Question 1

During normal times, discretionary fiscal policy

Accepted Answer

A)  is more effective in influencing real GDP than at times of a recession. 
B)  is probably not very effective in influencing real GDP due to time lags. 
C)  is more effective in influencing real GDP than automatic stabilizers. 
D)  works well because there are no lag problems in influencing real GDP. 
A)  is more effective in influencing real GDP than at times of a recession. 
B)  is probably not very effective in influencing real GDP due to time lags. 
C)  is more effective in influencing real GDP than automatic stabilizers. 
D)  works well because there are no lag problems in influencing real GDP.

Question 2

Which of the following represent expansionary fiscal policy?

Accepted Answer

A)  a reduction in government spending 
B)  an increase in average individual income tax rates 
C)  a cut in corporate income tax rates 
D)  an increase in marginal individual income tax rates 
A)  a reduction in government spending 
B)  an increase in average individual income tax rates 
C)  a cut in corporate income tax rates 
D)  an increase in marginal individual income tax rates

Question 3

Discretionary fiscal policy

Accepted Answer

A)  may not have desired effects on real GDP because of the time lags. 
B)  may not have desired effects on real GDP because it leads to increases in aggregate demand. 
C)  may not have desired effects on real GDP because it leads to decreases in aggregate demand. 
D)  would have a larger effect on real GDP if the multiplier was smaller. 
A)  may not have desired effects on real GDP because of the time lags. 
B)  may not have desired effects on real GDP because it leads to increases in aggregate demand. 
C)  may not have desired effects on real GDP because it leads to decreases in aggregate demand. 
D)  would have a larger effect on real GDP if the multiplier was smaller.

Question 4

The recognition time lag is the time that elapses between

Accepted Answer

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

Question 5

Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely

Accepted Answer

A)  increase government borrowing and increase interest rates. 
B)  generate extra tax revenues to cover the extra spending. 
C)  reduce interest rates and increase planned investment. 
D)  reduce interest rates, increase in planned investment, and increase real GDP. 
A)  increase government borrowing and increase interest rates. 
B)  generate extra tax revenues to cover the extra spending. 
C)  reduce interest rates and increase planned investment. 
D)  reduce interest rates, increase in planned investment, and increase real GDP.

Question 6

Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct?

Accepted Answer

A)  Real GDP will fall more in economy A than in economy B. 
B)  Real GDP will fall more in economy B than in economy A. 
C)  Real GDP will fall the same in both economies. 
D)  The effect on the relative size of the reduction in real GDP in the two economies is ambiguous. 
A)  Real GDP will fall more in economy A than in economy B. 
B)  Real GDP will fall more in economy B than in economy A. 
C)  Real GDP will fall the same in both economies. 
D)  The effect on the relative size of the reduction in real GDP in the two economies is ambiguous.

Question 7

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

Accepted Answer

A)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets. 
A)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets.

Question 8

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

Accepted Answer

A)  change the incentive to work 
B)  change the incentive to save 
C)  change the incentive to invest 
D)  all of the above 
A)  change the incentive to work 
B)  change the incentive to save 
C)  change the incentive to invest 
D)  all of the above

Question 9

-Refer to the above figure. Suppose that the economy starts at   . If the government reduces taxes, then the economy goes to   , but then falls back to   . This is an example of

Accepted Answer

A)  partial crowding-out effect. 
B)  Ricardian equivalence. 
C)  laissez-faire. 
D)  complete crowding-out effect. 
A)  partial crowding-out effect. 
B)  Ricardian equivalence. 
C)  laissez-faire. 
D)  complete crowding-out effect.

Question 10

The Keynesian perspective on the effect of an increase in taxes is that this policy action

Accepted Answer

A)  generates reductions in consumption and in saving. 
B)  generates reductions in consumption and an increase in saving to pay for the new taxes. 
C)  has no impact on consumption. 
D)  increases current consumption and reduces future consumption. 
A)  generates reductions in consumption and in saving. 
B)  generates reductions in consumption and an increase in saving to pay for the new taxes. 
C)  has no impact on consumption. 
D)  increases current consumption and reduces future consumption.

Question 11

Which of the following is an example of fiscal policy?

Accepted Answer

A)  a reduction in the federal funds rate. 
B)  a reduction in the money supply. 
C)  a reduction in lump-sum taxes. 
D)  an increase in the physical stock of capital. 
A)  a reduction in the federal funds rate. 
B)  a reduction in the money supply. 
C)  a reduction in lump-sum taxes. 
D)  an increase in the physical stock of capital.

