Question 1

An increase in government spending without an accompanying increase in taxes

Accepted Answer

A)  does not increase aggregate demand. 
B)  would effectively eliminate an inflationary gap. 
C)  causes investment spending to increase. 
D)  requires additional government borrowing. 
A)  does not increase aggregate demand. 
B)  would effectively eliminate an inflationary gap. 
C)  causes investment spending to increase. 
D)  requires additional government borrowing.

Question 2

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

Accepted Answer

A)  increase spending less than the simplest Keynesian model would predict. 
B)  increase spending more than the simplest Keynesian model would predict. 
C)  reduce taxes rather than increase government spending. 
D)  both reduce taxes and reduce spending to be able to achieve full employment. 
A)  increase spending less than the simplest Keynesian model would predict. 
B)  increase spending more than the simplest Keynesian model would predict. 
C)  reduce taxes rather than increase government spending. 
D)  both reduce taxes and reduce spending to be able to achieve full employment.

Question 3

Explain why proponents of supply-side effects of tax rate variations who also believe that tax-rate changes influence aggregate demand might claim that cuts in marginal income tax rates can potentially push up real Gross Domestic Product (GDP) without generating inflation.

Accepted Answer

According to supply-side economics, a re

Question 4

An increase in government spending would cause which of the following to happen?

Accepted Answer

A)  The aggregate demand curve would shift to the right. 
B)  The aggregate demand curve would shift to the left. 
C)  The aggregate supply curve would shift to the right. 
D)  The aggregate supply curve would shift to the left. 
A)  The aggregate demand curve would shift to the right. 
B)  The aggregate demand curve would shift to the left. 
C)  The aggregate supply curve would shift to the right. 
D)  The aggregate supply curve would shift to the left.

Question 5

According to the Keynesian approach, a decrease in taxes

Accepted Answer

A)  will increase consumption exactly by the amount of the taxes. 
B)  will increase consumption by an amount of less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will decrease consumption, as the government will have to spend less. 
A)  will increase consumption exactly by the amount of the taxes. 
B)  will increase consumption by an amount of less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will decrease consumption, as the government will have to spend less.

Question 6

Unemployment compensation programs are called automatic stabilizers because payments increase during

Accepted Answer

A)  expansionary periods. 
B)  recessions. 
C)  both recessions and expansions. 
D)  wartime only. 
A)  expansionary periods. 
B)  recessions. 
C)  both recessions and expansions. 
D)  wartime only.

Question 7

Supply-side economists argue cuts in tax rates

Accepted Answer

A)  always reduce tax revenues. 
B)  may increase tax revenues. 
C)  always increase budget deficits. 
D)  have no effect on tax revenues. 
A)  always reduce tax revenues. 
B)  may increase tax revenues. 
C)  always increase budget deficits. 
D)  have no effect on tax revenues.

Question 8

The time required to collect information about the current state of the economy is known as

Accepted Answer

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

Question 9

Which of the following statements about fiscal policy is true?

Accepted Answer

A)  Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. 
B)  Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. 
C)  Government can shift the aggregate demand curve inward by increasing spending. 
D)  Government can shift the aggregate demand curve outward by reducing spending. 
A)  Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. 
B)  Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. 
C)  Government can shift the aggregate demand curve inward by increasing spending. 
D)  Government can shift the aggregate demand curve outward by reducing spending.

Question 10

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

Accepted Answer

A)  the indirect effect. 
B)  the interest rate effect. 
C)  the crowding-out effect. 
D)  the Laffer effect. 
A)  the indirect effect. 
B)  the interest rate effect. 
C)  the crowding-out effect. 
D)  the Laffer effect.

Question 11

Supply-side economists argue that decreasing marginal tax rates

Accepted Answer

A)  increases productivity and shifts the AS curve to the right. 
B)  increases productivity and shifts the AS curve to the left. 
C)  increases productivity and shifts the AD curve to the left. 
D)  due to the Ricardian equivalence, has no impact on the economy. 
A)  increases productivity and shifts the AS curve to the right. 
B)  increases productivity and shifts the AS curve to the left. 
C)  increases productivity and shifts the AD curve to the left. 
D)  due to the Ricardian equivalence, has no impact on the economy.

Question 12

Fiscal policy involves discretionary changes in

Accepted Answer

A)  interest rates. 
B)  exchange rates. 
C)  income tax rates. 
D)  the rate of growth of the quantity of money in circulation. 
A)  interest rates. 
B)  exchange rates. 
C)  income tax rates. 
D)  the rate of growth of the quantity of money in circulation.

Question 13

Suppose there currently is an inflationary gap. What could the government do to bring prices down?

Accepted Answer

A)  Nothing. 
B)  Reduce government spending. 
C)  Increase government spending. 
D)  Shift the long-run aggregate supply curve. 
A)  Nothing. 
B)  Reduce government spending. 
C)  Increase government spending. 
D)  Shift the long-run aggregate supply curve.

