Question 1

The modern consensus view of fiscal policy stresses

Accepted Answer

A) that the federal government should always balance its budget. 
B) that offsetting factors make fiscal policy much less effective than the Keynesian view suggested. 
C) that proper timing of fiscal policy is very difficult to achieve,rendering fiscal policy less useful as a stabilization tool. 
D) that both b and c are true. 
A) that the federal government should always balance its budget. 
B) that offsetting factors make fiscal policy much less effective than the Keynesian view suggested. 
C) that proper timing of fiscal policy is very difficult to achieve,rendering fiscal policy less useful as a stabilization tool. 
D) that both b and c are true. D

Question 2

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 new classical economist be most likely to favor?

Accepted Answer

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

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. A

Question 4

Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports?

Accepted Answer

A) Expansionary fiscal policy leads to high budget deficits.Foreigners become concerned about the stability of the United States and stop buying American goods as a result. 
B) When the government spends more,some of its spending is on foreign goods.As imports rise,net exports fall. 
C) The higher interest rates associated with expansionary fiscal policy attract foreign investors.To buy U.S.financial assets,foreigners bid up the real exchange rate,which in turn causes net exports to fall. 
D) The cut in taxes associated with expansionary fiscal policy stimulates aggregate supply.As aggregate supply rises,consumers have a greater incentive to purchase domestic goods,causing imports to fall and net exports to drop. 
A) Expansionary fiscal policy leads to high budget deficits.Foreigners become concerned about the stability of the United States and stop buying American goods as a result. 
B) When the government spends more,some of its spending is on foreign goods.As imports rise,net exports fall. 
C) The higher interest rates associated with expansionary fiscal policy attract foreign investors.To buy U.S.financial assets,foreigners bid up the real exchange rate,which in turn causes net exports to fall. 
D) The cut in taxes associated with expansionary fiscal policy stimulates aggregate supply.As aggregate supply rises,consumers have a greater incentive to purchase domestic goods,causing imports to fall and net exports to drop.

Question 5

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

Accepted Answer

A) Automatic stabilizers offset some of the fluctuations in aggregate demand without any government action. 
B) Fiscal policy is much less potent than the early Keynesian view implied. 
C) The effectiveness of discretionary fiscal policy as a stabilization tool is highly questionable given the difficulties in proper timing. 
D) All of the above are correct. 
E) None of the above is correct. 
A) Automatic stabilizers offset some of the fluctuations in aggregate demand without any government action. 
B) Fiscal policy is much less potent than the early Keynesian view implied. 
C) The effectiveness of discretionary fiscal policy as a stabilization tool is highly questionable given the difficulties in proper timing. 
D) All of the above are correct. 
E) None of the above is correct.

Question 6

Both the crowding-out effect and new classical model indicate that

Accepted Answer

A) expansionary fiscal policy is a highly effective weapon with which to fight an economic downturn. 
B) restrictive fiscal policy is a highly effective weapon with which to control inflation caused by excess demand. 
C) there are side effects of budget deficits that will substantially,if not entirely,offset their expansionary impact on aggregate demand. 
D) fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a weapon against recession. 
A) expansionary fiscal policy is a highly effective weapon with which to fight an economic downturn. 
B) restrictive fiscal policy is a highly effective weapon with which to control inflation caused by excess demand. 
C) there are side effects of budget deficits that will substantially,if not entirely,offset their expansionary impact on aggregate demand. 
D) fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a weapon against recession.

Question 7

According to the Keynesian view,government spending will have its greatest impact during a severe recession because

Accepted Answer

A) automatic stabilizers will shift the budget toward a surplus during a severe recession. 
B) underemployed resources will be widespread and the crowding out of private spending will be minimal. 
C) budget deficits will reduce interest rates and thereby stimulate private investment. 
D) increases in the government's outstanding debt will lead to lower future taxes. 
A) automatic stabilizers will shift the budget toward a surplus during a severe recession. 
B) underemployed resources will be widespread and the crowding out of private spending will be minimal. 
C) budget deficits will reduce interest rates and thereby stimulate private investment. 
D) increases in the government's outstanding debt will lead to lower future taxes.

Question 8

Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing?

