Question 1

According to the traditional Keynesian approach, a tax cut raises aggregate demand because

Accepted Answer

A)  taxes are part of the C + I + G + X line. 
B)  disposable income available to consumers increases. 
C)  taxpayers anticipate a tax increase in the future. 
D)  a tax cut always results in a balanced budget. 
A)  taxes are part of the C + I + G + X line. 
B)  disposable income available to consumers increases. 
C)  taxpayers anticipate a tax increase in the future. 
D)  a tax cut always results in a balanced budget.

Question 2

An example of an automatic stabilizer is

Accepted Answer

A)  unemployment compensation. 
B)  a newly enacted surtax to slow down an overheated economy. 
C)  a horizontal aggregate supply curve. 
D)  a change in the marginal tax rates. 
A)  unemployment compensation. 
B)  a newly enacted surtax to slow down an overheated economy. 
C)  a horizontal aggregate supply curve. 
D)  a change in the marginal tax rates.

Question 3

All of the following are automatic fiscal stabilizers EXCEPT

Accepted Answer

A)  a congressionally mandated decrease in tax rates to stimulate the economy. 
B)  a decrease in unemployment compensation payments during an expansion. 
C)  a decrease in overall tax revenues during a recession. 
D)  an increase in unemployment expenditures during a recession. 
A)  a congressionally mandated decrease in tax rates to stimulate the economy. 
B)  a decrease in unemployment compensation payments during an expansion. 
C)  a decrease in overall tax revenues during a recession. 
D)  an increase in unemployment expenditures during a recession.

Question 4

All of the following are automatic stabilizers EXCEPT

Accepted Answer

A)  the federal income tax system. 
B)  welfare payments. 
C)  discretionary tax cuts. 
D)  unemployment compensation. 
A)  the federal income tax system. 
B)  welfare payments. 
C)  discretionary tax cuts. 
D)  unemployment compensation.

Question 5

The amount of time it takes Congress to debate the size of a tax cut is known as the

Accepted Answer

A)  action time lag. 
B)  effect time lag. 
C)  recognition time lag. 
D)  Ricardian-equivalence time lag. 
A)  action time lag. 
B)  effect time lag. 
C)  recognition time lag. 
D)  Ricardian-equivalence time lag.

Question 6

Because of crowding out,

Accepted Answer

A)  expansionary fiscal policy during a recession must involve a tax increase. 
B)  expansionary fiscal policy during a recession is reinforced by private investment spending. 
C)  the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates. 
D)  expansionary fiscal policy is completely achieved even with a decline in investment spending. 
A)  expansionary fiscal policy during a recession must involve a tax increase. 
B)  expansionary fiscal policy during a recession is reinforced by private investment spending. 
C)  the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates. 
D)  expansionary fiscal policy is completely achieved even with a decline in investment spending.

Question 7

All the following actions represent fiscal policy EXCEPT

Accepted Answer

A)  a reduction in the money supply by the Federal Reserve. 
B)  an increase in government spending. 
C)  a reduction in individual income tax rates. 
D)  an increase in corporate income tax rates. 
A)  a reduction in the money supply by the Federal Reserve. 
B)  an increase in government spending. 
C)  a reduction in individual income tax rates. 
D)  an increase in corporate income tax rates.

Question 8

Three candidates for political office disagree over the benefits of enlarging the federal budget deficit. Candidate C says the stimulation package is needed to increase employment and real GDP; Candidate D says it will only cause higher prices; and Candidate F says it will have no effect on either real GDP or the price level. How do the three candidates differ with respect to the condition of the economy and the effects of fiscal policy?

