Question 1

The existence of automatic stabilizers will

Accepted Answer

A) reduce the recognition lag of discretionary fiscal policy. 
B) eliminate recessions. 
C) reduce the size of recessionary and inflationary gaps. 
D) cause the effects of shocks to aggregate demand to have a larger effect on GDP. 
A) reduce the recognition lag of discretionary fiscal policy. 
B) eliminate recessions. 
C) reduce the size of recessionary and inflationary gaps. 
D) cause the effects of shocks to aggregate demand to have a larger effect on GDP.

Question 2

In the extreme case of a complete crowding-out effect

Accepted Answer

A) an increase in interest rates will stimulate investment spending. 
B) an increase in tax rates will stimulate work effort. 
C) an increase in government spending will not increase aggregate demand. 
D) an increase in government spending will stimulate investment spending. 
A) an increase in interest rates will stimulate investment spending. 
B) an increase in tax rates will stimulate work effort. 
C) an increase in government spending will not increase aggregate demand. 
D) an increase in government spending will stimulate investment spending.

Question 3

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve

Accepted Answer

A) an increase in tax rates increases tax revenues. 
B) a reduction in tax rates reduces tax revenues. 
C) a reduction in tax rates increases tax revenues. 
D) any variation in tax rates has no effect on tax revenues. 
A) an increase in tax rates increases tax revenues. 
B) a reduction in tax rates reduces tax revenues. 
C) a reduction in tax rates increases tax revenues. 
D) any variation in tax rates has no effect on tax revenues.

Question 4

An advantage of automatic stabilizers over discretionary fiscal policy is that

Accepted Answer

A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. 
B) automatic stabilizers can be easily fine-tuned to move the economy to full employment. 
C) only the President is involved in implementing automatic stabilizers, instead of both the President and Congress. 
D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy. 
A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. 
B) automatic stabilizers can be easily fine-tuned to move the economy to full employment. 
C) only the President is involved in implementing automatic stabilizers, instead of both the President and Congress. 
D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy.

Question 5

"Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE?

Accepted Answer

A) yes, because theoretically nothing else can offset the effects of fiscal policy 
B) yes, when the long-run aggregate supply curve is horizontal too 
C) no, because crowding out could take place 
D) no, because the increased spending may cause the price level to increase 
A) yes, because theoretically nothing else can offset the effects of fiscal policy 
B) yes, when the long-run aggregate supply curve is horizontal too 
C) no, because crowding out could take place 
D) no, because the increased spending may cause the price level to increase

Question 6

An example of an automatic stabilizer is

Accepted Answer

A) the progressive tax system. 
B) the decision of the President to cut taxes in a recession. 
C) the Congressional decision to increase unemployment benefits in a recession. 
D) the raising of taxes on cigarettes to discourage smoking to stabilize health-care costs. 
A) the progressive tax system. 
B) the decision of the President to cut taxes in a recession. 
C) the Congressional decision to increase unemployment benefits in a recession. 
D) the raising of taxes on cigarettes to discourage smoking to stabilize health-care costs.

Question 7

Automatic stabilizers are designed to

Accepted Answer

A) promote global trade. 
B) simplify the tax system. 
C) moderate changes in disposable income. 
D) stabilize the bi-partisan budget process. 
A) promote global trade. 
B) simplify the tax system. 
C) moderate changes in disposable income. 
D) stabilize the bi-partisan budget process.

Question 8

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD₂. If the government wants to use fiscal policy to close the existing gap, it should

Accepted Answer

A) increase taxes. 
B) decrease taxes. 
C) increase the money supply. 
D) increase government spending. 
A) increase taxes. 
B) decrease taxes. 
C) increase the money supply. 
D) increase government spending.

Question 9

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

Accepted Answer

A) Increase government spending. 
B) Decrease interest rates. 
C) Increase the money supply. 
D) all of the above 
A) Increase government spending. 
B) Decrease interest rates. 
C) Increase the money supply. 
D) all of the above

Question 10

In the traditional Keynesian model, a tax cut

Accepted Answer

A) causes the C + I + G + X line to shift upward. 
B) causes the C + I + G + X line to shift downward. 
C) causes a movement along the C + I + G + X line. 
D) does not affect the C + I + G + X line. 
A) causes the C + I + G + X line to shift upward. 
B) causes the C + I + G + X line to shift downward. 
C) causes a movement along the C + I + G + X line. 
D) does not affect the C + I + G + X line.

Question 11

-Refer to the above figure. If the relevant aggregate demand curve is AD₂, what is the current economic situation?

Accepted Answer

A) inflationary gap 
B) recessionary gap 
C) equilibrium 
D) overemployment 
A) inflationary gap 
B) recessionary gap 
C) equilibrium 
D) overemployment

Question 12

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?