Accepted Answer

A) The budget deficit will cause business decision makers to become more optimistic. 
B) The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall. 
C) The increase in government spending will cause the money supply to expand,thereby causing an inflationary boom. 
D) The additional borrowing will cause the central bank to buy more bonds,which will reduce aggregate demand. 
A) The budget deficit will cause business decision makers to become more optimistic. 
B) The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall. 
C) The increase in government spending will cause the money supply to expand,thereby causing an inflationary boom. 
D) The additional borrowing will cause the central bank to buy more bonds,which will reduce aggregate demand.

Question 9

Crowding out refers to the situation in which

Accepted Answer

A) borrowing by the federal government raises interest rates and causes firms to invest less. 
B) foreigners sell their bonds and purchase U.S.goods and services. 
C) borrowing by the federal government causes state and local governments to lower their taxes. 
D) increased federal taxes to balance the budget causes interest rates to increase and consumer credit to decrease. 
A) borrowing by the federal government raises interest rates and causes firms to invest less. 
B) foreigners sell their bonds and purchase U.S.goods and services. 
C) borrowing by the federal government causes state and local governments to lower their taxes. 
D) increased federal taxes to balance the budget causes interest rates to increase and consumer credit to decrease.

Question 10

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 11

Which of the following groups would be least likely to support a balanced budget amendment to the U.S.Constitution?

Accepted Answer

A) Keynesians 
B) new classicals 
C) supply-siders 
D) believers in the crowding-out view 
A) Keynesians 
B) new classicals 
C) supply-siders 
D) believers in the crowding-out view

Question 12

Expansionary fiscal policy during a recession is most effective when it

Accepted Answer

A) creates jobs,even if they are on unproductive projects. 
B) directs the economy to full employment and resources into productive projects. 
C) substantially changes the composition of aggregate demand. 
D) provides members of Congress with large political contributions. 
A) creates jobs,even if they are on unproductive projects. 
B) directs the economy to full employment and resources into productive projects. 
C) substantially changes the composition of aggregate demand. 
D) provides members of Congress with large political contributions.

Question 13

Which of the following best explains why high marginal tax rates retard output?

Accepted Answer

A) High marginal tax rates reduce the incentive to earn,invest,and use resources efficiently. 
B) High marginal tax rates will encourage foreign investment. 
C) High marginal tax rates will reduce budget deficits and lower interest rates. 
D) High marginal tax rates encourage people to substitute more-desired nondeductible goods for less-desired tax-deductible goods. 
A) High marginal tax rates reduce the incentive to earn,invest,and use resources efficiently. 
B) High marginal tax rates will encourage foreign investment. 
C) High marginal tax rates will reduce budget deficits and lower interest rates. 
D) High marginal tax rates encourage people to substitute more-desired nondeductible goods for less-desired tax-deductible goods.

Question 14

Use the figure below to answer the following question(s).
Figure 12-1
  
-Refer to Figure 12-2.When the economy is operating at point a,reliance on the self-correcting mechanism will

Accepted Answer

A) result in higher resource prices and a shift to the left in the SRAS curve. 
B) result in lower resource prices and a shift to the right in the SRAS curve. 
C) lead to lower interest rates and a shift to the right in the AD curve. 
D) lead to higher interest rates and a shift to the left in the AD curve. 
E) do both b and c. 
A) result in higher resource prices and a shift to the left in the SRAS curve. 
B) result in lower resource prices and a shift to the right in the SRAS curve. 
C) lead to lower interest rates and a shift to the right in the AD curve. 
D) lead to higher interest rates and a shift to the left in the AD curve. 
E) do both b and c.

Question 15

Keynesian critics would argue that expansion in government debt during a recession would lead to

Accepted Answer

A) consumer optimism and a substantial increase in private consumption and investment. 
B) higher future interest payments and tax rates. 
C) lower future interest payments and tax rates. 
D) a strong recovery and substantial future economic growth. 
A) consumer optimism and a substantial increase in private consumption and investment. 
B) higher future interest payments and tax rates. 
C) lower future interest payments and tax rates. 
D) a strong recovery and substantial future economic growth.

