Question 1

According to the Keynesian view, the proper response to a severe recession would be

Accepted Answer

A)  an increase in taxes in order to reduce the budget deficit. 
B)  an increase in government spending financed by borrowing. 
C)  a shift toward a restrictive monetary policy to reduce aggregate demand. 
D)  reliance on automatic stabilizers to direct the economy toward full employment. 
A)  an increase in taxes in order to reduce the budget deficit. 
B)  an increase in government spending financed by borrowing. 
C)  a shift toward a restrictive monetary policy to reduce aggregate demand. 
D)  reliance on automatic stabilizers to direct the economy toward full employment.

Question 2

During  and following the recession of 2008-2009, private investment was

Accepted Answer

A)  strong, and this should increase the future productivity  of workers. 
B)  strong, and this will tend to weaken the future productivity of workers. 
C)  weak, and this will tend to   reduce the future productivity of workers. 
D)  weak, and this will  tend to increase the  future productivity  of workers. 
A)  strong, and this should increase the future productivity  of workers. 
B)  strong, and this will tend to weaken the future productivity of workers. 
C)  weak, and this will tend to   reduce the future productivity of workers. 
D)  weak, and this will  tend to increase the  future productivity  of workers.

Question 3

The debt to GDP ratio in the U.S. is unlikely to cause major problems as long as which of the following scenario holds?

Accepted Answer

A)  Interest rates remain low. 
B)  Unemployment remains high. 
C)  GDP growth remains low. 
D)  A large proportion of the population stays in retirement collecting Social Security payments. 
A)  Interest rates remain low. 
B)  Unemployment remains high. 
C)  GDP growth remains low. 
D)  A large proportion of the population stays in retirement collecting Social Security payments.

Question 4

Public choice analysis indicates that it will be politically more attractive to

Accepted Answer

A)  enact restrictive fiscal policy during an economic expansion than to enact expansionary fiscal policy during a recession. 
B)  enact expansionary fiscal policy during an economic expansion than to enact restrictive fiscal policy during a recession. 
C)  enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion. 
D)  raise taxes than to increase spending. 
A)  enact restrictive fiscal policy during an economic expansion than to enact expansionary fiscal policy during a recession. 
B)  enact expansionary fiscal policy during an economic expansion than to enact restrictive fiscal policy during a recession. 
C)  enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy during an economic expansion. 
D)  raise taxes than to increase spending.

Question 5

Use the figure below to answer the following question(s). Figure 12-2
  Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

Accepted Answer

A)  a tax increase to balance the budget 
B)  restrictive fiscal policy 
C)  expansionary fiscal policy 
D)  continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment) 
A)  a tax increase to balance the budget 
B)  restrictive fiscal policy 
C)  expansionary fiscal policy 
D)  continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)

Question 6

Both Keynesians and non-Keynesians now recognize

Accepted Answer

A)  the limitations of automatic stabilizers as a stabilization tool. 
B)  the adverse effects of high marginal tax rates on economic growth. 
C)  the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner. 
D)  the highly expansionary impact of budget deficits. 
A)  the limitations of automatic stabilizers as a stabilization tool. 
B)  the adverse effects of high marginal tax rates on economic growth. 
C)  the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner. 
D)  the highly expansionary impact of budget deficits.

Question 7

The most effective fiscal stimulus will

Accepted Answer

A)  create jobs, even if the employment is on unproductive projects. 
B)  substantially change the composition of aggregate demand. 
C)  encourage interest groups to lobby more intensely and make larger political contributions. 
D)  direct the economy to full employment and direct resources toward economically productive projects. 
A)  create jobs, even if the employment is on unproductive projects. 
B)  substantially change the composition of aggregate demand. 
C)  encourage interest groups to lobby more intensely and make larger political contributions. 
D)  direct the economy to full employment and direct resources toward economically productive projects.

Question 8

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

Accepted Answer

A)  an increase in government expenditures to provide subsidies for large banks that made bad investment decisions 
B)  an increase in government expenditures that changes the composition of aggregate demand 
C)  a reduction in tax rates 
D)  an increase in payments to unemployed workers financed by borrowing 
A)  an increase in government expenditures to provide subsidies for large banks that made bad investment decisions 
B)  an increase in government expenditures that changes the composition of aggregate demand 
C)  a reduction in tax rates 
D)  an increase in payments to unemployed workers financed by borrowing

Question 9

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Accepted Answer

A)  decrease consumption spending. 
B)  increase consumption spending. 
C)  decrease investment spending. 
D)  increase export sales. 
A)  decrease consumption spending. 
B)  increase consumption spending. 
C)  decrease investment spending. 
D)  increase export sales.

Question 10

Are jobs the key to economic progress and the achievement of high income levels?

Accepted Answer

A)  Yes, as long as people are working, income levels will be high. 
B)  Yes, when full employment is present, the income levels of the residents will be at their maximum. 
C)  No, employment will not lead to higher incomes if it does not involve production of goods and services that people value. 
D)  Uncertain, when an economy is at full employment production of goods and services people value is important, but when unemployment is present, jobs are the key to prosperity. 
A)  Yes, as long as people are working, income levels will be high. 
B)  Yes, when full employment is present, the income levels of the residents will be at their maximum. 
C)  No, employment will not lead to higher incomes if it does not involve production of goods and services that people value. 
D)  Uncertain, when an economy is at full employment production of goods and services people value is important, but when unemployment is present, jobs are the key to prosperity.

Question 11

The coordination problem accompanying expansionary fiscal policy refers to

Accepted Answer

A)  the tendency of increases in government expenditures to expand private sector output by an even larger amount. 
B)  the possibility that demand stimulus programs will direct resources toward unproductive projects and areas of full employment. 
C)  the possibility that borrowing to finance current spending will lead to lower future interest rates. 
D)  the reluctance of Congress to approve increases in government spending during a recession. 
A)  the tendency of increases in government expenditures to expand private sector output by an even larger amount. 
B)  the possibility that demand stimulus programs will direct resources toward unproductive projects and areas of full employment. 
C)  the possibility that borrowing to finance current spending will lead to lower future interest rates. 
D)  the reluctance of Congress to approve increases in government spending during a recession.

Question 12

Which is more likely to stimulate aggregate demand in a timely manner?

Accepted Answer

A)  a tax cut, because households will increase their consumption by the full amount of their tax reduction 
B)  a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years 
C)  a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years 
D)  a spending increase, because it can be easily reversed once the economy has recovered 
A)  a tax cut, because households will increase their consumption by the full amount of their tax reduction 
B)  a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years 
C)  a spending increase, because disbursement can take place quickly while a tax cut will be spread out over several years 
D)  a spending increase, because it can be easily reversed once the economy has recovered

Question 13

The crowding-out effect suggests that

Accepted Answer

A)  expansionary fiscal policy causes inflation. 
B)  restrictive fiscal policy is an effective weapon against inflation. 
C)  a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. 
D)  a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment. 
A)  expansionary fiscal policy causes inflation. 
B)  restrictive fiscal policy is an effective weapon against inflation. 
C)  a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. 
D)  a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.

Question 14

When the tax rates imposed on the rich are high, a reduction in these rates

Accepted Answer

A)  will always lead to a reduction in the tax revenue collected from the rich. 
B)  will not affect the tax revenue collected from the rich. 
C)  will increase the reported incomes of the rich and it may also lead to an increase in tax revenue collected from them. 
D)  will decrease the reported incomes of the rich, and thereby reduce the tax revenue collected from them. 
A)  will always lead to a reduction in the tax revenue collected from the rich. 
B)  will not affect the tax revenue collected from the rich. 
C)  will increase the reported incomes of the rich and it may also lead to an increase in tax revenue collected from them. 
D)  will decrease the reported incomes of the rich, and thereby reduce the tax revenue collected from them.

Question 15

An increase in subsidies and other government spending during a recession is likely to result in

Accepted Answer

A)  an increase in rent-seeking activity. 
B)  an increase in productive projects and a reduction in unproductive projects. 
C)  a decrease in the level of future taxes. 
D)  greater reliance on profits and losses in the allocation of resources. 
A)  an increase in rent-seeking activity. 
B)  an increase in productive projects and a reduction in unproductive projects. 
C)  a decrease in the level of future taxes. 
D)  greater reliance on profits and losses in the allocation of resources.

Question 16

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

Accepted Answer

A)  slowed the recovery process and resulted in weak long-term growth of real GDP. 
B)  stimulated 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)  slowed the recovery process, but provided the foundation for rapid long-term growth of real GDP. 
A)  slowed the recovery process and resulted in weak long-term growth of real GDP. 
B)  stimulated 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)  slowed the recovery process, but provided the foundation for rapid long-term growth of real GDP.

