Question 1

Compared to a permanent reduction in tax rates,a temporary tax cut will generally

Accepted Answer

A) exert a larger impact on output and employment because its effects are immediate,long-lasting,and do not add much to the national debt. 
B) exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn. 
C) exert a larger impact on output and employment because the temporary tax cut will lead to a larger budget deficit. 
D) exert an identical impact on output and employment because the incentive effects will be the same regardless of whether the tax cut is temporary or permanent. 
A) exert a larger impact on output and employment because its effects are immediate,long-lasting,and do not add much to the national debt. 
B) exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn. 
C) exert a larger impact on output and employment because the temporary tax cut will lead to a larger budget deficit. 
D) exert an identical impact on output and employment because the incentive effects will be the same regardless of whether the tax cut is temporary or permanent.

Question 2

According to the new classical theory,a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

Accepted Answer

A) cause real output to expand $200 billion if the marginal propensity to consume is three-fourths. 
B) exert little impact on real output because higher real interest rates will crowd out private spending. 
C) stimulate aggregate demand,causing prices to rise (inflation). 
D) be largely offset by a reduction in private spending because individuals will anticipate higher future taxes. 
A) cause real output to expand $200 billion if the marginal propensity to consume is three-fourths. 
B) exert little impact on real output because higher real interest rates will crowd out private spending. 
C) stimulate aggregate demand,causing prices to rise (inflation). 
D) be largely offset by a reduction in private spending because individuals will anticipate higher future taxes.

Question 3

The incentive to consume tax-deductible goods,instead of nondeductible goods,increases when

Accepted Answer

A) marginal tax rates are high. 
B) marginal tax rates are low. 
C) the inflation rate is low and relatively stable. 
D) This is a trick question: the consumption of tax-deductible goods is not affected by marginal tax rates. 
A) marginal tax rates are high. 
B) marginal tax rates are low. 
C) the inflation rate is low and relatively stable. 
D) This is a trick question: the consumption of tax-deductible goods is not affected by marginal tax rates.

Question 4

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 5

Why might increases in government spending be ineffective during a recession?

Accepted Answer

A) The level of aggregate demand will not affect output and employment during a recession. 
B) Increases in government spending cannot stimulate aggregate demand. 
C) According to the Keynesian view,fiscal policy will be largely ineffective during a recession. 
D) Recessions often reflect a coordination problem related to the composition of aggregate demand,not just its level. 
A) The level of aggregate demand will not affect output and employment during a recession. 
B) Increases in government spending cannot stimulate aggregate demand. 
C) According to the Keynesian view,fiscal policy will be largely ineffective during a recession. 
D) Recessions often reflect a coordination problem related to the composition of aggregate demand,not just its level.

Question 6

Supply-side economics stresses that

Accepted Answer

A) budget deficits will stimulate demand,output,and employment. 
B) budget deficits will lead to higher interest rates,which will weaken their expansionary impact. 
C) an increase in government expenditures financed by higher tax rates will cause real income to rise. 
D) changes in marginal tax rates exert important effects on real output and employment. 
A) budget deficits will stimulate demand,output,and employment. 
B) budget deficits will lead to higher interest rates,which will weaken their expansionary impact. 
C) an increase in government expenditures financed by higher tax rates will cause real income to rise. 
D) changes in marginal tax rates exert important effects on real output and employment.

Question 7

A person's marginal tax rate determines the percentage of

Accepted Answer

A) taxes that are allocated to the repayment of government debt. 
B) additional earnings that the individual is permitted to keep. 
C) the individual's total income that must be paid in taxes. 
D) additional taxable income allocated to saving rather than investment. 
A) taxes that are allocated to the repayment of government debt. 
B) additional earnings that the individual is permitted to keep. 
C) the individual's total income that must be paid in taxes. 
D) additional taxable income allocated to saving rather than investment.

Question 8

The crowding-out effect stresses that

Accepted Answer

A) an increase in government expenditures will stimulate aggregate demand and,thereby,help to prevent recessions. 
B) an increase in taxes will restrain aggregate demand and,thereby,help to control inflation. 
C) additional government borrowing to finance a larger deficit will increase the demand for loanable funds,causing real interest rates to rise. 
D) a budget deficit is a highly effective tool with which to combat recessions. 
E) both a and d are correct. 
A) an increase in government expenditures will stimulate aggregate demand and,thereby,help to prevent recessions. 
B) an increase in taxes will restrain aggregate demand and,thereby,help to control inflation. 
C) additional government borrowing to finance a larger deficit will increase the demand for loanable funds,causing real interest rates to rise. 
D) a budget deficit is a highly effective tool with which to combat recessions. 
E) both a and d are correct.

Question 9

Fiscal policy moved toward expansion during the 1980s but toward restriction during the 1990s.How did these differences affect the economy?

Accepted Answer

A) The expansionary fiscal policy of the 1980s led to strong growth while the restrictive policy of the 1990s led to stagnation. 
B) The expansionary fiscal policy of the 1980s led to weaker growth than the restrictive policy of the 1990s. 
C) The expansionary fiscal policy of the 1980s generated more rapid growth than the restrictive policy of the 1990s. 
D) There is little evidence that the differences in fiscal policy between the two decades exerted much impact on either aggregate demand or real output. 
A) The expansionary fiscal policy of the 1980s led to strong growth while the restrictive policy of the 1990s led to stagnation. 
B) The expansionary fiscal policy of the 1980s led to weaker growth than the restrictive policy of the 1990s. 
C) The expansionary fiscal policy of the 1980s generated more rapid growth than the restrictive policy of the 1990s. 
D) There is little evidence that the differences in fiscal policy between the two decades exerted much impact on either aggregate demand or real output.

Question 10

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.

Question 11

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 12

"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

Accepted Answer

A) the Keynesian model and the new classical model,but not the crowding-out model 
B) the Keynesian model and the crowding-out model,but not the new classical model 
C) the Keynesian model,but not the crowding-out and new classical models 
D) all three models 
A) the Keynesian model and the new classical model,but not the crowding-out model 
B) the Keynesian model and the crowding-out model,but not the new classical model 
C) the Keynesian model,but not the crowding-out and new classical models 
D) all three models

Question 13

Advocates of the crowding-out effect maintain that the large budget deficits during the recession of 2008-2009

Accepted Answer

A) stimulated output and employment,leading to a quicker recovery. 
B) will lead to a slower recovery than would have been the case if government borrowing had been more restrained. 
C) led to lower interest rates,stimulating private investment and consumption. 
D) will lead to lower future taxes and more private spending as the economy recovers. 
A) stimulated output and employment,leading to a quicker recovery. 
B) will lead to a slower recovery than would have been the case if government borrowing had been more restrained. 
C) led to lower interest rates,stimulating private investment and consumption. 
D) will lead to lower future taxes and more private spending as the economy recovers.

Question 14

Rosa's annual income increased from $30,000 to $40,000.If Rosa is in the 40 percent marginal tax bracket,the $10,000 increase in income will expand her disposable income by

Accepted Answer

A) $4,000. 
B) $6,000. 
C) $7,000. 
D) $7,200. 
A) $4,000. 
B) $6,000. 
C) $7,000. 
D) $7,200.

Question 15

Which of the following is most important for long-run growth and a healthy economy?

Accepted Answer

A) a low rate of household savings and a high rate of consumption 
B) a high rate of both savings and consumption 
C) a high rate of government expenditures financed by borrowing 
D) high tax rates and budget surpluses 
A) a low rate of household savings and a high rate of consumption 
B) a high rate of both savings and consumption 
C) a high rate of government expenditures financed by borrowing 
D) high tax rates and budget surpluses

Question 16

Supply-side economics stresses that high marginal tax rates

Accepted Answer

A) are the key to maintaining a balanced budget. 
B) are an effective short-run countercyclical tool to promote recovery from a recession. 
C) discourage people from working harder and using their resources productively. 
D) encourage people to work,supply resources,and use them more efficiently. 
A) are the key to maintaining a balanced budget. 
B) are an effective short-run countercyclical tool to promote recovery from a recession. 
C) discourage people from working harder and using their resources productively. 
D) encourage people to work,supply resources,and use them more efficiently.

