Question 1

If the economy is in a recession,the most appropriate fiscal policy would be to:

Accepted Answer

A)  decrease government spending in order to balance the budget. 
B)  decrease both government spending and taxes. 
C)  increase government spending and cut taxes,thus running a higher budget deficit. 
D)  increase government spending and increase taxes in order to keep the budget balanced. 
A)  decrease government spending in order to balance the budget. 
B)  decrease both government spending and taxes. 
C)  increase government spending and cut taxes,thus running a higher budget deficit. 
D)  increase government spending and increase taxes in order to keep the budget balanced.

Question 2

Fiscal policy lags:

Accepted Answer

A)  are generally shorter than monetary policy lags. 
B)  are generally longer than monetary policy lags. 
C)  are generally the same length as monetary policy lags. 
D)  may be shorter or longer than monetary policy lags. 
A)  are generally shorter than monetary policy lags. 
B)  are generally longer than monetary policy lags. 
C)  are generally the same length as monetary policy lags. 
D)  may be shorter or longer than monetary policy lags.

Question 3

If Ricardian equivalence holds:

Accepted Answer

A)  taxpayers respond to lower tax rates today with increased savings today. 
B)  taxpayers respond to lower tax rates today with increased spending today. 
C)  consumption smoothing is less important than when Ricardian equivalence doesn't hold. 
D)  changes in fiscal policy are more likely to have a larger impact on aggregate demand. 
A)  taxpayers respond to lower tax rates today with increased savings today. 
B)  taxpayers respond to lower tax rates today with increased spending today. 
C)  consumption smoothing is less important than when Ricardian equivalence doesn't hold. 
D)  changes in fiscal policy are more likely to have a larger impact on aggregate demand.

Question 4

Which is NOT true regarding the 2009 stimulus plan enacted under President Obama?

Accepted Answer

A)  The stimulus plan included new spending and tax cuts totaling $800 billion to $900 billion. 
B)  Many of the tax cuts were saved rather than spent. 
C)  Federal grants to states prevented massive state layoffs but also made state agencies highly dependent on the federal government for revenue. 
D)  The stimulus plan led to a high degree of crowding out of private investment. 
A)  The stimulus plan included new spending and tax cuts totaling $800 billion to $900 billion. 
B)  Many of the tax cuts were saved rather than spent. 
C)  Federal grants to states prevented massive state layoffs but also made state agencies highly dependent on the federal government for revenue. 
D)  The stimulus plan led to a high degree of crowding out of private investment.

Question 5

The tax cuts enacted by President John F.Kennedy in the early 1960s:

Accepted Answer

A)  constituted a massive fraction of GDP. 
B)  were not good for long-run growth. 
C)  probably had little effect on the economy until 1965-1967. 
D)  were among the smallest tax cuts in the post-World War II era. 
A)  constituted a massive fraction of GDP. 
B)  were not good for long-run growth. 
C)  probably had little effect on the economy until 1965-1967. 
D)  were among the smallest tax cuts in the post-World War II era.

Question 6

Other things equal,which will result in a larger stimulus,a temporary investment tax rebate or a permanent investment tax rebate?

Accepted Answer

A)  a temporary investment tax rebate 
B)  a permanent investment tax rebate 
C)  They will both produce the same amount of stimulus. 
D)  Neither will provide any stimulus. 
A)  a temporary investment tax rebate 
B)  a permanent investment tax rebate 
C)  They will both produce the same amount of stimulus. 
D)  Neither will provide any stimulus.

Question 7

If the government increases its spending,financing methods that can cause crowding out include:

Accepted Answer

A)  raising taxes only. 
B)  selling bonds only. 
C)  both raising taxes and selling bonds. 
D)  neither raising taxes nor selling bonds. 
A)  raising taxes only. 
B)  selling bonds only. 
C)  both raising taxes and selling bonds. 
D)  neither raising taxes nor selling bonds.

Question 8

The crowding out effect refers to an increase in private spending that leads to a decrease in government spending.

