Question 1

Prior to World War II, the purpose of the federal budget was to

Accepted Answer

A) stabilize the economy. 
B) achieve macroeconomic objectives such as full employment and price level stability. 
C) finance the business of government. 
D) provide incentives to encourage investment. 
E) oversee revenue equalization among the provinces. 
A) stabilize the economy. 
B) achieve macroeconomic objectives such as full employment and price level stability. 
C) finance the business of government. 
D) provide incentives to encourage investment. 
E) oversee revenue equalization among the provinces.

Question 2

Lowering taxes on employment ________, which ________ the equilibrium quantity of labour.

Accepted Answer

A) increases the supply of labour and the demand for labour; increases 
B) increases the demand for labour; increases 
C) increases the supply of labour; increases 
D) decreases the supply of labour and increases the demand for labour; decreases 
E) decreases the demand for labour and increases the supply of labour; decreases 
A) increases the supply of labour and the demand for labour; increases 
B) increases the demand for labour; increases 
C) increases the supply of labour; increases 
D) decreases the supply of labour and increases the demand for labour; decreases 
E) decreases the demand for labour and increases the supply of labour; decreases

Question 3

All of the following statements are true except

Accepted Answer

A) total revenues have no strong trends. 
B) revenues include corporate income taxes, personal income taxes; indirect taxes and investment income. 
C) the main source of fluctuations in revenues is corporate income taxes. 
D) indirect taxes decreased during the 2000s. 
E) personal income taxes decreased during the 2000s. 
A) total revenues have no strong trends. 
B) revenues include corporate income taxes, personal income taxes; indirect taxes and investment income. 
C) the main source of fluctuations in revenues is corporate income taxes. 
D) indirect taxes decreased during the 2000s. 
E) personal income taxes decreased during the 2000s.

Question 4

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What is the real GDP when the government has a balanced budget?

Accepted Answer

A) $100 
B) $250 
C) $1,250 billion 
D) $750 billion 
E) $1,000 billion 
A) $100 
B) $250 
C) $1,250 billion 
D) $750 billion 
E) $1,000 billion

Question 5

A cyclical deficit occurs when

Accepted Answer

A) government outlays are greater than revenues. 
B) government outlays are less than revenues. 
C) there is a deficit due to the fact real GDP is greater than potential GDP. 
D) there is a deficit due to the fact real GDP is less than potential GDP. 
E) there is a deficit even when real GDP equals potential GDP. 
A) government outlays are greater than revenues. 
B) government outlays are less than revenues. 
C) there is a deficit due to the fact real GDP is greater than potential GDP. 
D) there is a deficit due to the fact real GDP is less than potential GDP. 
E) there is a deficit even when real GDP equals potential GDP.

Question 6

Discretionary fiscal policy is risky because it is hampered by

Accepted Answer

A) recognition lag, impact lag, and law-making lag. 
B) recognition lag, business cycle lag, and law-making lag. 
C) business cycle lag, impact lag, and law-making lag. 
D) recognition lag, impact lag, and business cycle lag. 
E) recognition lag, inflation lag, and law-making lag. 
A) recognition lag, impact lag, and law-making lag. 
B) recognition lag, business cycle lag, and law-making lag. 
C) business cycle lag, impact lag, and law-making lag. 
D) recognition lag, impact lag, and business cycle lag. 
E) recognition lag, inflation lag, and law-making lag.

Question 7

If real GDP is less than potential GDP, which of the following fiscal policies would increase real GDP?

Accepted Answer

A) a decrease in taxes 
B) an increase in government expenditures 
C) a fall in the interest rate 
D) Both A and B are correct 
E) Both B and C are correct. 
A) a decrease in taxes 
B) an increase in government expenditures 
C) a fall in the interest rate 
D) Both A and B are correct 
E) Both B and C are correct.

Question 8

The cyclical deficit

Accepted Answer

A) is a persistent economic phenomenon. 
B) occurs when the economy is at full employment. 
C) arises purely because real GDP does not equal potential GDP. 
D) is an accumulation of the government debt. 
E) exceeds the structural surplus. 
A) is a persistent economic phenomenon. 
B) occurs when the economy is at full employment. 
C) arises purely because real GDP does not equal potential GDP. 
D) is an accumulation of the government debt. 
E) exceeds the structural surplus.

