Question 1

If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to

Accepted Answer

A) increase real Gross Domestic Product (GDP). 
B) increase the price level. 
C) increase either the real Gross Domestic Product (GDP)or the price level, depending on the length of the time lag. 
D) decrease both real Gross Domestic Product (GDP)and the price level. 
A) increase real Gross Domestic Product (GDP). 
B) increase the price level. 
C) increase either the real Gross Domestic Product (GDP)or the price level, depending on the length of the time lag. 
D) decrease both real Gross Domestic Product (GDP)and the price level.

Question 2

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

Accepted Answer

A) increases in taxes and cuts in government spending 
B) cuts in taxes 
C) increases in taxes and increases in government spending 
D) cuts in taxes and increases in government spending 
A) increases in taxes and cuts in government spending 
B) cuts in taxes 
C) increases in taxes and increases in government spending 
D) cuts in taxes and increases in government spending

Question 3

Fiscal policy is defined as

Accepted Answer

A) the design of a tax system to transfer income from the rich to the poor. 
B) the use of Congressional power to pursue social and political goals. 
C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals. 
D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner. 
A) the design of a tax system to transfer income from the rich to the poor. 
B) the use of Congressional power to pursue social and political goals. 
C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals. 
D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.

Question 4

In the traditional Keynesian model, if the government increases spending, then

Accepted Answer

A) real Gross Domestic Product (GDP)will rise and the price level will remain constant. 
B) real Gross Domestic Product (GDP)will increase and the price level will fall. 
C) both real Gross Domestic Product (GDP)and the price level will rise. 
D) real Gross Domestic Product (GDP)will remain constant and the price level will rise. 
A) real Gross Domestic Product (GDP)will rise and the price level will remain constant. 
B) real Gross Domestic Product (GDP)will increase and the price level will fall. 
C) both real Gross Domestic Product (GDP)and the price level will rise. 
D) real Gross Domestic Product (GDP)will remain constant and the price level will rise.

Question 5

Which of the following is an example of fiscal policy?

Accepted Answer

A) a reduction in the federal funds rate. 
B) a reduction in the money supply. 
C) a reduction in lump-sum taxes. 
D) an increase in the physical stock of capital. 
A) a reduction in the federal funds rate. 
B) a reduction in the money supply. 
C) a reduction in lump-sum taxes. 
D) an increase in the physical stock of capital.

Question 6

-Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD₁ to AD₂. Interest rates have started to rise. Which of the following statements is TRUE in the short run?

Accepted Answer

A) Real GDP will be $14 trillion since the effect of government spending is not influenced by interest rates. 
B) Real GDP will fall back to $11 trillion since the effect that increased government spending has on real GDP is short lived. 
C) Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in interest rates. 
D) Real GDP will end up somewhere between $11 and $14 trillion as businesses and consumers reduce their spending in response to the increase in interest rates. 
A) Real GDP will be $14 trillion since the effect of government spending is not influenced by interest rates. 
B) Real GDP will fall back to $11 trillion since the effect that increased government spending has on real GDP is short lived. 
C) Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in interest rates. 
D) Real GDP will end up somewhere between $11 and $14 trillion as businesses and consumers reduce their spending in response to the increase in interest rates.

Question 7

If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is

Accepted Answer

A) engaging in expansionary fiscal policy by lowering marginal tax rates. 
B) engaging in expansionary fiscal policy of increasing government spending. 
C) lowering marginal tax rates on people and raising them on corporations. 
D) leaving the economy alone and letting the natural forces bring it into a long-run equilibrium. 
A) engaging in expansionary fiscal policy by lowering marginal tax rates. 
B) engaging in expansionary fiscal policy of increasing government spending. 
C) lowering marginal tax rates on people and raising them on corporations. 
D) leaving the economy alone and letting the natural forces bring it into a long-run equilibrium.

Question 8

When private expenditures decrease as a result of increased government spending, this is known as

Accepted Answer

A) the stabilizer effect. 
B) the crowding out effect. 
C) the multiplier effect. 
D) government deficit spending. 
A) the stabilizer effect. 
B) the crowding out effect. 
C) the multiplier effect. 
D) government deficit spending.

Question 9

Suppose that real GDP is initially $13 trillion and the government attempts to increase real GDP to $14 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. How much increase in real government spending could lead to the desired level of real GDP?

Accepted Answer

A) $200 billion 
B) $250 billion 
C) $500 billion 
D) $1 trillion 
A) $200 billion 
B) $250 billion 
C) $500 billion 
D) $1 trillion

Question 10

The Keynesian approach assumes that

Accepted Answer

A) there is no unemployment in the economy. 
B) the economy is self-regulating. 
C) the government budget is always in deficit. 
D) the price level is fixed. 
A) there is no unemployment in the economy. 
B) the economy is self-regulating. 
C) the government budget is always in deficit. 
D) the price level is fixed.

