Question 1

Suppose the government increases lump-sum taxes. This causes

Accepted Answer

A)  disposable income to decrease, which causes consumption spending to decrease and aggregate demand to decrease. 
B)  government spending to decrease, which causes aggregate demand to decrease. 
C)  consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. 
D)  disposable income to decrease, which causes aggregate supply to decrease. 
A)  disposable income to decrease, which causes consumption spending to decrease and aggregate demand to decrease. 
B)  government spending to decrease, which causes aggregate demand to decrease. 
C)  consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. 
D)  disposable income to decrease, which causes aggregate supply to decrease. A

Question 2

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 B

Question 3

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. B

Question 4

In the traditional Keynesian model, if the government cuts taxes, then

Accepted Answer

A)  both consumption and real Gross Domestic Product (GDP) will increase. 
B)  both consumption and real Gross Domestic Product (GDP) will decrease. 
C)  consumption will increase but Gross Domestic Product (GDP) will decrease. 
D)  consumption will decrease but Gross Domestic Product (GDP) will increase. 
A)  both consumption and real Gross Domestic Product (GDP) will increase. 
B)  both consumption and real Gross Domestic Product (GDP) will decrease. 
C)  consumption will increase but Gross Domestic Product (GDP) will decrease. 
D)  consumption will decrease but Gross Domestic Product (GDP) will increase.

Question 5

The amount of time that it takes to identify a national economic problem 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 6

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 7

-Refer to the above figure. A budget deficit occurs when real national income is

Accepted Answer

A)  Y1 
B)  Y2 
C)  Y3 
D)  None of the above: cannot be determined given the information 
A)  Y1 
B)  Y2 
C)  Y3 
D)  None of the above: cannot be determined given the information

Question 8

Supply-side economists argue that

Accepted Answer

A)  lower tax rates sometimes lead to increased tax revenues. 
B)  higher tax rates lead to increased productivity. 
C)  lower tax rates lead to a drop in real Gross Domestic Product (GDP). 
D)  lower tax rates always lead to lower tax revenues. 
A)  lower tax rates sometimes lead to increased tax revenues. 
B)  higher tax rates lead to increased productivity. 
C)  lower tax rates lead to a drop in real Gross Domestic Product (GDP). 
D)  lower tax rates always lead to lower tax revenues.

Question 9

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 10

What are direct expenditure offsets and how do they influence the effects of fiscal policy?

Accepted Answer

When government spending competes with t

Question 11

-Refer to the above figure. If the economy is currently at point C, then an increase in taxes will lead to

Accepted Answer

A)  an increase in the price and an increase in real GDP. 
B)  an increase in the price and a decrease in real GDP. 
C)  a decrease in the price and a decrease in real GDP. 
D)  a decrease in the price and an increase in real GDP. 
A)  an increase in the price and an increase in real GDP. 
B)  an increase in the price and a decrease in real GDP. 
C)  a decrease in the price and a decrease in real GDP. 
D)  a decrease in the price and an increase in real GDP.

Question 12

The crowding out effect of expansionary fiscal policy refers to which of the following?

Accepted Answer

A)  a reduction in private sector planned investment 
B)  a reduction in the stock of inventories 
C)  the reduction in the size of the budget deficit 
D)  the reduction in the size of the recessionary gap 
A)  a reduction in private sector planned investment 
B)  a reduction in the stock of inventories 
C)  the reduction in the size of the budget deficit 
D)  the reduction in the size of the recessionary gap

Question 13

Fiscal policy includes all of the following EXCEPT

Accepted Answer

A)  changing taxes. 
B)  changing government spending. 
C)  policies that influence aggregate demand. 
D)  policies that influence the rate of growth of the quantity of money in circulation. 
A)  changing taxes. 
B)  changing government spending. 
C)  policies that influence aggregate demand. 
D)  policies that influence the rate of growth of the quantity of money in circulation.

Question 14

-Refer to the above figure. Which panel is consistent with the Laffer curve?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 15

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 16

Automatic stabilizers are so-named because

Accepted Answer

A)  they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits. 
B)  they occur automatically when real GDP changes. 
C)  the policy suggestions of the Council of Economic Advisors are automatically followed. 
D)  the policy suggestions of the Office of Management and Budget are automatically followed. 
A)  they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits. 
B)  they occur automatically when real GDP changes. 
C)  the policy suggestions of the Council of Economic Advisors are automatically followed. 
D)  the policy suggestions of the Office of Management and Budget are automatically followed.

Question 17

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

Accepted Answer

A)  the C + I + G + X line will shift down but the aggregate demand curve will not shift. 
B)  the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. 
C)  the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. 
D)  the C + I + G + X line will shift up but the aggregate demand curve will not shift. 
A)  the C + I + G + X line will shift down but the aggregate demand curve will not shift. 
B)  the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. 
C)  the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. 
D)  the C + I + G + X line will shift up but the aggregate demand curve will not shift.

Question 18

Deficit financing

Accepted Answer

A)  is when the government adjusts taxes to raise money to pay for government projects. 
B)  is the mechanism behind the Laffer curve. 
C)  is how the automatic stabilizers work. 
D)  is when discretionary fiscal policy leads to spending more than is collected in taxes. 
A)  is when the government adjusts taxes to raise money to pay for government projects. 
B)  is the mechanism behind the Laffer curve. 
C)  is how the automatic stabilizers work. 
D)  is when discretionary fiscal policy leads to spending more than is collected in taxes.

Question 19

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 20

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.

Exam 13: Fiscal Policy

Suppose the government increases lump-sum taxes. This causes

During which time will fiscal policy be the most effective?

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

In the traditional Keynesian model, if the government cuts taxes, then

The amount of time that it takes to identify a national economic problem is

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

-Refer to the above figure. A budget deficit occurs when real national income is

Supply-side economists argue that

All of the following are automatic stabilizers EXCEPT

What are direct expenditure offsets and how do they influence the effects of fiscal policy?

-Refer to the above figure. If the economy is currently at point C, then an increase in taxes will lead to

The crowding out effect of expansionary fiscal policy refers to which of the following?

Fiscal policy includes all of the following EXCEPT

-Refer to the above figure. Which panel is consistent with the Laffer curve?

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

Automatic stabilizers are so-named because

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

Deficit financing

Fiscal policy time lags tend to be

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

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