Question 17

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Accepted Answer

A)  stimulate aggregate demand and employment. 
B)  retard aggregate demand and employment. 
C)  increase the real rate of interest. 
D)  exert little or no impact on the real interest rate, aggregate demand, and employment. 
A)  stimulate aggregate demand and employment. 
B)  retard aggregate demand and employment. 
C)  increase the real rate of interest. 
D)  exert little or no impact on the real interest rate, aggregate demand, and employment.

Question 18

Suppose that increases in government expenditures and large budget deficits are projected for the next decade.  If strong growth is observed during this decade, this would be most consistent with

Accepted Answer

A)  the Keynesian view. 
B)  the supply-side view. 
C)  the crowding-out effect. 
D)  the new classical theory. 
A)  the Keynesian view. 
B)  the supply-side view. 
C)  the crowding-out effect. 
D)  the new classical theory.

Question 19

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Accepted Answer

A)  Successful fiscal policy would be easy to achieve if Congress had greater access to forecasting tools. 
B)  Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited. 
C)  Successful fiscal policy is easier to achieve today because econometric forecasting models are highly accurate. 
D)  Congress and the President have persistently altered fiscal policy in a stabilizing manner. 
A)  Successful fiscal policy would be easy to achieve if Congress had greater access to forecasting tools. 
B)  Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited. 
C)  Successful fiscal policy is easier to achieve today because econometric forecasting models are highly accurate. 
D)  Congress and the President have persistently altered fiscal policy in a stabilizing manner.

Question 20

Use the figure below to answer the following question(s). Figure 12-1
  Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a Keynesian economist be most likely to favor?

Accepted Answer

A)  a reduction in government expenditures 
B)  an increase in government expenditures 
C)  an increase in taxes 
D)  continuation of the current tax and expenditure policies 
A)  a reduction in government expenditures 
B)  an increase in government expenditures 
C)  an increase in taxes 
D)  continuation of the current tax and expenditure policies

According to the Keynesian view, the proper response to a severe recession would be

During and following the recession of 2008-2009, private investment was

The debt to GDP ratio in the U.S. is unlikely to cause major problems as long as which of the following scenario holds?

Public choice analysis indicates that it will be politically more attractive to

Use the figure below to answer the following question(s). Figure 12-2 Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

Both Keynesians and non-Keynesians now recognize

The most effective fiscal stimulus will

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Are jobs the key to economic progress and the achievement of high income levels?

The coordination problem accompanying expansionary fiscal policy refers to

Which is more likely to stimulate aggregate demand in a timely manner?

The crowding-out effect suggests that

When the tax rates imposed on the rich are high, a reduction in these rates

An increase in subsidies and other government spending during a recession is likely to result in

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

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Suppose that increases in government expenditures and large budget deficits are projected for the next decade. If strong growth is observed during this decade, this would be most consistent with

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Use the figure below to answer the following question(s). Figure 12-1 Refer to Figure 12-1. If the output of the economy is Y₁, which of the following would a Keynesian economist be most likely to favor?

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

According to the Keynesian view, the proper response to a severe recession would be

During and following the recession of 2008-2009, private investment was

The debt to GDP ratio in the U.S. is unlikely to cause major problems as long as which of the following scenario holds?

Public choice analysis indicates that it will be politically more attractive to

Use the figure below to answer the following question(s). Figure 12-2 Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist if the economy is operating at point a?

Both Keynesians and non-Keynesians now recognize

The most effective fiscal stimulus will

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Are jobs the key to economic progress and the achievement of high income levels?

The coordination problem accompanying expansionary fiscal policy refers to

Which is more likely to stimulate aggregate demand in a timely manner?

The crowding-out effect suggests that

When the tax rates imposed on the rich are high, a reduction in these rates

An increase in subsidies and other government spending during a recession is likely to result in

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

The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of debt financing for taxes) will

Suppose that increases in government expenditures and large budget deficits are projected for the next decade. If strong growth is observed during this decade, this would be most consistent with

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Use the figure below to answer the following question(s). Figure 12-1 Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a Keynesian economist be most likely to favor?

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

Use the figure below to answer the following question(s). Figure 12-1 Refer to Figure 12-1. If the output of the economy is Y₁, which of the following would a Keynesian economist be most likely to favor?