Question 14

To close a recessionary gap through fiscal policy, the government should

Accepted Answer

A)  decrease government spending in order to increase aggregate supply. 
B)  increase government spending in order to increase aggregate demand. 
C)  reduce taxes in order to stimulate investment, and thus increase aggregate supply. 
D)  increase government spending and taxes in order to both increase aggregate demand and aggregate supply. 
A)  decrease government spending in order to increase aggregate supply. 
B)  increase government spending in order to increase aggregate demand. 
C)  reduce taxes in order to stimulate investment, and thus increase aggregate supply. 
D)  increase government spending and taxes in order to both increase aggregate demand and aggregate supply.

Question 15

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because

Accepted Answer

A)  the crowding out effect does not apply to taxes. 
B)  lower tax rates have no effect on the opportunity cost of labor. 
C)  the aggregate supply curve will shift inward to the left if the tax rates are lowered. 
D)  the lower marginal tax rates will be applied to a growing tax base due to economic growth. 
A)  the crowding out effect does not apply to taxes. 
B)  lower tax rates have no effect on the opportunity cost of labor. 
C)  the aggregate supply curve will shift inward to the left if the tax rates are lowered. 
D)  the lower marginal tax rates will be applied to a growing tax base due to economic growth.

Question 16

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

Accepted Answer

A)  there being no government role in the economy. 
B)  an active government role in the economy. 
C)  the need for autocratic rule. 
D)  the long-run nature of the economy. 
A)  there being no government role in the economy. 
B)  an active government role in the economy. 
C)  the need for autocratic rule. 
D)  the long-run nature of the economy.

Question 17

-Refer to the above figure. If the relevant aggregate demand curve is   , then the economy is experiencing

Accepted Answer

A)  an inflationary gap. 
B)  a recessionary gap. 
C)  a deflationary gap. 
D)  full employment. 
A)  an inflationary gap. 
B)  a recessionary gap. 
C)  a deflationary gap. 
D)  full employment.

Question 18

In the short run, if the government attempts to increase aggregate demand, it should

Accepted Answer

A)  increase government spending and reduce taxes. 
B)  decrease government spending and increase taxes. 
C)  shift the long-run aggregate supply curve to the right. 
D)  shift the short-run aggregate supply curve to the right. 
A)  increase government spending and reduce taxes. 
B)  decrease government spending and increase taxes. 
C)  shift the long-run aggregate supply curve to the right. 
D)  shift the short-run aggregate supply curve to the right.

Question 19

What does research tell us about the impact of Ricardian equivalence effects on the economy?

Accepted Answer

A)  There is no evidence of any impact of Ricardian equivalence effects. 
B)  Ricardian equivalence effects have a huge impact on aggregate demand. 
C)  There is a very small impact on both aggregate demand and aggregate supply. 
D)  Ricardian equivalence effects may exist, but their magnitudes are unclear. 
A)  There is no evidence of any impact of Ricardian equivalence effects. 
B)  Ricardian equivalence effects have a huge impact on aggregate demand. 
C)  There is a very small impact on both aggregate demand and aggregate supply. 
D)  Ricardian equivalence effects may exist, but their magnitudes are unclear.

Question 20

The effect time lag of fiscal policy refers to

Accepted Answer

A)  the time needed for Congress to enact a policy. 
B)  the delay in recognizing an economic problem. 
C)  the time between the onset of a policy and when the policy has impact on the economy. 
D)  the difficulty in getting the President and the Congress to agree on an appropriate policy. 
A)  the time needed for Congress to enact a policy. 
B)  the delay in recognizing an economic problem. 
C)  the time between the onset of a policy and when the policy has impact on the economy. 
D)  the difficulty in getting the President and the Congress to agree on an appropriate policy.

Exam 13: Fiscal Policy

An increase in government spending without an accompanying increase in taxes

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

Explain why proponents of supply-side effects of tax rate variations who also believe that tax-rate changes influence aggregate demand might claim that cuts in marginal income tax rates can potentially push up real Gross Domestic Product (GDP) without generating inflation.

An increase in government spending would cause which of the following to happen?

According to the Keynesian approach, a decrease in taxes

Unemployment compensation programs are called automatic stabilizers because payments increase during

Supply-side economists argue cuts in tax rates

The time required to collect information about the current state of the economy is known as

Which of the following statements about fiscal policy is true?

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

Supply-side economists argue that decreasing marginal tax rates

Fiscal policy involves discretionary changes in

Suppose there currently is an inflationary gap. What could the government do to bring prices down?

To close a recessionary gap through fiscal policy, the government should

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

-Refer to the above figure. If the relevant aggregate demand curve is , then the economy is experiencing

In the short run, if the government attempts to increase aggregate demand, it should

What does research tell us about the impact of Ricardian equivalence effects on the economy?

The effect time lag of fiscal policy refers to

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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