Question 1

According to the Keynesian approach, an increase in taxes

Accepted Answer

A)  will reduce consumption exactly by the amount of the taxes. 
B)  will reduce consumption by an amount less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will increase consumption, as the government will spend the extra tax revenue and that increases consumption. 
A)  will reduce consumption exactly by the amount of the taxes. 
B)  will reduce consumption by an amount less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will increase consumption, as the government will spend the extra tax revenue and that increases consumption.

Question 2

-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 3

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

Question 4

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Accepted Answer

A)  increase aggregate demand. 
B)  decrease aggregate demand. 
C)  have no effect on aggregate demand. 
D)  affect only aggregate supply. 
A)  increase aggregate demand. 
B)  decrease aggregate demand. 
C)  have no effect on aggregate demand. 
D)  affect only aggregate supply.

Question 5

Which of the following is NOT related to fiscal policy?

Accepted Answer

A)  passage of new securities laws 
B)  decreasing marginal tax rates 
C)  reducing the budget deficit 
D)  increasing government expenditures 
A)  passage of new securities laws 
B)  decreasing marginal tax rates 
C)  reducing the budget deficit 
D)  increasing government expenditures

Question 6

Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy.

Accepted Answer

@#IMG-DLM& See the above figure. The original equi

Question 7

Which of the following conditions describes a recessionary gap?

Accepted Answer

A)  The short-run equilibrium level of real GDP is above the long-run level of real GDP. 
B)  The short-run equilibrium level of real GDP is below the long-run level of real GDP. 
C)  The actual interest rate is above the equilibrium interest rate. 
D)  The actual interest rate is below the equilibrium interest rate. 
A)  The short-run equilibrium level of real GDP is above the long-run level of real GDP. 
B)  The short-run equilibrium level of real GDP is below the long-run level of real GDP. 
C)  The actual interest rate is above the equilibrium interest rate. 
D)  The actual interest rate is below the equilibrium interest rate.

Question 8

Which one of the following is true about the effects of fiscal policy?

Accepted Answer

A)  A decrease government spending will increase aggregate supply. 
B)  A tax change does not have any direct or indirect effects on aggregate demand. 
C)  A decrease in government spending will decrease aggregate demand. 
D)  An increase in government spending will reduce aggregate demand. 
A)  A decrease government spending will increase aggregate supply. 
B)  A tax change does not have any direct or indirect effects on aggregate demand. 
C)  A decrease in government spending will decrease aggregate demand. 
D)  An increase in government spending will reduce aggregate demand.

Question 9

The existence of automatic stabilizers will

Accepted Answer

A)  reduce the recognition lag of discretionary fiscal policy. 
B)  eliminate recessions. 
C)  reduce the size of recessionary and inflationary gaps. 
D)  cause the effects of shocks to aggregate demand to have a larger effect on GDP. 
A)  reduce the recognition lag of discretionary fiscal policy. 
B)  eliminate recessions. 
C)  reduce the size of recessionary and inflationary gaps. 
D)  cause the effects of shocks to aggregate demand to have a larger effect on GDP.

Question 10

The changing of government expenditures or taxes to achieve national economic goals is

Accepted Answer

A)  discretionary fiscal policy. 
B)  automatic fiscal policy. 
C)  recessionary fiscal policy. 
D)  inflationary fiscal policy. 
A)  discretionary fiscal policy. 
B)  automatic fiscal policy. 
C)  recessionary fiscal policy. 
D)  inflationary fiscal policy.

Question 11

In the traditional Keynesian model, an increase in government spending

Accepted Answer

A)  causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. 
B)  causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. 
C)  causes the C + I + G + X line to shift upward by more than the increase in government spending. 
D)  causes no change in the C + I + G + X line. 
A)  causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. 
B)  causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. 
C)  causes the C + I + G + X line to shift upward by more than the increase in government spending. 
D)  causes no change in the C + I + G + X line.

Question 12

When fiscal policy is used, time lags are variable and last anywhere from

Accepted Answer

A)  one to three weeks. 
B)  one to three months. 
C)  one to three years. 
D)  one to three decades. 
A)  one to three weeks. 
B)  one to three months. 
C)  one to three years. 
D)  one to three decades.

Question 13

When the government cuts taxes or increases government spending

Accepted Answer

A)  the long-run aggregate supply curve shifts to the left. 
B)  the short-run aggregate supply curve shifts to the left. 
C)  the aggregate demand curve shifts to the left. 
D)  the aggregate demand curve shifts to the right. 
A)  the long-run aggregate supply curve shifts to the left. 
B)  the short-run aggregate supply curve shifts to the left. 
C)  the aggregate demand curve shifts to the left. 
D)  the aggregate demand curve shifts to the right.

Question 14

The traditional Keynesian approach to fiscal policy assumes that

Accepted Answer

A)  the effect of unemployment compensation is to destabilize the economy. 
B)  an equal income distribution ensures a stable economy. 
C)  consumers spend more when their incomes are higher. 
D)  cutting taxes is a more effective way to stimulate the economy than is increasing government spending. 
A)  the effect of unemployment compensation is to destabilize the economy. 
B)  an equal income distribution ensures a stable economy. 
C)  consumers spend more when their incomes are higher. 
D)  cutting taxes is a more effective way to stimulate the economy than is increasing government spending.

Question 15

A decrease in taxes will have no effect on real GDP if

Accepted Answer

A)  people look at changes in taxes only in the present. 
B)  there is no crowding out. 
C)  the Ricardian equivalence theorem holds. 
D)  the tax decrease is offset by an increase in government spending. 
A)  people look at changes in taxes only in the present. 
B)  there is no crowding out. 
C)  the Ricardian equivalence theorem holds. 
D)  the tax decrease is offset by an increase in government spending.

Question 16

Fiscal policy during periods of relatively low unemployment and low inflation have

Accepted Answer

A)  little effect due to time lags and the crowding-out effect. 
B)  significant effect due to the timely intervention of the president and congress. 
C)  significant effect because the changes in fiscal policy gives investors confidence in the economy. 
D)  little effect because the global market makes up fifty percent of aggregate spending. 
A)  little effect due to time lags and the crowding-out effect. 
B)  significant effect due to the timely intervention of the president and congress. 
C)  significant effect because the changes in fiscal policy gives investors confidence in the economy. 
D)  little effect because the global market makes up fifty percent of aggregate spending.

Question 17

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

Accepted Answer

A)  an increase in aggregate demand equivalent to the full impact of all of the coupons redeemable. 
B)  no increase in aggregate demand due to the Ricardian equivalence theorem. 
C)  no increase in aggregate demand because there would be no direct expenditure offset. 
D)  an increase in aggregate demand but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset. 
A)  an increase in aggregate demand equivalent to the full impact of all of the coupons redeemable. 
B)  no increase in aggregate demand due to the Ricardian equivalence theorem. 
C)  no increase in aggregate demand because there would be no direct expenditure offset. 
D)  an increase in aggregate demand but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset.

Question 18

-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to   , but the increase in spending only shifts the aggregate demand curve to   , then

Accepted Answer

A)  complete crowding out has occurred. 
B)  some crowding out has occurred. 
C)  the increased borrowing caused interest rates to fall. 
D)  the short-run aggregate supply curve is steeper than the figure indicates. 
A)  complete crowding out has occurred. 
B)  some crowding out has occurred. 
C)  the increased borrowing caused interest rates to fall. 
D)  the short-run aggregate supply curve is steeper than the figure indicates.

Question 19

Supply-side theory asserts that high marginal tax rates

Accepted Answer

A)  encourage private saving. 
B)  encourage business investment. 
C)  discourage government expenditures. 
D)  discourage work effort. 
A)  encourage private saving. 
B)  encourage business investment. 
C)  discourage government expenditures. 
D)  discourage work effort.

Question 20

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.

Exam 13: Fiscal Policy

According to the Keynesian approach, an increase in taxes

-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?

Supply-side economics focuses on tax cuts to stimulate

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Which of the following is NOT related to fiscal policy?

Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy.

Which of the following conditions describes a recessionary gap?

Which one of the following is true about the effects of fiscal policy?

The existence of automatic stabilizers will

The changing of government expenditures or taxes to achieve national economic goals is

In the traditional Keynesian model, an increase in government spending

When fiscal policy is used, time lags are variable and last anywhere from

When the government cuts taxes or increases government spending

The traditional Keynesian approach to fiscal policy assumes that

A decrease in taxes will have no effect on real GDP if

Fiscal policy during periods of relatively low unemployment and low inflation have

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to , but the increase in spending only shifts the aggregate demand curve to , then

Supply-side theory asserts that high marginal tax rates

During normal times,

The Nature of Economics

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