Accepted Answer

A) True 
 B)False

Question 9

What,if any,timing challenges exist with the use of discretionary fiscal policy? If there are any,compare and contrast them with the timing challenges of monetary policy.

Accepted Answer

The same timing challenges,or lags,exist

Question 10

In the United States,federal government expenditures must be approved by the:

Accepted Answer

A)  House of Representatives. 
B)  Senate. 
C)  president of the United States. 
D)  House of Representatives,the Senate,and the president of the United States. 
A)  House of Representatives. 
B)  Senate. 
C)  president of the United States. 
D)  House of Representatives,the Senate,and the president of the United States.

Question 11

Which is NOT a lag associated with fiscal policy?

Accepted Answer

A)  the time it takes to implement a policy once it's decided 
B)  the time to collect the data to assess the condition of the economy 
C)  the time it takes to assess whether the policy has worked 
D)  the time it takes to assess whether to use fiscal or monetary policy 
A)  the time it takes to implement a policy once it's decided 
B)  the time to collect the data to assess the condition of the economy 
C)  the time it takes to assess whether the policy has worked 
D)  the time it takes to assess whether to use fiscal or monetary policy

Question 12

Expansionary fiscal policy is enhanced by the multiplier effect,but compromised by the crowding out effect.

Accepted Answer

A) True 
 B)False

Question 13

Crowding out:

Accepted Answer

A)  is the decrease in private spending that occurs when government spending increases. 
B)  occurs when people see that lower taxes today means higher taxes in the future,so they quickly spend the tax cut. 
C)  is federal government policy on taxes,spending,and borrowing that is designed to influence business fluctuations. 
D)  is central bank policy on the monetary base,interest rates,and bank reserves that is designed to influence business fluctuations. 
A)  is the decrease in private spending that occurs when government spending increases. 
B)  occurs when people see that lower taxes today means higher taxes in the future,so they quickly spend the tax cut. 
C)  is federal government policy on taxes,spending,and borrowing that is designed to influence business fluctuations. 
D)  is central bank policy on the monetary base,interest rates,and bank reserves that is designed to influence business fluctuations.

Question 14

According to the text,the consensus about the effects of the 2009 fiscal stimulus was that:

Accepted Answer

A)  a lot of the tax cuts did not turn into consumer spending. 
B)  most state governments did not benefit from the stimulus program. 
C)  the spending on infrastructure created many new permanent jobs. 
D)  the massive government spending programs almost completely crowded out private spending. 
A)  a lot of the tax cuts did not turn into consumer spending. 
B)  most state governments did not benefit from the stimulus program. 
C)  the spending on infrastructure created many new permanent jobs. 
D)  the massive government spending programs almost completely crowded out private spending.

Question 15

Tax rebates are likely to have a larger impact on consumer spending if the tax cuts are permanent rather than temporary.

Accepted Answer

A) True 
 B)False

Question 16

Figure: Aggregate Demand Shifts   Refer to the figure.Suppose the economy is initially at point A in the diagram.If an increase in investment spending causes a shift of the AD curve from AD1 to AD4,then the government can avoid a short-run increase in inflation by:

Accepted Answer

A)  increasing taxes so that the AD curve shifts back to AD1. 
B)  increasing taxes so that the AD curve shifts further out to AD5. 
C)  increasing government spending so that the AD curve shifts back to AD1. 
D)  increasing government spending so that the AD curve shifts further out to AD5. 
A)  increasing taxes so that the AD curve shifts back to AD1. 
B)  increasing taxes so that the AD curve shifts further out to AD5. 
C)  increasing government spending so that the AD curve shifts back to AD1. 
D)  increasing government spending so that the AD curve shifts further out to AD5.

Question 17

When fiscal policy is funded by issuing bonds,government spending primarily crowds out:

Accepted Answer

A)  velocity. 
B)  consumer spending. 
C)  investment. 
D)  real growth. 
A)  velocity. 
B)  consumer spending. 
C)  investment. 
D)  real growth.

Question 18

Use the following to answer questions 
Figure: Aggregate Demand and Fiscal Policy  
-(Figure: Aggregate Demand and Fiscal Policy)Refer to the figure.For an economy in a recession at point Z,what will happen in the long run in the absence of any government action to counter the recession?

Accepted Answer

A)  Wages will become flexible and spending growth will recover to increase aggregate demand,moving the economy to point X. 
B)  Wages will remain sticky and aggregate demand will fall farther,moving the economy to point Y. 
C)  Aggregate demand will rise above the LRAS curve,moving the economy to point W. 
D)  The economy will remain in a recession at point Z. 
A)  Wages will become flexible and spending growth will recover to increase aggregate demand,moving the economy to point X. 
B)  Wages will remain sticky and aggregate demand will fall farther,moving the economy to point Y. 
C)  Aggregate demand will rise above the LRAS curve,moving the economy to point W. 
D)  The economy will remain in a recession at point Z.

Question 19

As the recession continued in early 2009,consumer confidence most likely:

Accepted Answer

A)  increased. 
B)  decreased. 
C)  remained constant. 
D)  became too difficult to calculate accurately. 
A)  increased. 
B)  decreased. 
C)  remained constant. 
D)  became too difficult to calculate accurately.

Question 20

Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when:

Accepted Answer

A)  the stock market and other private investments are booming. 
B)  increased uncertainty causes a decrease in private sector investing. 
C)  interest rates are high. 
D)  private sector spending is high. 
A)  the stock market and other private investments are booming. 
B)  increased uncertainty causes a decrease in private sector investing. 
C)  interest rates are high. 
D)  private sector spending is high.

Exam 18: Fiscal Policy

If the economy is in a recession,the most appropriate fiscal policy would be to:

Fiscal policy lags:

If Ricardian equivalence holds:

Which is NOT true regarding the 2009 stimulus plan enacted under President Obama?

The tax cuts enacted by President John F.Kennedy in the early 1960s:

Other things equal,which will result in a larger stimulus,a temporary investment tax rebate or a permanent investment tax rebate?

If the government increases its spending,financing methods that can cause crowding out include:

The crowding out effect refers to an increase in private spending that leads to a decrease in government spending.

What,if any,timing challenges exist with the use of discretionary fiscal policy? If there are any,compare and contrast them with the timing challenges of monetary policy.

In the United States,federal government expenditures must be approved by the:

Which is NOT a lag associated with fiscal policy?

Expansionary fiscal policy is enhanced by the multiplier effect,but compromised by the crowding out effect.

Crowding out:

According to the text,the consensus about the effects of the 2009 fiscal stimulus was that:

Tax rebates are likely to have a larger impact on consumer spending if the tax cuts are permanent rather than temporary.

Figure: Aggregate Demand Shifts Refer to the figure.Suppose the economy is initially at point A in the diagram.If an increase in investment spending causes a shift of the AD curve from AD1 to AD4,then the government can avoid a short-run increase in inflation by:

When fiscal policy is funded by issuing bonds,government spending primarily crowds out:

Use the following to answer questions Figure: Aggregate Demand and Fiscal Policy -(Figure: Aggregate Demand and Fiscal Policy)Refer to the figure.For an economy in a recession at point Z,what will happen in the long run in the absence of any government action to counter the recession?

As the recession continued in early 2009,consumer confidence most likely:

Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when:

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Saving,investment,and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Business Fluctuations

Transmission and Amplification Mechanisms

The Federal Reserve System

Monetary Policy

The Federal Budget- Taxes and Spending

International Trade

International Finance

Political Economy and Public Choice

Filters

Figure: Aggregate Demand Shifts Refer to the figure.Suppose the economy is initially at point A in the diagram.If an increase in investment spending causes a shift of the AD curve from AD₁ to AD₄,then the government can avoid a short-run increase in inflation by: