will

Accepted Answer

A)  expand the output of a good that consumers value highly relative to cost. 
B)  expand total employment if employment in the production of corn increases. 
C)  increase net employment and improve the efficiency of resource use. 
D)  exert little impact on net employment because expansion of employment in corn production will be partially offset by less employment in other sectors as the result of the taxes. 
A)  expand the output of a good that consumers value highly relative to cost. 
B)  expand total employment if employment in the production of corn increases. 
C)  increase net employment and improve the efficiency of resource use. 
D)  exert little impact on net employment because expansion of employment in corn production will be partially offset by less employment in other sectors as the result of the taxes.

Question 13

Supply-side economics stresses that

Accepted Answer

A)  aggregate demand is the major determinant of real output. 
B)  marginal tax rates exert important incentive effects that influence real output. 
C)  an increase in government expenditures and tax rates will cause real income to rise. 
D)  expansionary monetary policy will cause real output to expand without accelerating inflation. 
A)  aggregate demand is the major determinant of real output. 
B)  marginal tax rates exert important incentive effects that influence real output. 
C)  an increase in government expenditures and tax rates will cause real income to rise. 
D)  expansionary monetary policy will cause real output to expand without accelerating inflation.

Question 14

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

Accepted Answer

A)  increase the real interest rate, which will crowd out private spending. 
B)  lead to a $100 billion increase in real GDP. 
C)  lead to a $400 billion increase in real GDP if the marginal propensity to consume is three-fourths. 
D)  leave the interest rate, aggregate demand, and real output unchanged. 
A)  increase the real interest rate, which will crowd out private spending. 
B)  lead to a $100 billion increase in real GDP. 
C)  lead to a $400 billion increase in real GDP if the marginal propensity to consume is three-fourths. 
D)  leave the interest rate, aggregate demand, and real output unchanged.

Question 15

Which of the following is part of the synthesis view of fiscal policy?

Accepted Answer

A)  During a severe recession, the best policy is a "balanced budget policy." 
B)  During a recession, higher real interest rates and lower net exports will help direct the economy back to full employment. 
C)  Since changes in discretionary policy are easy to time, fiscal policy should be altered in response to each minor disturbance. 
D)  Automatic stabilizers help reduce the fluctuations in aggregate demand and output. 
A)  During a severe recession, the best policy is a "balanced budget policy." 
B)  During a recession, higher real interest rates and lower net exports will help direct the economy back to full employment. 
C)  Since changes in discretionary policy are easy to time, fiscal policy should be altered in response to each minor disturbance. 
D)  Automatic stabilizers help reduce the fluctuations in aggregate demand and output.

Question 16

The crowding-out effect implies that a

Accepted Answer

A)  budget surplus will be highly effective against inflation. 
B)  budget deficit is likely to stimulate aggregate demand and cause inflation. 
C)  budget deficit will increase real interest rates and, thereby, retard private spending. 
D)  budget surplus will retard aggregate demand and throw the economy into a downward spiral. 
A)  budget surplus will be highly effective against inflation. 
B)  budget deficit is likely to stimulate aggregate demand and cause inflation. 
C)  budget deficit will increase real interest rates and, thereby, retard private spending. 
D)  budget surplus will retard aggregate demand and throw the economy into a downward spiral.

Question 17

The crowding-out effect refers to the possibility that an

Accepted Answer

A)  increase in the money supply will result in a decline in taxes. 
B)  increase in consumption spending will crowd out government spending. 
C)  increase in private savings will crowd out the taxable income of households. 
D)  increase in government borrowing will result in higher interest rates, which will crowd out private investment and consumption. 
A)  increase in the money supply will result in a decline in taxes. 
B)  increase in consumption spending will crowd out government spending. 
C)  increase in private savings will crowd out the taxable income of households. 
D)  increase in government borrowing will result in higher interest rates, which will crowd out private investment and consumption.

Question 18

Since the mid-1980s, the debt-to-income ratio of American households

Accepted Answer

A)  has remained about the same as the previous 25 years. 
B)  has been slowly declining. 
C)  has fluctuated between about 55 and 70 percent of after-tax income. 
D)  has rapidly increased. 
A)  has remained about the same as the previous 25 years. 
B)  has been slowly declining. 
C)  has fluctuated between about 55 and 70 percent of after-tax income. 
D)  has rapidly increased.

Question 19

Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?

Accepted Answer

A)  an increase in government spending as a share of the economy and an expansion in the size of the budget deficit 
B)  a reduction in government spending as a share of the economy and a shift of the budget toward a surplus 
C)  an increase in government spending as a share of the economy and a shift of the budget toward a surplus 
D)  a reduction in government spending as a share of the economy and an expansion in the size of the budget deficit 
A)  an increase in government spending as a share of the economy and an expansion in the size of the budget deficit 
B)  a reduction in government spending as a share of the economy and a shift of the budget toward a surplus 
C)  an increase in government spending as a share of the economy and a shift of the budget toward a surplus 
D)  a reduction in government spending as a share of the economy and an expansion in the size of the budget deficit

Question 20

The new classical model implies that substitution of debt for tax financing

Accepted Answer

A)  increases aggregate demand and exerts an expansionary effect on real output. 
B)  is highly effective against inflation. 
C)  reduces savings because it increases both the current and future tax liability of households. 
D)  leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates. 
A)  increases aggregate demand and exerts an expansionary effect on real output. 
B)  is highly effective against inflation. 
C)  reduces savings because it increases both the current and future tax liability of households. 
D)  leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.

Which of the following occurred during and following the 2008-2009 recession?

The crowding-out effect refers to the tendency of

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

According to the critics of Keynesian economics, the rapid increase in government spending and large budget deficits in response to the recession of 2008-2009

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Which of the following is a consensus view among economists with regard to fiscal policy?

The fiscal policy response to the recession of 2008-2009 was

The supply-side effects of a reduction in taxes are the result of

A substantial decrease in marginal tax rates will encourage individuals to

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

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

When the government levies taxes to subsidize the producers of corn-based sugar, the subsidies will

Supply-side economics stresses that

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

Which of the following is part of the synthesis view of fiscal policy?

The crowding-out effect implies that a

The crowding-out effect refers to the possibility that an

Since the mid-1980s, the debt-to-income ratio of American households

Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?

The new classical model implies that substitution of debt for tax financing

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters

Exam 12: Fiscal Policy: Incentives, and Secondary Effects

Which of the following occurred during and following the 2008-2009 recession?

The crowding-out effect refers to the tendency of

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

According to the critics of Keynesian economics, the rapid increase in government spending and large budget deficits in response to the recession of 2008-2009

Which of the following most clearly indicates that fiscal policy is becoming more expansionary?

Which of the following is a consensus view among economists with regard to fiscal policy?

The fiscal policy response to the recession of 2008-2009 was

The supply-side effects of a reduction in taxes are the result of

A substantial decrease in marginal tax rates will encourage individuals to

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

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

When the government levies taxes to subsidize the producers of corn-based sugar, the subsidies will

Supply-side economics stresses that

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

Which of the following is part of the synthesis view of fiscal policy?

The crowding-out effect implies that a

The crowding-out effect refers to the possibility that an

Since the mid-1980s, the debt-to-income ratio of American households

Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?

The new classical model implies that substitution of debt for tax financing

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters