Question 1

In the long run, aggregate demand controls, no matter what happens to aggregate supply.

Accepted Answer

A) True 
 B)False

Question 2

If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to

Accepted Answer

A) counteract inflation. 
B) reduce the trade deficit. 
C) continue inflationary pressures. 
D) increase unemployment. 
A) counteract inflation. 
B) reduce the trade deficit. 
C) continue inflationary pressures. 
D) increase unemployment.

Question 3

The crowding-out effect is more likely to dominate the crowding-in effect when investment is relatively

Accepted Answer

A) insensitive to interest rates and to GDP. 
B) insensitive to interest rates but sensitive to GDP. 
C) sensitive to interest rates and to GDP. 
D) sensitive to interest rates and insensitive to GDP. 
A) insensitive to interest rates and to GDP. 
B) insensitive to interest rates but sensitive to GDP. 
C) sensitive to interest rates and to GDP. 
D) sensitive to interest rates and insensitive to GDP.

Question 4

The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

Accepted Answer

A) True 
 B)False

Question 5

What is "crowding-in" effect?
 Explain the factors which determine the strength of the crowding in effect.

Accepted Answer

Crowding in occurs when government spend

Question 6

Future generations will be hurt by a high national debt if incurring the debt

Accepted Answer

A) was done to pay Social Security recipients. 
B) resulted in heavy commitments to bail out business firms. 
C) increased formation of capital. 
D) slowed the formation of capital. 
A) was done to pay Social Security recipients. 
B) resulted in heavy commitments to bail out business firms. 
C) increased formation of capital. 
D) slowed the formation of capital.

Question 7

Figure 16-2
  
-Suppose that Figure 16-2 shows the effects of reducing the budget deficit by raising taxes.If authorities do not want real GDP to fall, monetary policy must

Accepted Answer

A) become sufficiently more expansionary to restore the aggregate demand curve to D? D? 
B) contract aggregate demand to be consistent with deficit-reducing fiscal policy. 
C) not lower interest rates and thwart the goal of a balanced budget. 
D) become more contractionary to lower the interest rate and spur investment. 
A) become sufficiently more expansionary to restore the aggregate demand curve to D? D? 
B) contract aggregate demand to be consistent with deficit-reducing fiscal policy. 
C) not lower interest rates and thwart the goal of a balanced budget. 
D) become more contractionary to lower the interest rate and spur investment.

Question 8

"Budget deficits are inflationary." The truth of this statement depends on

Accepted Answer

A) aggregate demand in the economy. 
B) the shape of the aggregate supply curve. 
C) the size of the national debt. 
D) existing debt as a percentage of GDP. 
A) aggregate demand in the economy. 
B) the shape of the aggregate supply curve. 
C) the size of the national debt. 
D) existing debt as a percentage of GDP.

Question 9

During the period from 1945 to 1975, the debt to GDP ratio

Accepted Answer

A) remained steady. 
B) rose slightly. 
C) increased rapidly. 
D) fell steadily. 
A) remained steady. 
B) rose slightly. 
C) increased rapidly. 
D) fell steadily.

Question 10

The structural deficit can be defined as

Accepted Answer

A) the deficit that is structurally obstructing economic recovery to reach level of high employment. 
B) a hypothetical construct that estimates the deficit, given current tax rates and expenditure policies, if the economy were operating at some fixed high-employment level. 
C) the deficit necessary to restructure the economy and reach a desired high-employment level. 
D) the deficit that would prevail if fiscal policy were structured differently in order to reach a desired high-employment level. 
A) the deficit that is structurally obstructing economic recovery to reach level of high employment. 
B) a hypothetical construct that estimates the deficit, given current tax rates and expenditure policies, if the economy were operating at some fixed high-employment level. 
C) the deficit necessary to restructure the economy and reach a desired high-employment level. 
D) the deficit that would prevail if fiscal policy were structured differently in order to reach a desired high-employment level.

Question 11

The deficit can be defined in simple terms as

Accepted Answer

A) Tax receipts − government expenditures + transfers. 
B) Tax receipts + government expenditures + transfers. 
C) Government expenditures + transfers − tax receipts. 
D) Government expenditures − transfers − tax receipts. 
A) Tax receipts − government expenditures + transfers. 
B) Tax receipts + government expenditures + transfers. 
C) Government expenditures + transfers − tax receipts. 
D) Government expenditures − transfers − tax receipts.

Question 12

The purpose of fiscal policy should be to

Accepted Answer

A) balance the budget to be fiscally responsible. 
B) balance aggregate supply and aggregate demand. 
C) keep taxes low to keep voters happy. 
D) minimize government spending to avoid wasting money. 
A) balance the budget to be fiscally responsible. 
B) balance aggregate supply and aggregate demand. 
C) keep taxes low to keep voters happy. 
D) minimize government spending to avoid wasting money.

Question 13

In 2010, which of the following was true regarding the extremely large deficits that the U.S.recently encountered?

Accepted Answer

A) Most politicians and economists argued that the deficit had to be reduced. 
B) Most politicians argued that the deficit had to be reduced but economists cautioned against this course of action. 
C) Most economists argued that the deficit had to be reduced but politicians cautioned against this course of action. 
D) Both politicians and economist cautioned against deficit reduction. 
A) Most politicians and economists argued that the deficit had to be reduced. 
B) Most politicians argued that the deficit had to be reduced but economists cautioned against this course of action. 
C) Most economists argued that the deficit had to be reduced but politicians cautioned against this course of action. 
D) Both politicians and economist cautioned against deficit reduction.

Question 14

"Crowding-out" refers to the process by which

Accepted Answer

A) high consumption leads to low saving and investment. 
B) the Fed prevents "runs" on banks. 
C) Fed sales of bonds reduce the ability of corporations to buy bonds. 
D) increased government spending raises interest rates, thus lowering investment spending. 
A) high consumption leads to low saving and investment. 
B) the Fed prevents "runs" on banks. 
C) Fed sales of bonds reduce the ability of corporations to buy bonds. 
D) increased government spending raises interest rates, thus lowering investment spending.

Question 15

If the level of government spending increases at the same time the Fed is pursuing contractionary monetary policy, we know that

Accepted Answer

A) incomes will fall. 
B) the interest rate will rise. 
C) incomes will rise. 
D) the interest rate will fall. 
A) incomes will fall. 
B) the interest rate will rise. 
C) incomes will rise. 
D) the interest rate will fall.

Question 16

In the early 1990s, economists became alarmed over the national debt because it

Accepted Answer

A) was larger than three months' GDP. 
B) was growing faster than GDP. 
C) had reached twice the size of GDP. 
D) was growing faster than private debt. 
A) was larger than three months' GDP. 
B) was growing faster than GDP. 
C) had reached twice the size of GDP. 
D) was growing faster than private debt.

Question 17

Higher interest rates and, therefore, a decrease in investment spending is most likely to be caused by which policy mix?

Accepted Answer

A) deficit reduction and expansionary monetary policy 
B) larger deficits and contractionary monetary policy 
C) larger deficits and expansionary monetary policy 
D) deficit reduction and contractionary monetary policy 
A) deficit reduction and expansionary monetary policy 
B) larger deficits and contractionary monetary policy 
C) larger deficits and expansionary monetary policy 
D) deficit reduction and contractionary monetary policy

Question 18

Deficits are created by governments running a large debt.

Accepted Answer

A) True 
 B)False

Question 19

Economists who argue in favor of rapid deficit reduction claim that deficit reduction will

Accepted Answer

A) reduce crowding in, reduce interest rates, and increase AS. 
B) stimulate AD and productivity. 
C) trigger crowding in, increase investment, and increase AS. 
D) reduce crowding out, increase investment, and increase AS. 
A) reduce crowding in, reduce interest rates, and increase AS. 
B) stimulate AD and productivity. 
C) trigger crowding in, increase investment, and increase AS. 
D) reduce crowding out, increase investment, and increase AS.

Question 20

The main goal of fiscal policy should always be to

Accepted Answer

A) generate a budget deficit. 
B) balance the budget. 
C) balance C + I with government spending. 
D) balance aggregate demand with aggregate supply. 
A) generate a budget deficit. 
B) balance the budget. 
C) balance C + I with government spending. 
D) balance aggregate demand with aggregate supply.

Exam 33: Budget Deficits in the Short and Long Run

In the long run, aggregate demand controls, no matter what happens to aggregate supply.

If the economy is in an inflationary gap, and the government attempts to balance the budget, the effect will be to

The crowding-out effect is more likely to dominate the crowding-in effect when investment is relatively

The short-run effects of government's financial rescue program and fiscal stimulus package helped the economy increase aggregate demand curing the Great Recession.

What is "crowding-in" effect? Explain the factors which determine the strength of the crowding in effect.

Future generations will be hurt by a high national debt if incurring the debt

Figure 16-2 -Suppose that Figure 16-2 shows the effects of reducing the budget deficit by raising taxes.If authorities do not want real GDP to fall, monetary policy must

"Budget deficits are inflationary." The truth of this statement depends on

During the period from 1945 to 1975, the debt to GDP ratio

The structural deficit can be defined as

The deficit can be defined in simple terms as

The purpose of fiscal policy should be to

In 2010, which of the following was true regarding the extremely large deficits that the U.S.recently encountered?

"Crowding-out" refers to the process by which

If the level of government spending increases at the same time the Fed is pursuing contractionary monetary policy, we know that

In the early 1990s, economists became alarmed over the national debt because it

Higher interest rates and, therefore, a decrease in investment spending is most likely to be caused by which policy mix?

Deficits are created by governments running a large debt.

Economists who argue in favor of rapid deficit reduction claim that deficit reduction will

The main goal of fiscal policy should always be to

What Is Economics

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: the Importance of Marginal Analysis

Securities: Business Finance and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets: the Price System

The Shortcomings of Free Markets

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: the Human Inputs

Poverty, Inequality, and Discrimination

Is Useconomic Leadership Threatened

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation

Bringing in the Supply Side: Unemployment and Inflation

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

He Financial Crisis and the Great Recession

The Debate Over Monetary and Fiscal Policy

The Trade-Off Between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder

Exchange Rates and the Macroeconomy

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