Question 1

In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT

Accepted Answer

A) a decrease in aggregate demand. 
B) a lower price level. 
C) a decrease in consumption. 
D) lower real GDP. 
A) a decrease in aggregate demand. 
B) a lower price level. 
C) a decrease in consumption. 
D) lower real GDP.

Question 2

Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects?
 What are the possible offsets to the demand-side effect?
 How might supply-side effects change these results?

Accepted Answer

Aggregate demand increases as consumptio

Question 3

-Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can

Accepted Answer

A) boost taxes to shift LRAS through point A. 
B) increase government spending to get the economy to point B. 
C) raise income tax rates to get the economy to point C. 
D) reduce government spending to get the economy to point D. 
A) boost taxes to shift LRAS through point A. 
B) increase government spending to get the economy to point B. 
C) raise income tax rates to get the economy to point C. 
D) reduce government spending to get the economy to point D.

Question 4

Contractionary fiscal policy will most likely

Accepted Answer

A) involve cutting taxes. 
B) raise real GDP. 
C) reduce the price level. 
D) involve increasing government spending. 
A) involve cutting taxes. 
B) raise real GDP. 
C) reduce the price level. 
D) involve increasing government spending.

Question 5

All of the following are automatic fiscal stabilizers EXCEPT

Accepted Answer

A) a congressionally mandated decrease in tax rates to stimulate the economy. 
B) a decrease in unemployment compensation payments during an expansion. 
C) a decrease in overall tax revenues during a recession. 
D) an increase in unemployment expenditures during a recession. 
A) a congressionally mandated decrease in tax rates to stimulate the economy. 
B) a decrease in unemployment compensation payments during an expansion. 
C) a decrease in overall tax revenues during a recession. 
D) an increase in unemployment expenditures during a recession.

Question 6

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

Question 7

Which of the following statements about fiscal policy is TRUE?

Accepted Answer

A) Real Gross Domestic Product (GDP)can be increased above its long-run equilibrium only in the short run. 
B) Real Gross Domestic Product (GDP)can never be increased above its long-run equilibrium, even for a brief period of time. 
C) Government can shift the aggregate demand curve inward by increasing spending. 
D) Government can shift the aggregate demand curve outward by reducing spending. 
A) Real Gross Domestic Product (GDP)can be increased above its long-run equilibrium only in the short run. 
B) Real Gross Domestic Product (GDP)can never be increased above its long-run equilibrium, even for a brief period of time. 
C) Government can shift the aggregate demand curve inward by increasing spending. 
D) Government can shift the aggregate demand curve outward by reducing spending.

Question 8

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

Accepted Answer

A) indirect effect. 
B) interest rate effect. 
C) open-economy effect. 
D) Ricardian equivalence theorem. 
A) indirect effect. 
B) interest rate effect. 
C) open-economy effect. 
D) Ricardian equivalence theorem.

Question 9

What does research tell us about the impact of Ricardian equivalence effects on the economy?

Accepted Answer

A) There is no evidence of any impact of Ricardian equivalence effects. 
B) Ricardian equivalence effects have a huge impact on aggregate demand. 
C) There is a very small impact on both aggregate demand and aggregate supply. 
D) Ricardian equivalence effects may exist, but their magnitudes are unclear. 
A) There is no evidence of any impact of Ricardian equivalence effects. 
B) Ricardian equivalence effects have a huge impact on aggregate demand. 
C) There is a very small impact on both aggregate demand and aggregate supply. 
D) Ricardian equivalence effects may exist, but their magnitudes are unclear.

Question 10

The amount of time it takes Congress to debate the size of a tax cut is known as the

Accepted Answer

A) action time lag. 
B) effect time lag. 
C) recognition time lag. 
D) Ricardian-equivalence time lag. 
A) action time lag. 
B) effect time lag. 
C) recognition time lag. 
D) Ricardian-equivalence time lag.

Question 11

Fiscal policy may end up being destabilizing to an economy because

Accepted Answer

A) there is never a long enough time lag. 
B) the economy is almost always at full employment. 
C) the President may have different goals than Congress. 
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve. 
A) there is never a long enough time lag. 
B) the economy is almost always at full employment. 
C) the President may have different goals than Congress. 
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.

Question 12

The fiscal policy of the United States is

Accepted Answer

A) summarized in the budget of the U.S. federal government. 
B) the sum of the budgets of each state and municipality. 
C) published in the Federal Reserve Bank's Annual Report. 
D) announced by the President in his State of the Union message. 
A) summarized in the budget of the U.S. federal government. 
B) the sum of the budgets of each state and municipality. 
C) published in the Federal Reserve Bank's Annual Report. 
D) announced by the President in his State of the Union message.

