Question 1

-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 2

If the federal government borrows from the private sector to pay for increased budget deficits and interest rates increase, this will cause

Accepted Answer

A)  a decrease in planned investment and planned consumption. 
B)  an increase in planned investment and planned consumption. 
C)  a decrease in planned investment and an increase in planned consumption. 
D)  an increase in planned investment and a decrease in planned consumption. 
A)  a decrease in planned investment and planned consumption. 
B)  an increase in planned investment and planned consumption. 
C)  a decrease in planned investment and an increase in planned consumption. 
D)  an increase in planned investment and a decrease in planned consumption.

Question 3

The Keynesian approach assumes that

Accepted Answer

A)  there is no unemployment in the economy. 
B)  the economy is self-regulating. 
C)  the government budget is always in deficit. 
D)  the price level is fixed. 
A)  there is no unemployment in the economy. 
B)  the economy is self-regulating. 
C)  the government budget is always in deficit. 
D)  the price level is fixed.

Question 4

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

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 5

According to the traditional Keynesian analysis, if the government increases spending by $10 million, then

Accepted Answer

A)  consumption will increase, and so total expenditures will increase by more than $10 million. 
B)  consumption will decrease, and so total expenditures will increase by less than the $10 million. 
C)  consumption will remain the same, and so total expenditures will increase by exactly $10 million. 
D)  consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption. 
A)  consumption will increase, and so total expenditures will increase by more than $10 million. 
B)  consumption will decrease, and so total expenditures will increase by less than the $10 million. 
C)  consumption will remain the same, and so total expenditures will increase by exactly $10 million. 
D)  consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption.

Question 6

To the extent that a direct expenditure offset results from an expansionary fiscal policy,

Accepted Answer

A)  the stimulative effect will be less than anticipated. 
B)  the stimulative effect will be more than anticipated. 
C)  the fiscal policy will not be discretionary. 
D)  the time lags associated with the implementation of fiscal policy will shorten. 
A)  the stimulative effect will be less than anticipated. 
B)  the stimulative effect will be more than anticipated. 
C)  the fiscal policy will not be discretionary. 
D)  the time lags associated with the implementation of fiscal policy will shorten.

Question 7

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.

Accepted Answer

A)  $3 trillion; increasing government spending by $1 trillion 
B)  $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C 
C)  $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending 
D)  $2 trillion; an increase in government spending of $14 trillion 
A)  $3 trillion; increasing government spending by $1 trillion 
B)  $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C 
C)  $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending 
D)  $2 trillion; an increase in government spending of $14 trillion

Question 8

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 9

Automatic stabilizers are

Accepted Answer

A)  provisions that cause changes in government spending and taxes without new action by Congress or the President. 
B)  policies set by certain committees in Congress. 
C)  tools used by the President's Council of Economic Advisers. 
D)  provisions that cause the aggregate supply curve to be upward sloping. 
A)  provisions that cause changes in government spending and taxes without new action by Congress or the President. 
B)  policies set by certain committees in Congress. 
C)  tools used by the President's Council of Economic Advisers. 
D)  provisions that cause the aggregate supply curve to be upward sloping.

Question 10

An advantage of automatic stabilizers over discretionary fiscal policy is that

Accepted Answer

A)  automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. 
B)  automatic stabilizers can be easily fine-tuned to move the economy to full employment. 
C)  only the President is involved in implementing automatic stabilizers, instead of both the President and Congress. 
D)  the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy. 
A)  automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. 
B)  automatic stabilizers can be easily fine-tuned to move the economy to full employment. 
C)  only the President is involved in implementing automatic stabilizers, instead of both the President and Congress. 
D)  the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy.

Question 11

Automatic stabilizers are designed to

Accepted Answer

A)  promote global trade. 
B)  simplify the tax system. 
C)  moderate changes in disposable income. 
D)  stabilize the bi-partisan budget process. 
A)  promote global trade. 
B)  simplify the tax system. 
C)  moderate changes in disposable income. 
D)  stabilize the bi-partisan budget process.

Question 12

According to the traditional Keynesian approach, if the government increases spending by $5 million and raises current taxes by $5 million at the same time, then

Accepted Answer

A)  real GDP will increase by $5 million. 
B)  real GDP will decrease by $5 million. 
C)  real GDP will decrease by more than $5 million. 
D)  real GDP will remain the same. 
A)  real GDP will increase by $5 million. 
B)  real GDP will decrease by $5 million. 
C)  real GDP will decrease by more than $5 million. 
D)  real GDP will remain the same.

Question 13

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

Accepted Answer

A)  monetary policy. 
B)  discretionary fiscal policy. 
C)  a Ricardian policy. 
D)  a laissez-faire policy. 
A)  monetary policy. 
B)  discretionary fiscal policy. 
C)  a Ricardian policy. 
D)  a laissez-faire policy.

Question 14

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for

Accepted Answer

A)  the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B)  the tax option because it is easier to pass. The effects on total spending would be identical. 
C)  the spending option because it won't affect the deficit the way the tax cut would. 
D)  the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier. 
A)  the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B)  the tax option because it is easier to pass. The effects on total spending would be identical. 
C)  the spending option because it won't affect the deficit the way the tax cut would. 
D)  the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

Question 15

Which one of the following statements is NOT true?

Accepted Answer

A)  Expansionary fiscal policy is employed to offset recessionary gaps. 
B)  Expansionary fiscal policy has an effect on interest rates. 
C)  Crowding out dilutes the effect of expansionary fiscal policy. 
D)  When crowding out occurs, fiscal policy is more effective. 
A)  Expansionary fiscal policy is employed to offset recessionary gaps. 
B)  Expansionary fiscal policy has an effect on interest rates. 
C)  Crowding out dilutes the effect of expansionary fiscal policy. 
D)  When crowding out occurs, fiscal policy is more effective.

Question 16

An example of fiscal policy is

Accepted Answer

A)  a reduction in government spending. 
B)  a reduction in investment spending by the private sector. 
C)  an increase in autonomous spending by consumers. 
D)  an increase in Social Security spending by the elderly. 
A)  a reduction in government spending. 
B)  a reduction in investment spending by the private sector. 
C)  an increase in autonomous spending by consumers. 
D)  an increase in Social Security spending by the elderly.

Question 17

Discretionary Fiscal policy

Accepted Answer

A)  is the use of government spending and tax policies to influence economic growth and inflation. 
B)  is the use of regulation to influence economic growth and inflation. 
C)  is the purchase and sale of Treasury securities to influence economic growth and inflation. 
D)  is the conversion of nominal data to real data. 
A)  is the use of government spending and tax policies to influence economic growth and inflation. 
B)  is the use of regulation to influence economic growth and inflation. 
C)  is the purchase and sale of Treasury securities to influence economic growth and inflation. 
D)  is the conversion of nominal data to real data.

Question 18

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?

Accepted Answer

A)  There will be an increase in the interest rate. 
B)  There will be a decrease in the interest rate. 
C)  The crowding out effect will be cancelled out. 
D)  There will be an increase in net exports. 
A)  There will be an increase in the interest rate. 
B)  There will be a decrease in the interest rate. 
C)  The crowding out effect will be cancelled out. 
D)  There will be an increase in net exports.

Question 19

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 20

-Refer to the above figure. If the relevant aggregate demand curve is   , what is the current economic situation?

Accepted Answer

A)  inflationary gap 
B)  recessionary gap 
C)  equilibrium 
D)  overemployment 
A)  inflationary gap 
B)  recessionary gap 
C)  equilibrium 
D)  overemployment

Exam 13: Fiscal Policy

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

If the federal government borrows from the private sector to pay for increased budget deficits and interest rates increase, this will cause

The Keynesian approach assumes that

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

According to the traditional Keynesian analysis, if the government increases spending by $10 million, then

To the extent that a direct expenditure offset results from an expansionary fiscal policy,

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.

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

Automatic stabilizers are

An advantage of automatic stabilizers over discretionary fiscal policy is that

Automatic stabilizers are designed to

According to the traditional Keynesian approach, if the government increases spending by $5 million and raises current taxes by $5 million at the same time, then

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for

Which one of the following statements is NOT true?

An example of fiscal policy is

Discretionary Fiscal policy

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector?

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

-Refer to the above figure. If the relevant aggregate demand curve is , what is the current economic situation?

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

Measuring the Economys Performance

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

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of , which can be closed by .