Question 16

Other things constant,a reduction in marginal tax rates will tend to increase aggregate supply because the lower taxes will increase

Accepted Answer

A) disposable income,which will induce an increase in consumption and aggregate supply. 
B) business optimism,which will increase both investment and aggregate supply. 
C) savings,which will lead to lower interest rates,an increase in consumption,and an increase in aggregate supply. 
D) the attractiveness of productive activity relative to leisure and tax avoidance. 
A) disposable income,which will induce an increase in consumption and aggregate supply. 
B) business optimism,which will increase both investment and aggregate supply. 
C) savings,which will lead to lower interest rates,an increase in consumption,and an increase in aggregate supply. 
D) the attractiveness of productive activity relative to leisure and tax avoidance.

Question 17

Use the figure below to answer the following question(s).
Figure 12-3
  
-Refer to Figure 12-3.If an economy is currently operating at Y₁,which of the following would a Keynesian economist be most likely to favor?

Accepted Answer

A) a shift in the federal budget toward a surplus 
B) a shift in the federal budget toward a deficit 
C) a balanced budget 
D) an increase in taxes 
A) a shift in the federal budget toward a surplus 
B) a shift in the federal budget toward a deficit 
C) a balanced budget 
D) an increase in taxes

Question 18

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Accepted Answer

Crowding out refers to the relationship

Question 19

Why might an expansion in government spending increase the severity of the coordination problem during a recession?

Accepted Answer

A) Increases in government spending will not affect the composition of aggregate demand. 
B) Congress is unlikely to approve increases in government spending during a recession. 
C) Spending increases will be driven by political considerations and will often flow into areas where resources are already fully employed. 
D) Government spending can be counted on to flow toward high productivity projects. 
A) Increases in government spending will not affect the composition of aggregate demand. 
B) Congress is unlikely to approve increases in government spending during a recession. 
C) Spending increases will be driven by political considerations and will often flow into areas where resources are already fully employed. 
D) Government spending can be counted on to flow toward high productivity projects.

Question 20

If a budget surplus leads to a decrease in U.S.real interest rates,the lower rates will tend to cause

Accepted Answer

A) the dollar to appreciate. 
B) the dollar to depreciate. 
C) a decrease in private investment. 
D) a decrease in net exports. 
A) the dollar to appreciate. 
B) the dollar to depreciate. 
C) a decrease in private investment. 
D) a decrease in net exports.

Exam 12: Fiscal Policy, incentives, and Secondary Effects

The modern consensus view of fiscal policy stresses

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 new classical economist be most likely to favor?

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

Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports?

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

Both the crowding-out effect and new classical model indicate that

According to the Keynesian view,government spending will have its greatest impact during a severe recession because

Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing?

Crowding out refers to the situation in which

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

Which of the following groups would be least likely to support a balanced budget amendment to the U.S.Constitution?

Expansionary fiscal policy during a recession is most effective when it

Which of the following best explains why high marginal tax rates retard output?

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-2.When the economy is operating at point a,reliance on the self-correcting mechanism will

Keynesian critics would argue that expansion in government debt during a recession would lead to

Other things constant,a reduction in marginal tax rates will tend to increase aggregate supply because the lower taxes will increase

Use the figure below to answer the following question(s). Figure 12-3 -Refer to Figure 12-3.If an economy is currently operating at Y₁,which of the following would a Keynesian economist be most likely to favor?

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Why might an expansion in government spending increase the severity of the coordination problem during a recession?

If a budget surplus leads to a decrease in U.S.real interest rates,the lower rates will tend to cause

The Economic Approach

Asome Tools of the Economist

Asupply,demand,and the Market Process

Asupply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Ataking the Nations Economic Pulse

Economic Fluctuations, unemployment, and Inflation

Aan Introduction to Basic Macroeconomic Markets

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

Fiscal Policy: the Keynesian View and Historical Perspective

Amoney 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

Consumer Choice and Elasticity

Acosts and the Supply of Goods

Aprice Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Aprice-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Government Spending and Taxation

The Economics of Social Security

The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Great Debates in Economics: Keynes Versus Hayek

The Crisis of 2008: Causes and Lessons for the Future

Lessons From the Great Depression

Lessons From Japan and Canada

The Federal Budget and the National Debt

The Economics of Healthcare

Education: Problems and Performance

Earnings Differences Between Men and Women

Do Labor Unions Increase the Wages of Workers

The Question of Resource Exhaustion

Difficult Environmental Cases and the Role of Government

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