Accepted Answer

A) Increase taxes and reduce government spending. 
B) Reduce taxes and increase government spending. 
C) Increase taxes and increase government spending. 
D) Reduce taxes and reduce government spending. 
A) Increase taxes and reduce government spending. 
B) Reduce taxes and increase government spending. 
C) Increase taxes and increase government spending. 
D) Reduce taxes and reduce government spending.

Question 13

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is

Accepted Answer

A) fiscal policy. 
B) the recognition time lag. 
C) the effect time lag. 
D) the action time lag. 
A) fiscal policy. 
B) the recognition time lag. 
C) the effect time lag. 
D) the action time lag.

Question 14

The time that elapses between the implementation of a policy and its intended result is referred to as

Accepted Answer

A) the action time lag. 
B) the recognition time lag. 
C) the effect time lag. 
D) the data lag. 
A) the action time lag. 
B) the recognition time lag. 
C) the effect time lag. 
D) the data lag.

Question 15

During which time will fiscal policy be the most effective?

Accepted Answer

A) normal times 
B) times of war 
C) in the middle of expansions 
D) times of stagflation 
A) normal times 
B) times of war 
C) in the middle of expansions 
D) times of stagflation

Question 16

Typical goals for fiscal policy are

Accepted Answer

A) high employment and price stability. 
B) high prices for consumers and low prices for businesses. 
C) running high deficits and raising consumer prices. 
D) increasing the money supply so the government can spend more. 
A) high employment and price stability. 
B) high prices for consumers and low prices for businesses. 
C) running high deficits and raising consumer prices. 
D) increasing the money supply so the government can spend more.

Question 17

Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue?

Accepted Answer

The government could initiate contractio

Question 18

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

Accepted Answer

A) reduce aggregate demand by cutting government spending or raising taxes. 
B) reduce aggregate demand by increasing government spending or cutting taxes. 
C) increase aggregate supply by cutting government spending or raising taxes. 
D) increase aggregate supply by increasing government spending or lowering taxes. 
A) reduce aggregate demand by cutting government spending or raising taxes. 
B) reduce aggregate demand by increasing government spending or cutting taxes. 
C) increase aggregate supply by cutting government spending or raising taxes. 
D) increase aggregate supply by increasing government spending or lowering taxes.

Question 19

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.

Accepted Answer

A) $3 trillion; increasing government spending by $1 trillion 
B) $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C 
C) $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending 
D) $2 trillion; an increase in government spending of $14 trillion 
A) $3 trillion; increasing government spending by $1 trillion 
B) $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C 
C) $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending 
D) $2 trillion; an increase in government spending of $14 trillion

Question 20

Discretionary fiscal policy

Accepted Answer

A) may not have desired effects on real GDP because of the time lags. 
B) may not have desired effects on real GDP because it leads to increases in aggregate demand. 
C) may not have desired effects on real GDP because it leads to decreases in aggregate demand. 
D) would have a larger effect on real GDP if the multiplier was smaller. 
A) may not have desired effects on real GDP because of the time lags. 
B) may not have desired effects on real GDP because it leads to increases in aggregate demand. 
C) may not have desired effects on real GDP because it leads to decreases in aggregate demand. 
D) would have a larger effect on real GDP if the multiplier was smaller.

The existence of automatic stabilizers will

In the extreme case of a complete crowding-out effect

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve

An advantage of automatic stabilizers over discretionary fiscal policy is that

"Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE?

An example of an automatic stabilizer is

Automatic stabilizers are designed to

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD₂. If the government wants to use fiscal policy to close the existing gap, it should

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

In the traditional Keynesian model, a tax cut

-Refer to the above figure. If the relevant aggregate demand curve is AD₂, what is the current economic situation?

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is

The time that elapses between the implementation of a policy and its intended result is referred to as

During which time will fiscal policy be the most effective?

Typical goals for fiscal policy are

Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue?

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of , which can be closed by .

Discretionary fiscal policy

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Deficit Spending and the Public Debt

Money Banking and Central Banking

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

Exam 12: Fiscal Policy

The existence of automatic stabilizers will

In the extreme case of a complete crowding-out effect

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve

An advantage of automatic stabilizers over discretionary fiscal policy is that

"Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE?

An example of an automatic stabilizer is

Automatic stabilizers are designed to

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD₂. If the government wants to use fiscal policy to close the existing gap, it should

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

In the traditional Keynesian model, a tax cut

-Refer to the above figure. If the relevant aggregate demand curve is AD₂, what is the current economic situation?

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is

The time that elapses between the implementation of a policy and its intended result is referred to as

During which time will fiscal policy be the most effective?

Typical goals for fiscal policy are

Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue?

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.

Discretionary fiscal policy

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Deficit Spending and the Public Debt

Money Banking and Central Banking

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of , which can be closed by .