Accepted Answer

A)  Candidate C thinks the simple Keynesian model is applicable, while D thinks the expansionary policy will fully crowd out private investment. F believes the economy is experiencing a recessionary gap. 
B)  Candidate C thinks the simple Keynesian model is applicable; D thinks the short-run aggregate supply curve is horizontal; and F thinks the expansionary policy will generate lower interest rates. 
C)  Candidate C thinks the economy is below the full-employment real GDP and that the short-run aggregate supply curve is horizontal. Candidate D believes the economy is at full employment.. Candidate F believes the expansionary policy will result only in direct fiscal offsets. 
D)  Candidate C thinks the short-run aggregate supply curve is upward sloping; D thinks interest rates will rise; and F thinks the economy is at full employment. 
A)  Candidate C thinks the simple Keynesian model is applicable, while D thinks the expansionary policy will fully crowd out private investment. F believes the economy is experiencing a recessionary gap. 
B)  Candidate C thinks the simple Keynesian model is applicable; D thinks the short-run aggregate supply curve is horizontal; and F thinks the expansionary policy will generate lower interest rates. 
C)  Candidate C thinks the economy is below the full-employment real GDP and that the short-run aggregate supply curve is horizontal. Candidate D believes the economy is at full employment.. Candidate F believes the expansionary policy will result only in direct fiscal offsets. 
D)  Candidate C thinks the short-run aggregate supply curve is upward sloping; D thinks interest rates will rise; and F thinks the economy is at full employment.

Question 9

-Refer to the above figure. As the real national income expands from Y2 to Y3,

Accepted Answer

A)  a budget surplus occurs. 
B)  a budget deficit occurs. 
C)  tax revenues fall. 
D)  government transfers rise. 
A)  a budget surplus occurs. 
B)  a budget deficit occurs. 
C)  tax revenues fall. 
D)  government transfers rise.

Question 10

Which of the following might be considered an automatic fiscal stabilizer?

Accepted Answer

A)  government spending for the war effort 
B)  401(k) retirement program 
C)  unemployment compensation 
D)  government budgeting for education 
A)  government spending for the war effort 
B)  401(k) retirement program 
C)  unemployment compensation 
D)  government budgeting for education

Question 11

-Refer to the above figure. Suppose that the economy initially is operating along AD1. If the government seeks to close the recessionary gap by raising government spending without any change in taxation, which moves the aggregate demand curve from   to   , then to   . Which of the following scenarios is true?

Accepted Answer

A)  Interest rates fall and investment rises. 
B)  Both interest rates and investment fall. 
C)  Both interest rates and investment rise. 
D)  Interest rates rise and investment falls. 
A)  Interest rates fall and investment rises. 
B)  Both interest rates and investment fall. 
C)  Both interest rates and investment rise. 
D)  Interest rates rise and investment falls.

Question 12

To the extent that the Ricardian equivalence theorem is true, which of the conditions below will hold?

Accepted Answer

A)  Increases in the government budget deficit will not affect aggregate demand. 
B)  Exports will not be considered part of aggregate demand. 
C)  Investment spending will not be considered part of aggregate demand. 
D)  The long-run aggregate supply curve will not be vertical. 
A)  Increases in the government budget deficit will not affect aggregate demand. 
B)  Exports will not be considered part of aggregate demand. 
C)  Investment spending will not be considered part of aggregate demand. 
D)  The long-run aggregate supply curve will not be vertical.

Question 13

Whenever government spending is a substitute for private spending

Accepted Answer

A)  interest rates will rise. 
B)  the Ricardian equivalence theorem holds. 
C)  the effects of expansionary fiscal policy are dampened. 
D)  there is a direct multiplier effect. 
A)  interest rates will rise. 
B)  the Ricardian equivalence theorem holds. 
C)  the effects of expansionary fiscal policy are dampened. 
D)  there is a direct multiplier effect.

Question 14

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

Accepted Answer

A)  decreasing interest rates 
B)  increasing the money supply 
C)  decreasing taxes 
D)  a simultaneous and equal reduction in taxes and reduction in government spending 
A)  decreasing interest rates 
B)  increasing the money supply 
C)  decreasing taxes 
D)  a simultaneous and equal reduction in taxes and reduction in government spending

Question 15

In the traditional Keynesian model, an increase in government spending raises total planned real expenditures by more than the original increase in government spending because

Accepted Answer

A)  consumption spending depends negatively on real GDP. 
B)  consumption spending depends positively on real GDP. 
C)  consumption spending is not related to real GDP. 
D)  of the crowding-out effect on consumption spending. 
A)  consumption spending depends negatively on real GDP. 
B)  consumption spending depends positively on real GDP. 
C)  consumption spending is not related to real GDP. 
D)  of the crowding-out effect on consumption spending.