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

If heavy federal borrowing pushes up real interest rates in the United States,which of the following will most likely result?

Accepted Answer

A) an inflow of capital and an appreciation in the foreign exchange value of the dollar 
B) an outflow of capital and a depreciation in the foreign exchange value of the dollar 
C) an inflow of capital and a depreciation in the foreign exchange value of the dollar 
D) an outflow of capital and an appreciation in the foreign exchange value of the dollar 
A) an inflow of capital and an appreciation in the foreign exchange value of the dollar 
B) an outflow of capital and a depreciation in the foreign exchange value of the dollar 
C) an inflow of capital and a depreciation in the foreign exchange value of the dollar 
D) an outflow of capital and an appreciation in the foreign exchange value of the dollar

Question 19

Use the figure below to answer the following question(s).
Figure 12-1
  
-Refer to Figure 12-2.If an economy is operating in the short run at point a,Keynesian analysis indicates that expansionary fiscal policy will

Accepted Answer

A) increase AD and move the economy toward point b. 
B) increase AD and move the economy toward point c. 
C) increase SRAS and move the economy toward point b. 
D) decrease SRAS and move the economy toward point c. 
A) increase AD and move the economy toward point b. 
B) increase AD and move the economy toward point c. 
C) increase SRAS and move the economy toward point b. 
D) decrease SRAS and move the economy toward point c.

Question 20

Which of the following best describes the crowding-out effect?

Accepted Answer

A) An increase in government expenditures will cause taxes to rise,which will reduce both aggregate demand and output. 
B) An increase in borrowing by the government will push interest rates upward,which will lead to a reduction in private spending. 
C) An increase in borrowing by the government will decrease the money supply and,thereby,reduce aggregate demand. 
D) An increase in government expenditures will cause the general level of prices to fall and,thereby,reduce aggregate demand and output. 
A) An increase in government expenditures will cause taxes to rise,which will reduce both aggregate demand and output. 
B) An increase in borrowing by the government will push interest rates upward,which will lead to a reduction in private spending. 
C) An increase in borrowing by the government will decrease the money supply and,thereby,reduce aggregate demand. 
D) An increase in government expenditures will cause the general level of prices to fall and,thereby,reduce aggregate demand and output.

Exam 12: Fiscal Policy, incentives, and Secondary Effects

Compared to a permanent reduction in tax rates,a temporary tax cut will generally

According to the new classical theory,a $50 billion increase in government expenditures financed by a $50 billion increase in the budget deficit will

The incentive to consume tax-deductible goods,instead of nondeductible goods,increases when

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

Why might increases in government spending be ineffective during a recession?

Supply-side economics stresses that

A person's marginal tax rate determines the percentage of

The crowding-out effect stresses that

Fiscal policy moved toward expansion during the 1980s but toward restriction during the 1990s.How did these differences affect the economy?

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

Supply-side economics stresses that

"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

Advocates of the crowding-out effect maintain that the large budget deficits during the recession of 2008-2009

Rosa's annual income increased from $30,000 to $40,000.If Rosa is in the 40 percent marginal tax bracket,the $10,000 increase in income will expand her disposable income by

Which of the following is most important for long-run growth and a healthy economy?

Supply-side economics stresses that high marginal tax rates

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

If heavy federal borrowing pushes up real interest rates in the United States,which of the following will most likely result?

Use the figure below to answer the following question(s). Figure 12-1 -Refer to Figure 12-2.If an economy is operating in the short run at point a,Keynesian analysis indicates that expansionary fiscal policy will

Which of the following best describes the crowding-out effect?

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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