Question 1

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

Accepted Answer

A)  real Gross Domestic Product (GDP) will rise and the price level will remain constant. 
B)  real Gross Domestic Product (GDP) will increase and the price level will fall. 
C)  both real Gross Domestic Product (GDP) and the price level will rise. 
D)  real Gross Domestic Product (GDP) will remain constant and the price level will rise. 
A)  real Gross Domestic Product (GDP) will rise and the price level will remain constant. 
B)  real Gross Domestic Product (GDP) will increase and the price level will fall. 
C)  both real Gross Domestic Product (GDP) and the price level will rise. 
D)  real Gross Domestic Product (GDP) will remain constant and the price level will rise.

Question 2

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 3

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

Accepted Answer

A)  Increase government spending. 
B)  Decrease interest rates. 
C)  Increase the money supply. 
D)  all of the above 
A)  Increase government spending. 
B)  Decrease interest rates. 
C)  Increase the money supply. 
D)  all of the above

Question 4

-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 5

Fiscal policy is defined as

Accepted Answer

A)  the design of a tax system to transfer income from the rich to the poor. 
B)  the use of Congressional power to pursue social and political goals. 
C)  the discretionary changing of government expenditures and/or taxes to achieve national economic goals. 
D)  the use of the taxing power of the government to redistribute wealth in a socially acceptable manner. 
A)  the design of a tax system to transfer income from the rich to the poor. 
B)  the use of Congressional power to pursue social and political goals. 
C)  the discretionary changing of government expenditures and/or taxes to achieve national economic goals. 
D)  the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.

Question 6

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap?

Accepted Answer

A)  An increase in government spending 
B)  An increase in taxes 
C)  A decrease in interest rates 
D)  An increase in the money supply 
A)  An increase in government spending 
B)  An increase in taxes 
C)  A decrease in interest rates 
D)  An increase in the money supply

Question 7

When there is an interval between when the fiscal policy changes and corresponding changes in aggregate spending, we have a(n)

Accepted Answer

A)  aggregate time lag. 
B)  action time lag. 
C)  recognition time lag. 
D)  effect time lag. 
A)  aggregate time lag. 
B)  action time lag. 
C)  recognition time lag. 
D)  effect time lag.

Question 8

What do automatic stabilizers attempt to stabilize?

Accepted Answer

A)  long-run aggregate supply 
B)  aggregate demand 
C)  exports 
D)  imports 
A)  long-run aggregate supply 
B)  aggregate demand 
C)  exports 
D)  imports

Question 9

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 10

Expansionary fiscal policy is used to

Accepted Answer

A)  combat inflation. 
B)  combat recessions. 
C)  encourage private saving. 
D)  make businesses more efficient. 
A)  combat inflation. 
B)  combat recessions. 
C)  encourage private saving. 
D)  make businesses more efficient.

Question 11

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 12

Other things being equal, a reduction in taxes will

Accepted Answer

A)  lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. 
B)  influence the short run aggregate supply curve but not the aggregate demand curve. 
C)  lead to a corresponding reduction in interest rates increasing the crowding out effect. 
D)  cause an increase in aggregate demand due to increases in consumption, investment, or net exports. 
A)  lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. 
B)  influence the short run aggregate supply curve but not the aggregate demand curve. 
C)  lead to a corresponding reduction in interest rates increasing the crowding out effect. 
D)  cause an increase in aggregate demand due to increases in consumption, investment, or net exports.

Question 13

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 14

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

Accepted Answer

A)  reduce aggregate demand by cutting government spending or raising taxes. 
B)  reduce aggregate demand by increasing government spending or cutting taxes. 
C)  increase aggregate supply by cutting government spending or raising taxes. 
D)  increase aggregate supply by increasing government spending or lowering taxes. 
A)  reduce aggregate demand by cutting government spending or raising taxes. 
B)  reduce aggregate demand by increasing government spending or cutting taxes. 
C)  increase aggregate supply by cutting government spending or raising taxes. 
D)  increase aggregate supply by increasing government spending or lowering taxes.

Question 15

When it takes time for the president and Congress to change fiscal policy to act on economic data, we have a(n)

Accepted Answer

A)  aggregate time lag. 
B)  action time lag. 
C)  recognition time lag. 
D)  effect time lag. 
A)  aggregate time lag. 
B)  action time lag. 
C)  recognition time lag. 
D)  effect time lag.

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 balanced-budget multiplier is equal to

Accepted Answer

A)  the percentage increase in government expenditures. 
B)  the reciprocal of the increase in government expenditures. 
C)  the percentage increase in taxes. 
D)  1. 
A)  the percentage increase in government expenditures. 
B)  the reciprocal of the increase in government expenditures. 
C)  the percentage increase in taxes. 
D)  1.

Question 18

In the traditional Keynesian model, an income tax cut raises real GDP because

Accepted Answer

A)  consumption spending depends negatively on after-tax income. 
B)  consumption spending depends positively on after-tax income. 
C)  consumption spending is not related to after-tax income. 
D)  of the crowding-out effects of taxes. 
A)  consumption spending depends negatively on after-tax income. 
B)  consumption spending depends positively on after-tax income. 
C)  consumption spending is not related to after-tax income. 
D)  of the crowding-out effects of taxes.

Question 19

According to supply-side economics, lower tax rates on wages

Accepted Answer

A)  generate higher revenues for the government and increased unemployment. 
B)  create incentives to work more, which increases real GDP. 
C)  are less productive than lower tax rates on consumers. 
D)  have little effect on the economy. 
A)  generate higher revenues for the government and increased unemployment. 
B)  create incentives to work more, which increases real GDP. 
C)  are less productive than lower tax rates on consumers. 
D)  have little effect on the economy.

Question 20

If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is

Accepted Answer

A)  engaging in expansionary fiscal policy by lowering marginal tax rates. 
B)  engaging in expansionary fiscal policy of increasing government spending. 
C)  lowering marginal tax rates on people and raising them on corporations. 
D)  leaving the economy alone and letting the natural forces bring it into a long-run equilibrium. 
A)  engaging in expansionary fiscal policy by lowering marginal tax rates. 
B)  engaging in expansionary fiscal policy of increasing government spending. 
C)  lowering marginal tax rates on people and raising them on corporations. 
D)  leaving the economy alone and letting the natural forces bring it into a long-run equilibrium.

Exam 13: Fiscal Policy

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

The traditional Keynesian approach to fiscal policy assumes

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

-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?

Fiscal policy is defined as

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap?

When there is an interval between when the fiscal policy changes and corresponding changes in aggregate spending, we have a(n)

What do automatic stabilizers attempt to stabilize?

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

Expansionary fiscal policy is used to

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?

Other things being equal, a reduction in taxes will

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

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

When it takes time for the president and Congress to change fiscal policy to act on economic data, we have a(n)

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

The balanced-budget multiplier is equal to

In the traditional Keynesian model, an income tax cut raises real GDP because

According to supply-side economics, lower tax rates on wages

If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is

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

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The Macroeconomy: Unemployment, Inflation, and Deflation

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Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

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Deficit Spending and the Public Debt

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Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

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