Question 16

A recession begins in July but government policy makers do not reach a consensus that a recession had in fact begun until October. This is an example of a(n)

Accepted Answer

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

Question 17

A government proposal to increase marginal tax rates on the wealthiest 2 percent of U.S. residents is supposed to generate an additional $100 billion in tax revenues. It is likely that

Accepted Answer

A)  the actual revenue raised will exceed the $100 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. 
B)  the actual revenue raised will be more than $100 billion, because the short-run aggregate supply curve is upward sloping. 
C)  the actual revenue raised will be less than $100 billion, because some of the people will respond by working less and earning less income that can be taxed. 
D)  the actual revenue raised will be close to $100 billion, because the wealthy don't respond to work incentives the way poorer workers do. 
A)  the actual revenue raised will exceed the $100 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. 
B)  the actual revenue raised will be more than $100 billion, because the short-run aggregate supply curve is upward sloping. 
C)  the actual revenue raised will be less than $100 billion, because some of the people will respond by working less and earning less income that can be taxed. 
D)  the actual revenue raised will be close to $100 billion, because the wealthy don't respond to work incentives the way poorer workers do.

Question 18

An example of expansionary fiscal policy could be

Accepted Answer

A)  to increase taxes. 
B)  to reduce taxes. 
C)  to reduce government spending. 
D)  to reduce interest rates. 
A)  to increase taxes. 
B)  to reduce taxes. 
C)  to reduce government spending. 
D)  to reduce interest rates.

Question 19

If the price level is fixed, then an increase in government spending will lead to

Accepted Answer

A)  a larger increase in nominal GDP than in real GDP. 
B)  a smaller increase in nominal GDP than in real GDP. 
C)  no increase in either nominal GDP or real GDP. 
D)  an increase in nominal GDP by the same amount as an increase in real GDP. 
A)  a larger increase in nominal GDP than in real GDP. 
B)  a smaller increase in nominal GDP than in real GDP. 
C)  no increase in either nominal GDP or real GDP. 
D)  an increase in nominal GDP by the same amount as an increase in real GDP.

Question 20

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

Accepted Answer

A)  less than $100 billion because some people will respond by working less. 
B)  exactly $100 billion because there are no offsetting factors to a tax increase. 
C)  more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. 
D)  more than $100 billion because interest rates will also be affected. 
A)  less than $100 billion because some people will respond by working less. 
B)  exactly $100 billion because there are no offsetting factors to a tax increase. 
C)  more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. 
D)  more than $100 billion because interest rates will also be affected.

Exam 13: Fiscal Policy

According to the traditional Keynesian approach, a tax cut raises aggregate demand because

An example of an automatic stabilizer is

All of the following are automatic fiscal stabilizers EXCEPT

All of the following are automatic stabilizers EXCEPT

The amount of time it takes Congress to debate the size of a tax cut is known as the

Because of crowding out,

All the following actions represent fiscal policy EXCEPT

-Refer to the above figure. As the real national income expands from Y2 to Y3,

Which of the following might be considered an automatic fiscal stabilizer?

To the extent that the Ricardian equivalence theorem is true, which of the conditions below will hold?

Whenever government spending is a substitute for private spending

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

In the traditional Keynesian model, an increase in government spending raises total planned real expenditures by more than the original increase in government spending because

A recession begins in July but government policy makers do not reach a consensus that a recession had in fact begun until October. This is an example of a(n)

A government proposal to increase marginal tax rates on the wealthiest 2 percent of U.S. residents is supposed to generate an additional $100 billion in tax revenues. It is likely that

An example of expansionary fiscal policy could be

If the price level is fixed, then an increase in government spending will lead to

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be

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. As the real national income expands from Y₂ to Y₃,