Question 13

The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity

Accepted Answer

A) is greater than the effect of a permanent tax cut. 
B) is the same as the effect of a permanent tax cut. 
C) can be greater than or smaller than the effect of a permanent tax cut, depending on how the tax cut affects the government. 
D) is smaller than the effect of a permanent tax cut. 
A) is greater than the effect of a permanent tax cut. 
B) is the same as the effect of a permanent tax cut. 
C) can be greater than or smaller than the effect of a permanent tax cut, depending on how the tax cut affects the government. 
D) is smaller than the effect of a permanent tax cut.

Question 14

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates

Accepted Answer

A) a decrease in aggregate demand. 
B) an increase in aggregate supply. 
C) a decrease in employment. 
D) a decrease in saving. 
A) a decrease in aggregate demand. 
B) an increase in aggregate supply. 
C) a decrease in employment. 
D) a decrease in saving.

Question 15

According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then

Accepted Answer

A) aggregate demand will decrease. 
B) a budget deficit will occur. 
C) a budget surplus will occur. 
D) aggregate demand will increase. 
A) aggregate demand will decrease. 
B) a budget deficit will occur. 
C) a budget surplus will occur. 
D) aggregate demand will increase.

Question 16

Provisions that cause changes in government spending and taxes that do not require action of the President or Congress are called

Accepted Answer

A) discretionary fiscal policy. 
B) discretionary stabilizers. 
C) automatic stabilizers. 
D) private stabilization effects. 
A) discretionary fiscal policy. 
B) discretionary stabilizers. 
C) automatic stabilizers. 
D) private stabilization effects.

Question 17

The crowding-out effect refers to the tendency of expansionary fiscal policy to

Accepted Answer

A) cause decreases in planned investment or planned consumption. 
B) cause households to save less. 
C) replace low-skilled labor with higher-skilled labor. 
D) cause firms to produce beyond capacity. 
A) cause decreases in planned investment or planned consumption. 
B) cause households to save less. 
C) replace low-skilled labor with higher-skilled labor. 
D) cause firms to produce beyond capacity.

Question 18

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD₂. In the end, the aggregate demand curve is still AD₁. A possible reason for this is that

Accepted Answer

A) the economy is already at full employment. 
B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. 
C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. 
D) some of the increased government spending is not counted in GDP. 
A) the economy is already at full employment. 
B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. 
C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. 
D) some of the increased government spending is not counted in GDP.

Question 19

Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct?

Accepted Answer

A) Real GDP will fall more in economy A than in economy B. 
B) Real GDP will fall more in economy B than in economy A. 
C) Real GDP will fall the same in both economies. 
D) The effect on the relative size of the reduction in real GDP in the two economies is ambiguous. 
A) Real GDP will fall more in economy A than in economy B. 
B) Real GDP will fall more in economy B than in economy A. 
C) Real GDP will fall the same in both economies. 
D) The effect on the relative size of the reduction in real GDP in the two economies is ambiguous.

Question 20

The recognition time lag recognizes that it takes time

Accepted Answer

A) to collect information about the state of the economy. 
B) to get politicians to agree on the best policy to enact. 
C) for any change in policy to take effect and for people to recognize that the policies are effective. 
D) for the politicians to enact the policy once the need for change has been recognized. 
A) to collect information about the state of the economy. 
B) to get politicians to agree on the best policy to enact. 
C) for any change in policy to take effect and for people to recognize that the policies are effective. 
D) for the politicians to enact the policy once the need for change has been recognized.

In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT

Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?

-Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can

Contractionary fiscal policy will most likely

All of the following are automatic fiscal stabilizers EXCEPT

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

Which of the following statements about fiscal policy is TRUE?

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

What does research tell us about the impact of Ricardian equivalence effects on the economy?

The amount of time it takes Congress to debate the size of a tax cut is known as the

Fiscal policy may end up being destabilizing to an economy because

The fiscal policy of the United States is

The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates

According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then

Provisions that cause changes in government spending and taxes that do not require action of the President or Congress are called

The crowding-out effect refers to the tendency of expansionary fiscal policy to

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD₂. In the end, the aggregate demand curve is still AD₁. A possible reason for this is that

The recognition time lag recognizes that it takes time

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

In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT

Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?

-Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can

Contractionary fiscal policy will most likely

All of the following are automatic fiscal stabilizers EXCEPT

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

Which of the following statements about fiscal policy is TRUE?

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

What does research tell us about the impact of Ricardian equivalence effects on the economy?

The amount of time it takes Congress to debate the size of a tax cut is known as the

Fiscal policy may end up being destabilizing to an economy because

The fiscal policy of the United States is

The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates

According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then

Provisions that cause changes in government spending and taxes that do not require action of the President or Congress are called

The crowding-out effect refers to the tendency of expansionary fiscal policy to

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD₂. In the end, the aggregate demand curve is still AD₁. A possible reason for this is that

The recognition time lag recognizes that it takes time

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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