Question 1

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 2

If an increase in government spending causes an increase in government borrowing, this could induce

Accepted Answer

A)  an increase in interest rates, which would cause private domestic investment to fall. 
B)  an increase in interest rates, which would cause private domestic investment to rise. 
C)  an increase in interest rates but no effect on private domestic investment. 
D)  a decrease in interest rates, which would cause private domestic investment to rise. 
A)  an increase in interest rates, which would cause private domestic investment to fall. 
B)  an increase in interest rates, which would cause private domestic investment to rise. 
C)  an increase in interest rates but no effect on private domestic investment. 
D)  a decrease in interest rates, which would cause private domestic investment to rise.

Question 3

Discretionary fiscal policy

Accepted Answer

A)  is not very effective in influencing real GDP during normal times because of time lags. 
B)  can be very effective in influencing real GDP during abnormal times, such as when a nation is at war. 
C)  may reassure investors and consumers that the federal government will be able to avert a major economic downturn. 
D)  all of the above 
A)  is not very effective in influencing real GDP during normal times because of time lags. 
B)  can be very effective in influencing real GDP during abnormal times, such as when a nation is at war. 
C)  may reassure investors and consumers that the federal government will be able to avert a major economic downturn. 
D)  all of the above

Question 4

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Accepted Answer

A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  Ricardian equivalence. 
D)  Recognition time lag. 
A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  Ricardian equivalence. 
D)  Recognition time lag.

Question 5

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Accepted Answer

A)  a tax decrease passed into law by Congress 
B)  an increase in the money supply by the Federal Reserve 
C)  a decrease in government expenditures approved by Congress 
D)  an agreement among major banks to raise interest rates 
A)  a tax decrease passed into law by Congress 
B)  an increase in the money supply by the Federal Reserve 
C)  a decrease in government expenditures approved by Congress 
D)  an agreement among major banks to raise interest rates

Question 6

How might fiscal policy be used to correct an inflationary gap?

Accepted Answer

A)  The exchange rate would be adjusted to encourage imports. 
B)  The exchange rate would be adjusted to discourage imports. 
C)  The interest rate would be adjusted to encourage saving. 
D)  Taxes would be increased to reduce aggregate demand. 
A)  The exchange rate would be adjusted to encourage imports. 
B)  The exchange rate would be adjusted to discourage imports. 
C)  The interest rate would be adjusted to encourage saving. 
D)  Taxes would be increased to reduce aggregate demand.

Question 7

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 8

Suppose that real GDP is initially $14 trillion and the government attempts to increase real GDP to $15 trillion. The marginal propensity to consume is 0.8, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. Which increase in government spending below could yield the desired level of real GDP?

Accepted Answer

A)  $100 billion 
B)  $125 billion 
C)  $200 billion 
D)  $400 billion 
A)  $100 billion 
B)  $125 billion 
C)  $200 billion 
D)  $400 billion

Question 9

If the government increases spending while holding taxes constant, we expect

Accepted Answer

A)  an increase in investment spending by businesses too, as they anticipate future economic growth. 
B)  a decrease in real saving as consumers follow suit and also increase borrowing. 
C)  planned real investment spending by businesses to increase. 
D)  interest rates to rise. 
A)  an increase in investment spending by businesses too, as they anticipate future economic growth. 
B)  a decrease in real saving as consumers follow suit and also increase borrowing. 
C)  planned real investment spending by businesses to increase. 
D)  interest rates to rise.

Question 10

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 11

By definition, a direct expenditure offset will occur whenever

Accepted Answer

A)  the government increases spending in an area that competes with the private sector. 
B)  the government increases spending for the military. 
C)  the interest rate rises. 
D)  the interest rate falls. 
A)  the government increases spending in an area that competes with the private sector. 
B)  the government increases spending for the military. 
C)  the interest rate rises. 
D)  the interest rate falls.

Question 12

Once either expansionary or contractionary fiscal policy has been undertaken,

Accepted Answer

A)  aggregate demand will respond quickly and the problems in the economy will be corrected. 
B)  aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. 
C)  a time lag exists between implementation and the results of the policy. 
D)  taxes will need to be adjusted because of the recognition time lag. 
A)  aggregate demand will respond quickly and the problems in the economy will be corrected. 
B)  aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. 
C)  a time lag exists between implementation and the results of the policy. 
D)  taxes will need to be adjusted because of the recognition time lag.

Question 13

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.

Question 14

What is discretionary fiscal policy and what is its purpose?

Accepted Answer

Discretionary fiscal policy is the delib

Question 15

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 16

The action time lag is the time period that elapses

Accepted Answer

A)  between when an economic problem manifests itself and it is officially acknowledged. 
B)  between the recognition of an economic problem and implementing policies to solve it. 
C)  between implementing policies to solve an economic problem and when the results of that policy can be measured. 
D)  between the beginning of the budgetary process and the final budget resolution. 
A)  between when an economic problem manifests itself and it is officially acknowledged. 
B)  between the recognition of an economic problem and implementing policies to solve it. 
C)  between implementing policies to solve an economic problem and when the results of that policy can be measured. 
D)  between the beginning of the budgetary process and the final budget resolution.

Question 17

What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times?

Accepted Answer

During normal times, discretionary fisca

Question 18

One part of the supply-side argument is that

Accepted Answer

A)  lower marginal tax rates are required to induce Congress to reduce government spending. 
B)  lower marginal tax rates can increase total tax revenues. 
C)  the marginal tax rate should be set at 50 percent. 
D)  the relevant aggregate supply curve is close to horizontal. 
A)  lower marginal tax rates are required to induce Congress to reduce government spending. 
B)  lower marginal tax rates can increase total tax revenues. 
C)  the marginal tax rate should be set at 50 percent. 
D)  the relevant aggregate supply curve is close to horizontal.

Question 19

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 20

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as

Accepted Answer

A)  the marginal propensity to consume. 
B)  the Ricardian equivalence theorem. 
C)  planned tax policy. 
D)  Congressional Tax policy. 
A)  the marginal propensity to consume. 
B)  the Ricardian equivalence theorem. 
C)  planned tax policy. 
D)  Congressional Tax policy.

Exam 13: Fiscal Policy

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

If an increase in government spending causes an increase in government borrowing, this could induce

Discretionary fiscal policy

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

How might fiscal policy be used to correct an inflationary gap?

If the government increases spending while holding taxes constant, we expect

Fiscal policy may end up being destabilizing to an economy because

By definition, a direct expenditure offset will occur whenever

Once either expansionary or contractionary fiscal policy has been undertaken,

The recognition time lag recognizes that it takes time

What is discretionary fiscal policy and what is its purpose?

Contractionary fiscal policy will most likely

The action time lag is the time period that elapses

What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times?

One part of the supply-side argument is that

Fiscal policy involves which of the following?

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, is known as

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