Question 1

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Accepted Answer

A)  increase; rise; falls 
B)  increase; fall; rises 
C)  decrease; rise; falls 
D)  decrease; fall; rises 
A)  increase; rise; falls 
B)  increase; fall; rises 
C)  decrease; rise; falls 
D)  decrease; fall; rises

Question 2

Government transfer payments include which of the following?

Accepted Answer

A)  interest on the national debt 
B)  grants to state and local governments 
C)  Social Security and Medicare programs 
D)  national defense 
A)  interest on the national debt 
B)  grants to state and local governments 
C)  Social Security and Medicare programs 
D)  national defense

Question 3

If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to

Accepted Answer

A)  increase taxes. 
B)  increase government spending. 
C)  use expansionary fiscal policy. 
D)  increase interest rates. 
A)  increase taxes. 
B)  increase government spending. 
C)  use expansionary fiscal policy. 
D)  increase interest rates.

Question 4

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally

Accepted Answer

A)  less difficult than with monetary policy. 
B)  far less difficult than with monetary policy. 
C)  more difficult than with monetary policy. 
D)  about the same difficulty as with monetary policy. 
A)  less difficult than with monetary policy. 
B)  far less difficult than with monetary policy. 
C)  more difficult than with monetary policy. 
D)  about the same difficulty as with monetary policy.

Question 5

The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is the largest category of federal government expenditures?

Accepted Answer

A)  defense spending 
B)  transfer payments 
C)  interest on the debt 
D)  grants to state and local governments 
A)  defense spending 
B)  transfer payments 
C)  interest on the debt 
D)  grants to state and local governments

Question 7

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.

Accepted Answer

A)  $250 billion 
B)  $400 billion 
C)  $640 billion 
D)  None of the above are correct. Taxes should be increased in this case. 
A)  $250 billion 
B)  $400 billion 
C)  $640 billion 
D)  None of the above are correct. Taxes should be increased in this case.

Question 8

Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.

Accepted Answer

A) True 
 B)False

Question 9

Figure 27-5  
-Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant

Accepted Answer

A)  decrease in investment spending. 
B)  decrease in oil prices. 
C)  increase in consumption spending. 
D)  increase in net exports. 
A)  decrease in investment spending. 
B)  decrease in oil prices. 
C)  increase in consumption spending. 
D)  increase in net exports.

Question 10

Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?

Accepted Answer

A)  Spending on these three programs will rise from 9.7% of GDP currently to 10.2% of GDP by 2050. 
B)  Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially. 
C)  Some economists have argued for decreasing taxes to help with these programs' funding problems. 
D)  Some economists have argued for increasing benefits to help with these programs' funding problems. 
A)  Spending on these three programs will rise from 9.7% of GDP currently to 10.2% of GDP by 2050. 
B)  Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially. 
C)  Some economists have argued for decreasing taxes to help with these programs' funding problems. 
D)  Some economists have argued for increasing benefits to help with these programs' funding problems.

Question 11

In an open economy, the government purchases multiplier will be

Accepted Answer

A)  larger as the marginal propensity to import decreases. 
B)  smaller as the marginal propensity to import decreases. 
C)  smaller as the marginal propensity to tax decreases. 
D)  larger as the marginal propensity to consume decreases. 
A)  larger as the marginal propensity to import decreases. 
B)  smaller as the marginal propensity to import decreases. 
C)  smaller as the marginal propensity to tax decreases. 
D)  larger as the marginal propensity to consume decreases.

Question 12

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

Accepted Answer

A)  reduce investment in new capital. 
B)  make domestic businesses less competitive in international markets as the dollar appreciates in value. 
C)  raise interest rates and reduce consumer expenditures on automobiles and new houses. 
D)  All of the above are correct. 
A)  reduce investment in new capital. 
B)  make domestic businesses less competitive in international markets as the dollar appreciates in value. 
C)  raise interest rates and reduce consumer expenditures on automobiles and new houses. 
D)  All of the above are correct.

Question 13

Figure 27-5  
-Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 14

Figure 27-1  
-Refer to Figure 27-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

Accepted Answer

A)  D to C. 
B)  A to E. 
C)  C to D. 
D)  C to B. 
E)  E to A. 
A)  D to C. 
B)  A to E. 
C)  C to D. 
D)  C to B. 
E)  E to A.

Question 15

Which of the following would not be considered an automatic stabilizer?

Accepted Answer

A)  legislation increasing funding for job retraining passed during a recession 
B)  decreasing unemployment insurance payments due to decreased jobless during an expansion 
C)  rising income tax collections due to rising incomes during an expansion 
D)  declining food stamp payments due to more persons finding jobs during an expansion 
A)  legislation increasing funding for job retraining passed during a recession 
B)  decreasing unemployment insurance payments due to decreased jobless during an expansion 
C)  rising income tax collections due to rising incomes during an expansion 
D)  declining food stamp payments due to more persons finding jobs during an expansion

Question 16

Figure 27-5  
-Refer to Figure 27-5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue

Accepted Answer

A)  expansionary fiscal policy. 
B)  contractionary fiscal policy. 
C)  expansionary monetary policy. 
D)  contractionary monetary policy. 
E)  contractionary automatic stabilizers. 
A)  expansionary fiscal policy. 
B)  contractionary fiscal policy. 
C)  expansionary monetary policy. 
D)  contractionary monetary policy. 
E)  contractionary automatic stabilizers.

Question 17

If tax reduction and simplification are effective, then

Accepted Answer

A)  real wages will rise as labor supply and demand increase. 
B)  saving and investment in new capital will increase. 
C)  interest rates will rise in financial markets and demand for financial assets falls. 
D)  fewer new firms will be established, since existing firms will make more profit. 
A)  real wages will rise as labor supply and demand increase. 
B)  saving and investment in new capital will increase. 
C)  interest rates will rise in financial markets and demand for financial assets falls. 
D)  fewer new firms will be established, since existing firms will make more profit.

Question 18

Figure 27-1  
-Refer to Figure 27-1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

Accepted Answer

A)  A to B. 
B)  B to C. 
C)  C to B. 
D)  B to A. 
E)  A to E. 
A)  A to B. 
B)  B to C. 
C)  C to B. 
D)  B to A. 
E)  A to E.

Question 19

Assume a country is required by law to balance the budget every year. Suppose aggregate demand falls, causing a recession and a budget deficit. To balance the budget, what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy?

Accepted Answer

To balance the budget, the gov

Question 20

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by

Accepted Answer

A)  $500 billion. 
B)  less than $500 billion. 
C)  more than $500 billion. 
D)  None of the above are correct. Congress must act to decrease government purchases in this case. 
A)  $500 billion. 
B)  less than $500 billion. 
C)  more than $500 billion. 
D)  None of the above are correct. Congress must act to decrease government purchases in this case.

Exam 27: Fiscal Policy

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

Government transfer payments include which of the following?

If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally

The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect.

Which of the following is the largest category of federal government expenditures?

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.

Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.

Figure 27-5 -Which of the following would be most likely to induce Congress and the president to conduct expansionary fiscal policy? A significant

Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?

In an open economy, the government purchases multiplier will be

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

Figure 27-5 -Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Figure 27-1 -Refer to Figure 27-1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

Which of the following would not be considered an automatic stabilizer?

Figure 27-5 -Refer to Figure 27-5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue

If tax reduction and simplification are effective, then

Figure 27-1 -Refer to Figure 27-1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

A recession tends to cause the federal budget deficit to because tax revenues and government spending on transfer payments .

Figure 27-5 -Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be and real GDP to be .