Question 1

Discretionary fiscal policy is so named because it

Accepted Answer

A)  is undertaken at the order of the nation's central bank. 
B)  occurs automatically as the nation's level of GDP changes. 
C)  involves specific changes in taxes and government spending undertaken by Congress and the president. 
D)  involves secret advice given by the Council of Economic Advisers to the president. 
A)  is undertaken at the order of the nation's central bank. 
B)  occurs automatically as the nation's level of GDP changes. 
C)  involves specific changes in taxes and government spending undertaken by Congress and the president. 
D)  involves secret advice given by the Council of Economic Advisers to the president.

Question 2

-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

Question 3

Automatic stabilizers have the effect of

Accepted Answer

A)  increasing aggregate demand during a recessionary gap. 
B)  increasing aggregate demand during an inflationary gap. 
C)  increasing long-run aggregate supply during a recessionary gap. 
D)  increasing long-run aggregate supply during an inflationary gap. 
A)  increasing aggregate demand during a recessionary gap. 
B)  increasing aggregate demand during an inflationary gap. 
C)  increasing long-run aggregate supply during a recessionary gap. 
D)  increasing long-run aggregate supply during an inflationary gap.

Question 4

The amount of time that elapses between the implementation of a policy and the results of that policy is

Accepted Answer

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

Question 5

Supply-side economics focuses attention on how fiscal policy might be used to

Accepted Answer

A)  increase aggregate demand to the full-employment level of real GDP. 
B)  shift the aggregate supply curve out. 
C)  align aggregate demand and aggregate supply. 
D)  increase consumption. 
A)  increase aggregate demand to the full-employment level of real GDP. 
B)  shift the aggregate supply curve out. 
C)  align aggregate demand and aggregate supply. 
D)  increase consumption.

Question 6

If the government increases spending and there is a complete direct expenditure offset, then

Accepted Answer

A)  aggregate demand and real Gross Domestic Product (GDP) will not change. 
B)  aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase. 
C)  the price level will drop. 
D)  the government spending multiplier will be greater than zero. 
A)  aggregate demand and real Gross Domestic Product (GDP) will not change. 
B)  aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase. 
C)  the price level will drop. 
D)  the government spending multiplier will be greater than zero.

Question 7

Government-provided unemployment insurance is an example of

Accepted Answer

A)  a discretionary fiscal stabilizer. 
B)  an automatic fiscal stabilizer. 
C)  a monetary stabilizer. 
D)  an automatic monetary stabilizer. 
A)  a discretionary fiscal stabilizer. 
B)  an automatic fiscal stabilizer. 
C)  a monetary stabilizer. 
D)  an automatic monetary stabilizer.

Question 8

The traditional Keynesian approach to fiscal policy assumes

Accepted Answer

A)  current taxes are the only taxes taken into account by firms and consumers. 
B)  the focus of attention should be the long run. 
C)  prices are flexible while interest rates are not. 
D)  exchange rates are fixed. 
A)  current taxes are the only taxes taken into account by firms and consumers. 
B)  the focus of attention should be the long run. 
C)  prices are flexible while interest rates are not. 
D)  exchange rates are fixed.

Question 9

The Laffer curve

Accepted Answer

A)  initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rates lead to decreasing tax revenue. 
B)  slopes downward throughout its range since increasing tax rates will always lead to decreases in tax revenue. 
C)  slopes upward throughout its range since increasing tax rates will always lead to increases in tax revenue. 
D)  is horizontal because tax revenue is independent of the rate of interest. 
A)  initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rates lead to decreasing tax revenue. 
B)  slopes downward throughout its range since increasing tax rates will always lead to decreases in tax revenue. 
C)  slopes upward throughout its range since increasing tax rates will always lead to increases in tax revenue. 
D)  is horizontal because tax revenue is independent of the rate of interest.