Question 11

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

Accepted Answer

A) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets. 
A) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets.

Question 12

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

Accepted Answer

A) a new cruise missile for the military 
B) expanding the school lunch program 
C) constructing more low income housing 
D) providing textbooks for college students 
A) a new cruise missile for the military 
B) expanding the school lunch program 
C) constructing more low income housing 
D) providing textbooks for college students

Question 13

Explain how fiscal policy can correct a contractionary gap.

Accepted Answer

A contractionary gap can be cl

Question 14

Supply-side economists argue cuts in tax rates

Accepted Answer

A) always reduce tax revenues. 
B) may increase tax revenues. 
C) always increase budget deficits. 
D) have no effect on tax revenues. 
A) always reduce tax revenues. 
B) may increase tax revenues. 
C) always increase budget deficits. 
D) have no effect on tax revenues.

Question 15

An increase in government spending that is not financed by an increase in taxes will cause which of the following?

Accepted Answer

A) an increase in interest rates and an increase in planned investment 
B) an increase in interest rates and a reduction in planned investment 
C) a reduction in interest rates and an increase in planned investment 
D) a reduction in interest rates and a reduction in planned investment 
A) an increase in interest rates and an increase in planned investment 
B) an increase in interest rates and a reduction in planned investment 
C) a reduction in interest rates and an increase in planned investment 
D) a reduction in interest rates and a reduction in planned investment

Question 16

Supply-side economists argue that changes in tax rates cause changes in

Accepted Answer

A) the full-employment level of output. 
B) labor supply. 
C) saving. 
D) all of the above. 
A) the full-employment level of output. 
B) labor supply. 
C) saving. 
D) all of the above.

Question 17

In the short run, expansionary fiscal policy usually will

Accepted Answer

A) increase the price level and increase real GDP. 
B) increase the price level and decrease real GDP. 
C) decrease the price level and increase real GDP. 
D) decrease the price level and decrease real GDP. 
A) increase the price level and increase real GDP. 
B) increase the price level and decrease real GDP. 
C) decrease the price level and increase real GDP. 
D) decrease the price level and decrease real GDP.

Question 18

Discretionary Fiscal policy

Accepted Answer

A) is the use of government spending and tax policies to influence economic growth and inflation. 
B) is the use of regulation to influence economic growth and inflation. 
C) is the purchase and sale of Treasury securities to influence economic growth and inflation. 
D) is the conversion of nominal data to real data. 
A) is the use of government spending and tax policies to influence economic growth and inflation. 
B) is the use of regulation to influence economic growth and inflation. 
C) is the purchase and sale of Treasury securities to influence economic growth and inflation. 
D) is the conversion of nominal data to real data.

Question 19

The crowding-out effect is

Accepted Answer

A) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S. private sector. 
B) the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the U.S. private sector. 
C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S. private sector. 
D) the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the U.S. private sector. 
A) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S. private sector. 
B) the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the U.S. private sector. 
C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S. private sector. 
D) the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the U.S. private sector.

Question 20

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?

Accepted Answer

A) There will be an increase in the interest rate. 
B) There will be a decrease in the interest rate. 
C) The crowding out effect will be cancelled out. 
D) There will be an increase in net exports. 
A) There will be an increase in the interest rate. 
B) There will be a decrease in the interest rate. 
C) The crowding out effect will be cancelled out. 
D) There will be an increase in net exports.

If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

Fiscal policy is defined as

In the traditional Keynesian model, if the government increases spending, then

Which of the following is an example of fiscal policy?

-Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD₁ to AD₂. Interest rates have started to rise. Which of the following statements is TRUE in the short run?

If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is

When private expenditures decrease as a result of increased government spending, this is known as

The Keynesian approach assumes that

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

Explain how fiscal policy can correct a contractionary gap.

Supply-side economists argue cuts in tax rates

An increase in government spending that is not financed by an increase in taxes will cause which of the following?

Supply-side economists argue that changes in tax rates cause changes in

In the short run, expansionary fiscal policy usually will

Discretionary Fiscal policy

The crowding-out effect is

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?

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

If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

Fiscal policy is defined as

In the traditional Keynesian model, if the government increases spending, then

Which of the following is an example of fiscal policy?

-Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD₁ to AD₂. Interest rates have started to rise. Which of the following statements is TRUE in the short run?

If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is

When private expenditures decrease as a result of increased government spending, this is known as

The Keynesian approach assumes that

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

Explain how fiscal policy can correct a contractionary gap.

Supply-side economists argue cuts in tax rates

An increase in government spending that is not financed by an increase in taxes will cause which of the following?

Supply-side economists argue that changes in tax rates cause changes in

In the short run, expansionary fiscal policy usually will

Discretionary Fiscal policy

The crowding-out effect is

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?

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