Question 9

Which one of the following happens automatically if the economy goes into a recession?

Accepted Answer

A) Government outlays increase and revenues do not change. 
B) Revenues decrease and government outlays do not change. 
C) The government budget deficit increases or the government budget surplus decreases. 
D) The government budget deficit decreases. 
E) Both government outlays and revenues increase, and the deficit stays the same. 
A) Government outlays increase and revenues do not change. 
B) Revenues decrease and government outlays do not change. 
C) The government budget deficit increases or the government budget surplus decreases. 
D) The government budget deficit decreases. 
E) Both government outlays and revenues increase, and the deficit stays the same.

Question 10

Choose the correct statement.

Accepted Answer

A) Tax cuts increase aggregate supply and aggregate demand. 
B) Tax cuts strengthen the incentive to work and to invest. 
C) The tax multiplier becomes smaller as time passes. 
D) According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending increases. 
E) Both A and B are correct. 
A) Tax cuts increase aggregate supply and aggregate demand. 
B) Tax cuts strengthen the incentive to work and to invest. 
C) The tax multiplier becomes smaller as time passes. 
D) According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending increases. 
E) Both A and B are correct.

Question 11

All of the following statements are true except

Accepted Answer

A) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. 
B) debt interest has been steadily increasing since 1960. 
C) expenditures on goods and services have a downward trend. 
D) outlays increased steadily from 1971 through 1985. 
E) transfer payments decreased sharply during the 1990s. 
A) the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest. 
B) debt interest has been steadily increasing since 1960. 
C) expenditures on goods and services have a downward trend. 
D) outlays increased steadily from 1971 through 1985. 
E) transfer payments decreased sharply during the 1990s.

Question 12

According to the Laffer curve, raising the tax rate

Accepted Answer

A) always increases the amount of tax revenue. 
B) always decreases the amount of tax revenue. 
C) does not change the amount of tax revenue. 
D) might increase, decrease, or not change the amount of tax revenue. 
E) has no effect on the amount of tax revenue. 
A) always increases the amount of tax revenue. 
B) always decreases the amount of tax revenue. 
C) does not change the amount of tax revenue. 
D) might increase, decrease, or not change the amount of tax revenue. 
E) has no effect on the amount of tax revenue.

Question 13

The effect of a change in taxes is less than the same sized change in government expenditure because

Accepted Answer

A) the amount by which consumption initially changes is equal to MPC times the tax change. 
B) some people do not pay their taxes. 
C) changes in government expenditure do not directly affect consumption. 
D) tax rates are the same regardless of income levels. 
E) none of the above 
A) the amount by which consumption initially changes is equal to MPC times the tax change. 
B) some people do not pay their taxes. 
C) changes in government expenditure do not directly affect consumption. 
D) tax rates are the same regardless of income levels. 
E) none of the above

Question 14

A tax cut on capital income

Accepted Answer

A) does not affect potential GDP because the interest rate affects aggregate expenditure only. 
B) does not affect potential GDP because it has no impact on the supply of labour. 
C) increases potential GDP because workers have greater incentives to work. 
D) increases potential GDP because the supply of loanable funds increases. 
E) increases potential GDP because households have more disposable income to spend. 
A) does not affect potential GDP because the interest rate affects aggregate expenditure only. 
B) does not affect potential GDP because it has no impact on the supply of labour. 
C) increases potential GDP because workers have greater incentives to work. 
D) increases potential GDP because the supply of loanable funds increases. 
E) increases potential GDP because households have more disposable income to spend.

Question 15

The economy is in a recession, the recessionary gap is large, and there is a budget deficit. The budget deficit is ________. Automatic fiscal policy is ________ the output gap.

Accepted Answer

A) totally composed of a cyclical deficit; increasing 
B) total composed of a structural deficit; increasing 
C) at least partly composed of a cyclical deficit; decreasing 
D) totally composed of a cyclical deficit; decreasing 
E) at least partly composed of a cyclical deficit; increasing 
A) totally composed of a cyclical deficit; increasing 
B) total composed of a structural deficit; increasing 
C) at least partly composed of a cyclical deficit; decreasing 
D) totally composed of a cyclical deficit; decreasing 
E) at least partly composed of a cyclical deficit; increasing

Question 16

Use the figure below to answer the following questions.
   
