Question 1

According to traditional Keynesian economics, expansionary fiscal policy initiated by the federal government

Accepted Answer

A) is never appropriate. 
B) is an appropriate way to prevent recessions and depressions. 
C) is an appropriate way to slow down an over-heated economy. 
D) will always fail due to crowding out effects. 
A) is never appropriate. 
B) is an appropriate way to prevent recessions and depressions. 
C) is an appropriate way to slow down an over-heated economy. 
D) will always fail due to crowding out effects.

Question 2

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

Accepted Answer

A) an increase in real Gross Domestic Product (GDP). 
B) a direct expenditure offset. 
C) a Ricardian dilemma. 
D) a reduction of the government deficit. 
A) an increase in real Gross Domestic Product (GDP). 
B) a direct expenditure offset. 
C) a Ricardian dilemma. 
D) a reduction of the government deficit.

Question 3

By definition, a direct expenditure offset will occur whenever

Accepted Answer

A) the government increases spending in an area that competes with the private sector. 
B) the government increases spending for the military. 
C) the interest rate rises. 
D) the interest rate falls. 
A) the government increases spending in an area that competes with the private sector. 
B) the government increases spending for the military. 
C) the interest rate rises. 
D) the interest rate falls.

Question 4

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

Accepted Answer

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

Question 5

All of the following are automatic stabilizers EXCEPT

Accepted Answer

A) discretionary increases in government spending. 
B) income transfer payments. 
C) progressive income tax system. 
D) unemployment compensation. 
A) discretionary increases in government spending. 
B) income transfer payments. 
C) progressive income tax system. 
D) unemployment compensation.

Question 6

If the government increases spending while holding taxes constant, we expect

Accepted Answer

A) an increase in investment spending by businesses too, as they anticipate future economic growth. 
B) a decrease in real saving as consumers follow suit and also increase borrowing. 
C) planned real investment spending by businesses to increase. 
D) interest rates to rise. 
A) an increase in investment spending by businesses too, as they anticipate future economic growth. 
B) a decrease in real saving as consumers follow suit and also increase borrowing. 
C) planned real investment spending by businesses to increase. 
D) interest rates to rise.

Question 7

The effect time lag of fiscal policy refers to

Accepted Answer

A) the time needed for Congress to enact a policy. 
B) the delay in recognizing an economic problem. 
C) the time between the onset of a policy and when the policy has impact on the economy. 
D) the difficulty in getting the President and the Congress to agree on an appropriate policy. 
A) the time needed for Congress to enact a policy. 
B) the delay in recognizing an economic problem. 
C) the time between the onset of a policy and when the policy has impact on the economy. 
D) the difficulty in getting the President and the Congress to agree on an appropriate policy.

Question 8

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as

Accepted Answer

A) the marginal propensity to consume. 
B) the Ricardian equivalence theorem. 
C) planned tax policy. 
D) Congressional Tax policy. 
A) the marginal propensity to consume. 
B) the Ricardian equivalence theorem. 
C) planned tax policy. 
D) Congressional Tax policy.

Question 9

Tax policy conducted for the purpose of achieving full employment, price stability, or economic growth is an example of

Accepted Answer

A) monetary policy. 
B) interest-rate policy. 
C) exchange-rate policy. 
D) discretionary fiscal policy. 
A) monetary policy. 
B) interest-rate policy. 
C) exchange-rate policy. 
D) discretionary fiscal policy.

Question 10

Fiscal policy time lags tend to be

Accepted Answer

A) constant, always thirteen months long. 
B) variable, between one and three years. 
C) variable, between one and three weeks. 
D) variable, between one and three months. 
A) constant, always thirteen months long. 
B) variable, between one and three years. 
C) variable, between one and three weeks. 
D) variable, between one and three months.

Question 11

The government might engage in expansionary fiscal policy if it wanted to

Accepted Answer

A) reduce the price level. 
B) reduce real GDP. 
C) shift the aggregate demand curve to the left. 
D) reduce the level of unemployment. 
A) reduce the price level. 
B) reduce real GDP. 
C) shift the aggregate demand curve to the left. 
D) reduce the level of unemployment.

Question 12

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₃. This is an example of

Accepted Answer

A) partial crowding-out effect. 
B) Ricardian equivalence. 
C) laissez-faire. 
D) complete crowding-out effect. 
A) partial crowding-out effect. 
B) Ricardian equivalence. 
C) laissez-faire. 
D) complete crowding-out effect.