Question 10

According to the traditional Keynesian approach, if the government increases taxes, then

Accepted Answer

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

Question 11

An example of an automatic stabilizer is

Accepted Answer

A)  the progressive tax system. 
B)  the decision of the President to cut taxes in a recession. 
C)  the Congressional decision to increase unemployment benefits in a recession. 
D)  the raising of taxes on cigarettes to discourage smoking to stabilize health-care costs. 
A)  the progressive tax system. 
B)  the decision of the President to cut taxes in a recession. 
C)  the Congressional decision to increase unemployment benefits in a recession. 
D)  the raising of taxes on cigarettes to discourage smoking to stabilize health-care costs.

Question 12

When data on the economy requires some time to gather and interpret, 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 13

Keynes believed that the way to prevent recessions and depressions was to

Accepted Answer

A)  reduce spending when there is a recessionary gap. 
B)  only change tax rates as a means of regulating the economy. 
C)  maximize the crowding out effect. 
D)  increase aggregate demand through expansionary fiscal policy. 
A)  reduce spending when there is a recessionary gap. 
B)  only change tax rates as a means of regulating the economy. 
C)  maximize the crowding out effect. 
D)  increase aggregate demand through expansionary fiscal policy.

Question 14

In the traditional Keynesian model, an increase in current taxes

Accepted Answer

A)  increases disposable income but does not affect consumption. 
B)  decreases both disposable income and consumption. 
C)  decreases disposable income but increases consumption. 
D)  has no effect on either disposable income or consumption. 
A)  increases disposable income but does not affect consumption. 
B)  decreases both disposable income and consumption. 
C)  decreases disposable income but increases consumption. 
D)  has no effect on either disposable income or consumption.

Question 15

What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy?

Accepted Answer

Automatic stabilizers are provisions of

Question 16

An increase in government spending that is not financed by an increase in taxes will cause which of the following?

Accepted Answer

A)  an increase in interest rates and an increase in planned investment 
B)  an increase in interest rates and a reduction in planned investment 
C)  a reduction in interest rates and an increase in planned investment 
D)  a reduction in interest rates and a reduction in planned investment 
A)  an increase in interest rates and an increase in planned investment 
B)  an increase in interest rates and a reduction in planned investment 
C)  a reduction in interest rates and an increase in planned investment 
D)  a reduction in interest rates and a reduction in planned investment

Question 17

Explain how fiscal policy can correct a contractionary gap.

Accepted Answer

A contractionary gap can be cl

Question 18

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?

Accepted Answer

A)  Increase taxes and reduce government spending. 
B)  Reduce taxes and increase government spending. 
C)  Increase taxes and increase government spending. 
D)  Reduce taxes and reduce government spending. 
A)  Increase taxes and reduce government spending. 
B)  Reduce taxes and increase government spending. 
C)  Increase taxes and increase government spending. 
D)  Reduce taxes and reduce government spending.

Question 19

Which of the following would shift the aggregate demand curve to the right?

Accepted Answer

A)  An increase in government spending 
B)  An increase in taxes 
C)  An increase in interest rates 
D)  An increase in input prices 
A)  An increase in government spending 
B)  An increase in taxes 
C)  An increase in interest rates 
D)  An increase in input prices

Question 20

-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)  the free rider problem. 
C)  laissez-faire. 
D)  complete crowding-out effect. 
A)  partial crowding-out effect. 
B)  the free rider problem. 
C)  laissez-faire. 
D)  complete crowding-out effect.

Exam 13: Fiscal Policy

Discretionary fiscal policy is so named because it

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

Automatic stabilizers have the effect of

The amount of time that elapses between the implementation of a policy and the results of that policy is

Supply-side economics focuses attention on how fiscal policy might be used to

If the government increases spending and there is a complete direct expenditure offset, then

Government-provided unemployment insurance is an example of

The traditional Keynesian approach to fiscal policy assumes

The Laffer curve

According to the traditional Keynesian approach, if the government increases taxes, then

An example of an automatic stabilizer is

When data on the economy requires some time to gather and interpret, we have a(n)

Keynes believed that the way to prevent recessions and depressions was to

In the traditional Keynesian model, an increase in current taxes

What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy?

An increase in government spending that is not financed by an increase in taxes will cause which of the following?

Explain how fiscal policy can correct a contractionary gap.

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap?

Which of the following would shift the aggregate demand curve to the right?

-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 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