Figure 29.3.1
-Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If potential GDP is $750 billion,

Accepted Answer

A) neither a structural surplus nor a structural deficit exists. 
B) the structural deficit is $60 billion. 
C) the structural deficit is $40 billion. 
D) the structural surplus is $60 billion. 
E) the structural surplus is $40 billion. 
A) neither a structural surplus nor a structural deficit exists. 
B) the structural deficit is $60 billion. 
C) the structural deficit is $40 billion. 
D) the structural surplus is $60 billion. 
E) the structural surplus is $40 billion.

Question 17

Government debt is

Accepted Answer

A) equal to revenues minus outlays. 
B) always increasing. 
C) a phenomena that occurs only during times of war. 
D) the total amount of government borrowing. 
E) the result of a rising price level. 
A) equal to revenues minus outlays. 
B) always increasing. 
C) a phenomena that occurs only during times of war. 
D) the total amount of government borrowing. 
E) the result of a rising price level.

Question 18

The structural deficit is the deficit

Accepted Answer

A) in a recession. 
B) in an expansion. 
C) that would occur at potential GDP. 
D) caused by the business cycle. 
E) that would occur at the trough of the business cycle. 
A) in a recession. 
B) in an expansion. 
C) that would occur at potential GDP. 
D) caused by the business cycle. 
E) that would occur at the trough of the business cycle.

Question 19

The economy is in a recession and the recessionary gap is large. A discretionary fiscal stimulation package that would avoid a budget deficit is a simultaneous and equal

Accepted Answer

A) increase in government expenditure and an increase in taxes. 
B) decrease in government expenditure and taxes. 
C) increase in transfer payments and a decrease in taxes. 
D) decrease in transfer payments and increase in the quantity of money. 
E) increase in transfer payments and decrease in the quantity of money. 
A) increase in government expenditure and an increase in taxes. 
B) decrease in government expenditure and taxes. 
C) increase in transfer payments and a decrease in taxes. 
D) decrease in transfer payments and increase in the quantity of money. 
E) increase in transfer payments and decrease in the quantity of money.

Question 20

The use of fiscal policy is limited because

Accepted Answer

A) of recognition lag. 
B) of law-making lag. 
C) of impact lag. 
D) all of the above 
E) none of the above 
A) of recognition lag. 
B) of law-making lag. 
C) of impact lag. 
D) all of the above 
E) none of the above

Exam 29: Fiscal Policy

Prior to World War II, the purpose of the federal budget was to

Lowering taxes on employment ________, which ________ the equilibrium quantity of labour.

All of the following statements are true except

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What is the real GDP when the government has a balanced budget?

A cyclical deficit occurs when

Discretionary fiscal policy is risky because it is hampered by

If real GDP is less than potential GDP, which of the following fiscal policies would increase real GDP?

The cyclical deficit

Which one of the following happens automatically if the economy goes into a recession?

Choose the correct statement.

All of the following statements are true except

According to the Laffer curve, raising the tax rate

The effect of a change in taxes is less than the same sized change in government expenditure because

A tax cut on capital income

The economy is in a recession, the recessionary gap is large, and there is a budget deficit. The budget deficit is ________. Automatic fiscal policy is ________ the output gap.

Use the figure below to answer the following questions. Figure 29.3.1 -Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If potential GDP is $750 billion,

Government debt is

The structural deficit is the deficit

The economy is in a recession and the recessionary gap is large. A discretionary fiscal stimulation package that would avoid a budget deficit is a simultaneous and equal

The use of fiscal policy is limited because

What Is Economics

The Economic Problem

Demand and Supply

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Governments Actions in Markets

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Money, the Price Level, and Inflation

The Exchange Rate and the Balance of Payments

Aggregate Supply and Aggregate Demand

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Lowering taxes on employment , which the equilibrium quantity of labour.

The economy is in a recession, the recessionary gap is large, and there is a budget deficit. The budget deficit is . Automatic fiscal policy is the output gap.