Question 1

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

Accepted Answer

A) increase spending less than the simplest Keynesian model would predict. 
B) increase spending more than the simplest Keynesian model would predict. 
C) reduce taxes rather than increase government spending. 
D) both reduce taxes and reduce spending to be able to achieve full employment. 
A) increase spending less than the simplest Keynesian model would predict. 
B) increase spending more than the simplest Keynesian model would predict. 
C) reduce taxes rather than increase government spending. 
D) both reduce taxes and reduce spending to be able to achieve full employment.

Question 2

The Laffer curve indicates which of the following?

Accepted Answer

A) There is an ideal interest rate that will maximize investment spending. 
B) There is an ideal amount of government spending that will lead to full national employment. 
C) There is an ideal tax-revenue-maximizing tax rate for government taxes. 
D) There is an ideal tariff rate that will maximize exports and minimize imports. 
A) There is an ideal interest rate that will maximize investment spending. 
B) There is an ideal amount of government spending that will lead to full national employment. 
C) There is an ideal tax-revenue-maximizing tax rate for government taxes. 
D) There is an ideal tariff rate that will maximize exports and minimize imports.

Question 3

What are the various time lags that affect discretionary fiscal policy, and what are their effects?

Accepted Answer

The recognition lag refers to the time i

Question 4

According to David Ricardo, an increase in government spending without any tax increase will not increase aggregate demand because

Accepted Answer

A) consumers will consume less and save more to prepare for increased taxes in the future. 
B) the private sector is more likely than the public sector to spend any extra income on national defense. 
C) consumers will increase their consumption proportionately more than Keynesian economists believe they will. 
D) consumers will save less than they otherwise would have. 
A) consumers will consume less and save more to prepare for increased taxes in the future. 
B) the private sector is more likely than the public sector to spend any extra income on national defense. 
C) consumers will increase their consumption proportionately more than Keynesian economists believe they will. 
D) consumers will save less than they otherwise would have.

Question 5

During normal times

Accepted Answer

A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. 
B) fiscal policy can immediately correct problems in the economy. 
C) the Ricardian equivalence theorem makes fiscal policy very effective. 
D) fiscal policy is not effective because of the recognition time lag. 
A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. 
B) fiscal policy can immediately correct problems in the economy. 
C) the Ricardian equivalence theorem makes fiscal policy very effective. 
D) fiscal policy is not effective because of the recognition time lag.

Question 6

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

Accepted Answer

A) there being no government role in the economy. 
B) an active government role in the economy. 
C) the need for autocratic rule. 
D) the long-run nature of the economy. 
A) there being no government role in the economy. 
B) an active government role in the economy. 
C) the need for autocratic rule. 
D) the long-run nature of the economy.

Question 7

Which of the following are lags that fiscal policy makers must cope with?

Accepted Answer

A) recognition time lags 
B) action time lags 
C) effect time lags 
D) All of the above are correct. 
A) recognition time lags 
B) action time lags 
C) effect time lags 
D) All of the above are correct.

Question 8

-Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?

Accepted Answer

A) Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B. 
B) Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending. 
C) Point C is a long-run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B. 
D) Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B. 
A) Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B. 
B) Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending. 
C) Point C is a long-run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B. 
D) Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B.

Question 9

The traditional Keynesian approach to fiscal policy assumes

Accepted Answer

A) the price level is constant. 
B) government expenditures are often substitutes for private expenditures. 
C) the Ricardian equivalence theorem is correct. 
D) the validity of supply-side economics. 
A) the price level is constant. 
B) government expenditures are often substitutes for private expenditures. 
C) the Ricardian equivalence theorem is correct. 
D) the validity of supply-side economics.

Question 10

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Accepted Answer

A) increase real Gross Domestic Product (GDP)in both the short and long run. 
B) decrease real Gross Domestic Product (GDP)in both the short and long run. 
C) decrease real Gross Domestic Product (GDP)in the short run, but increase it in the long run. 
D) have no effect on aggregate demand. 
A) increase real Gross Domestic Product (GDP)in both the short and long run. 
B) decrease real Gross Domestic Product (GDP)in both the short and long run. 
C) decrease real Gross Domestic Product (GDP)in the short run, but increase it in the long run. 
D) have no effect on aggregate demand.

Question 11

Fiscal policy involves which of the following?

Accepted Answer

A) tax policy 
B) interest rates 
C) buying and selling government-agency bonds 
D) none of the above 
A) tax policy 
B) interest rates 
C) buying and selling government-agency bonds 
D) none of the above

Question 12

The various time lags involved with fiscal policy imply that

Accepted Answer

A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. 
B) fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. 
C) fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over. 
D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP. 
A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. 
B) fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. 
C) fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over. 
D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP.

Question 13

The Laffer curve

Accepted Answer

A) initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rates lead to decreasing tax revenue. 
B) slopes downward throughout its range since increasing tax rates will always lead to decreases in tax revenue. 
C) slopes upward throughout its range since increasing tax rates will always lead to increases in tax revenue. 
D) is horizontal because tax revenue is independent of the rate of interest. 
A) initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rates lead to decreasing tax revenue. 
B) slopes downward throughout its range since increasing tax rates will always lead to decreases in tax revenue. 
C) slopes upward throughout its range since increasing tax rates will always lead to increases in tax revenue. 
D) is horizontal because tax revenue is independent of the rate of interest.

Question 14

-Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?

Accepted Answer

A) Reduce taxes to stimulate investment, consumption and net exports. 
B) Increase government spending while holding taxes constant. 
C) Engage in contractionary fiscal policy by reducing government spending. 
D) Reduce the interest rate to stimulate investment minimizing the crowding out effect. 
A) Reduce taxes to stimulate investment, consumption and net exports. 
B) Increase government spending while holding taxes constant. 
C) Engage in contractionary fiscal policy by reducing government spending. 
D) Reduce the interest rate to stimulate investment minimizing the crowding out effect.

Question 15

Which one of the following statements is NOT true?

Accepted Answer

A) Expansionary fiscal policy is employed to offset recessionary gaps. 
B) Expansionary fiscal policy has an effect on interest rates. 
C) Crowding out dilutes the effect of expansionary fiscal policy. 
D) When crowding out occurs, fiscal policy is more effective. 
A) Expansionary fiscal policy is employed to offset recessionary gaps. 
B) Expansionary fiscal policy has an effect on interest rates. 
C) Crowding out dilutes the effect of expansionary fiscal policy. 
D) When crowding out occurs, fiscal policy is more effective.

Question 16

Supply-side economics focuses on tax cuts to stimulate

Accepted Answer

A) aggregate demand by reducing saving. 
B) aggregate supply by increasing production. 
C) government spending. 
D) household consumption. 
A) aggregate demand by reducing saving. 
B) aggregate supply by increasing production. 
C) government spending. 
D) household consumption.

Question 17

Which of the following actions could be undertaken if the government wants to close a recessionary 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 18

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

Accepted Answer

A) monetary policy. 
B) discretionary fiscal policy. 
C) a Ricardian policy. 
D) a laissez-faire policy. 
A) monetary policy. 
B) discretionary fiscal policy. 
C) a Ricardian policy. 
D) a laissez-faire policy.

Question 19

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

Accepted Answer

A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures. 
B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present. 
C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present. 
D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending. 
A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures. 
B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present. 
C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present. 
D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending.

Question 20

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

Accepted Answer

A) less than $100 billion because some people will respond by working less. 
B) exactly $100 billion because there are no offsetting factors to a tax increase. 
C) more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. 
D) more than $100 billion because interest rates will also be affected. 
A) less than $100 billion because some people will respond by working less. 
B) exactly $100 billion because there are no offsetting factors to a tax increase. 
C) more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. 
D) more than $100 billion because interest rates will also be affected.

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

The Laffer curve indicates which of the following?

What are the various time lags that affect discretionary fiscal policy, and what are their effects?

According to David Ricardo, an increase in government spending without any tax increase will not increase aggregate demand because

During normal times

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

Which of the following are lags that fiscal policy makers must cope with?

-Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?

The traditional Keynesian approach to fiscal policy assumes

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Fiscal policy involves which of the following?

The various time lags involved with fiscal policy imply that

The Laffer curve

-Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?

Which one of the following statements is NOT true?

Supply-side economics focuses on tax cuts to stimulate

Which of the following actions could be undertaken if the government wants to close a recessionary gap?

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

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

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

The Laffer curve indicates which of the following?

What are the various time lags that affect discretionary fiscal policy, and what are their effects?

According to David Ricardo, an increase in government spending without any tax increase will not increase aggregate demand because

During normal times

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

Which of the following are lags that fiscal policy makers must cope with?

-Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?

The traditional Keynesian approach to fiscal policy assumes

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Fiscal policy involves which of the following?

The various time lags involved with fiscal policy imply that

The Laffer curve

-Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?

Which one of the following statements is NOT true?

Supply-side economics focuses on tax cuts to stimulate

Which of the following actions could be undertaken if the government wants to close a recessionary gap?

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

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