Question 13

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as

Accepted Answer

A) the expenditure-offset theorem. 
B) the Keynesian Cross. 
C) the balanced budget multiplier. 
D) the Ricardian equivalence theorem. 
A) the expenditure-offset theorem. 
B) the Keynesian Cross. 
C) the balanced budget multiplier. 
D) the Ricardian equivalence theorem.

Question 14

What are the effects of fiscal policy during normal times?
 What are the effects of fiscal policy during abnormal times?

Accepted Answer

During normal times, discretionary fisca

Question 15

Which of the following is an example of an automatic stabilizer?

Accepted Answer

A) cost of living adjustments to Social Security payments 
B) unemployment benefits 
C) a temporary tax rebate 
D) all of the above 
A) cost of living adjustments to Social Security payments 
B) unemployment benefits 
C) a temporary tax rebate 
D) all of the above

Question 16

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for

Accepted Answer

A) the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B) the tax option because it is easier to pass. The effects on total spending would be identical. 
C) the spending option because it won't affect the deficit the way the tax cut would. 
D) the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier. 
A) the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B) the tax option because it is easier to pass. The effects on total spending would be identical. 
C) the spending option because it won't affect the deficit the way the tax cut would. 
D) the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

Question 17

The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is

Accepted Answer

A) supply-side economics. 
B) demand-side economics. 
C) the Ricardian equivalence theorem. 
D) consistent with crowding out. 
A) supply-side economics. 
B) demand-side economics. 
C) the Ricardian equivalence theorem. 
D) consistent with crowding out.

Question 18

The Ricardian equivalence theorem states that

Accepted Answer

A) an increase in government spending has no effect on aggregate supply. 
B) increases in government spending have a larger impact on real Gross Domestic Product (GDP)than decreases in taxes. 
C) an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. 
D) an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP)because it only affects the price index. 
A) an increase in government spending has no effect on aggregate supply. 
B) increases in government spending have a larger impact on real Gross Domestic Product (GDP)than decreases in taxes. 
C) an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. 
D) an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP)because it only affects the price index.

Question 19

Which of the following is an example of a discretionary fiscal policy action?

Accepted Answer

A) increasing government spending to deal with a recession 
B) a decrease in tax revenues as taxpayers' incomes decrease 
C) increasing the minimum wage rate 
D) raising regulations in the health care industry 
A) increasing government spending to deal with a recession 
B) a decrease in tax revenues as taxpayers' incomes decrease 
C) increasing the minimum wage rate 
D) raising regulations in the health care industry

Question 20

Explain the Ricardian equivalence theorem.

Accepted Answer

The Ricardian equivalence theorem is the

According to traditional Keynesian economics, expansionary fiscal policy initiated by the federal government

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

By definition, a direct expenditure offset will occur whenever

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

All of the following are automatic stabilizers EXCEPT

If the government increases spending while holding taxes constant, we expect

The effect time lag of fiscal policy refers to

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as

Tax policy conducted for the purpose of achieving full employment, price stability, or economic growth is an example of

Fiscal policy time lags tend to be

The government might engage in expansionary fiscal policy if it wanted to

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₃. This is an example of

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as

What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times?

Which of the following is an example of an automatic stabilizer?

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for

The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is

The Ricardian equivalence theorem states that

Which of the following is an example of a discretionary fiscal policy action?

Explain the Ricardian equivalence theorem.

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

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Exam 12: Fiscal Policy

According to traditional Keynesian economics, expansionary fiscal policy initiated by the federal government

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

By definition, a direct expenditure offset will occur whenever

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

All of the following are automatic stabilizers EXCEPT

If the government increases spending while holding taxes constant, we expect

The effect time lag of fiscal policy refers to

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as

Tax policy conducted for the purpose of achieving full employment, price stability, or economic growth is an example of

Fiscal policy time lags tend to be

The government might engage in expansionary fiscal policy if it wanted to

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₃. This is an example of

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as

What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times?

Which of the following is an example of an automatic stabilizer?

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for

The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is

The Ricardian equivalence theorem states that

Which of the following is an example of a discretionary fiscal policy action?

Explain the Ricardian equivalence theorem.

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

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