Question 12

Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue?

Accepted Answer

The government could initiate contractio

Question 13

Discretionary fiscal policy is

Accepted Answer

A)  automatic changes in government expenditures and interest rates that achieve certain national economic goals. 
B)  deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. 
C)  used to achieve full employment by changing monetary growth targets. 
D)  changes in support for research and education in order to achieve certain national economic goals. 
A)  automatic changes in government expenditures and interest rates that achieve certain national economic goals. 
B)  deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. 
C)  used to achieve full employment by changing monetary growth targets. 
D)  changes in support for research and education in order to achieve certain national economic goals.

Question 14

The period between the recognition of a problem and the implementation of a policy to solve the problem is

Accepted Answer

A)  the recognition lag. 
B)  the action time lag. 
C)  the effect time lag. 
D)  the fine tuning lag. 
A)  the recognition lag. 
B)  the action time lag. 
C)  the effect time lag. 
D)  the fine tuning lag.

Question 15

The traditional Keynesian approach concludes that an increase in government spending

Accepted Answer

A)  generates a greater increase in investment spending. 
B)  generates an equal increase in total spending because government spending makes up part of total spending. 
C)  generates a greater increase in total spending because consumption spending increases as incomes increase. 
D)  has no effect on total spending because consumers increase saving by an equal amount. 
A)  generates a greater increase in investment spending. 
B)  generates an equal increase in total spending because government spending makes up part of total spending. 
C)  generates a greater increase in total spending because consumption spending increases as incomes increase. 
D)  has no effect on total spending because consumers increase saving by an equal amount.

Question 16

The time that elapses between the implementation of a policy and its intended result is referred to as

Accepted Answer

A)  the action time lag. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the data lag. 
A)  the action time lag. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the data lag.

Question 17

Fiscal policy is implemented by

Accepted Answer

A)  the central bank. 
B)  private businesses. 
C)  the Internal Revenue Service. 
D)  the federal government. 
A)  the central bank. 
B)  private businesses. 
C)  the Internal Revenue Service. 
D)  the federal government.

Question 18

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

Accepted Answer

A)  increases in taxes and cuts in government spending 
B)  cuts in taxes 
C)  increases in taxes and increases in government spending 
D)  cuts in taxes and increases in government spending 
A)  increases in taxes and cuts in government spending 
B)  cuts in taxes 
C)  increases in taxes and increases in government spending 
D)  cuts in taxes and increases in government spending

Question 19

The Laffer curve shows that as tax rates increase

Accepted Answer

A)  initially tax revenues increase, then decrease. 
B)  tax revenues decrease as the incidence of cheating on tax returns increases. 
C)  tax revenues increase as more individuals and businesses have to pay taxes. 
D)  tax revenues remain unchanged. 
A)  initially tax revenues increase, then decrease. 
B)  tax revenues decrease as the incidence of cheating on tax returns increases. 
C)  tax revenues increase as more individuals and businesses have to pay taxes. 
D)  tax revenues remain unchanged.

Question 20

Supply-side economics

Accepted Answer

A)  promotes expansionary fiscal policy by increasing government spending. 
B)  promotes reducing taxes to create incentives to increase productivity. 
C)  promotes increasing taxes to create additional revenue for government spending. 
D)  is based on the Ricardian equivalence theorem. 
A)  promotes expansionary fiscal policy by increasing government spending. 
B)  promotes reducing taxes to create incentives to increase productivity. 
C)  promotes increasing taxes to create additional revenue for government spending. 
D)  is based on the Ricardian equivalence theorem.

Exam 13: Fiscal Policy

During normal times, discretionary fiscal policy

Which of the following represent expansionary fiscal policy?

Discretionary fiscal policy

The recognition time lag is the time that elapses between

Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

-Refer to the above figure. Suppose that the economy starts at . If the government reduces taxes, then the economy goes to , but then falls back to . This is an example of

The Keynesian perspective on the effect of an increase in taxes is that this policy action

Which of the following is an example of fiscal policy?

Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue?

Discretionary fiscal policy is

The period between the recognition of a problem and the implementation of a policy to solve the problem is

The traditional Keynesian approach concludes that an increase in government spending

The time that elapses between the implementation of a policy and its intended result is referred to as

Fiscal policy is implemented by

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

The Laffer curve shows that as tax rates increase

Supply-side economics

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

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