Question 1

During normal times, discretionary fiscal policy

Accepted Answer

A)  is more effective in influencing real GDP than at times of a recession. 
B)  is probably not very effective in influencing real GDP due to time lags. 
C)  is more effective in influencing real GDP than automatic stabilizers. 
D)  works well because there are no lag problems in influencing real GDP. 
A)  is more effective in influencing real GDP than at times of a recession. 
B)  is probably not very effective in influencing real GDP due to time lags. 
C)  is more effective in influencing real GDP than automatic stabilizers. 
D)  works well because there are no lag problems in influencing real GDP. B

Question 2

If the economy is experiencing a recessionary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

Accepted Answer

A)  reduce aggregate demand by cutting government spending or raising taxes. 
B)  increase aggregate demand by increasing government spending or cutting taxes. 
C)  increase aggregate supply by cutting government spending or raising taxes. 
D)  increase aggregate supply by increasing government spending or lowering taxes. 
A)  reduce aggregate demand by cutting government spending or raising taxes. 
B)  increase aggregate demand by increasing government spending or cutting taxes. 
C)  increase aggregate supply by cutting government spending or raising taxes. 
D)  increase aggregate supply by increasing government spending or lowering taxes. B

Question 3

Discretionary fiscal policy in the United States

Accepted Answer

A)  is undertaken at the order of the Federal Reserve. 
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 Federal Reserve. 
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. C

Question 4

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

Accepted Answer

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

Question 5

Explain the Ricardian equivalence theorem.

Accepted Answer

The Ricardian equivalence theorem is the

Question 6

To close an inflationary gap through fiscal policy, the government should

Accepted Answer

A)  decrease government spending in order to increase aggregate supply. 
B)  decrease government spending in order to reduce 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)  decrease government spending in order to reduce 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 7

In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result

Accepted Answer

A)  the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag. 
B)  the full effect of the fiscal policy change would not be felt until after March 2011 because of the recognition time lag. 
C)  the full effect of the fiscal policy change would be felt by March 2011 because people anticipated the spending and changed their behavior accordingly. 
D)  the full effect of the fiscal policy change would be felt when the last of the funds were spent by the government. 
A)  the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag. 
B)  the full effect of the fiscal policy change would not be felt until after March 2011 because of the recognition time lag. 
C)  the full effect of the fiscal policy change would be felt by March 2011 because people anticipated the spending and changed their behavior accordingly. 
D)  the full effect of the fiscal policy change would be felt when the last of the funds were spent by the government.

Question 8

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 9

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Accepted Answer

A)  increase aggregate demand. 
B)  increase both aggregate demand and aggregate supply. 
C)  have no effect on aggregate demand. 
D)  affect only aggregate supply. 
A)  increase aggregate demand. 
B)  increase both aggregate demand and aggregate supply. 
C)  have no effect on aggregate demand. 
D)  affect only aggregate supply.

Question 10

Fiscal policy involves which of the following?

Accepted Answer

A)  tax policy 
B)  interest rates 
C)  selling government bonds 
D)  all of the above 
A)  tax policy 
B)  interest rates 
C)  selling government bonds 
D)  all of the above

Question 11

According to the traditional Keynesian approach, a tax increase lowers aggregate demand because

Accepted Answer

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

Question 12

-Refer to the above figure. If the relevant aggregate demand curve is AD2, 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 13

An example of fiscal policy is

Accepted Answer

A)  an increase in government spending. 
B)  a reduction in investment spending by the private sector. 
C)  an increase in autonomous spending by consumers. 
D)  a cost-of-living adjustment in Social Security payments to the elderly. 
A)  an increase in government spending. 
B)  a reduction in investment spending by the private sector. 
C)  an increase in autonomous spending by consumers. 
D)  a cost-of-living adjustment in Social Security payments to the elderly.

Question 14

Once either expansionary or contractionary fiscal policy has been undertaken,

Accepted Answer

A)  aggregate demand will respond quickly and the problems in the economy will be corrected. 
B)  aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. 
C)  a time lag exists between implementation and the results of the policy. 
D)  taxes will need to be adjusted because of the recognition time lag. 
A)  aggregate demand will respond quickly and the problems in the economy will be corrected. 
B)  aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. 
C)  a time lag exists between implementation and the results of the policy. 
D)  taxes will need to be adjusted because of the recognition time lag.

Question 15

Which of the following is a basic assumption of the Ricardian equivalence theorem?

Accepted Answer

A)  Consumers pay no attention to government budget deficits. 
B)  Consumers think only in terms of the present. 
C)  If current tax cuts result in budget deficit increases, consumers increase their labor supply today. 
D)  Consumers consider future tax payments when deciding how much to spend and save today. 
A)  Consumers pay no attention to government budget deficits. 
B)  Consumers think only in terms of the present. 
C)  If current tax cuts result in budget deficit increases, consumers increase their labor supply today. 
D)  Consumers consider future tax payments when deciding how much to spend and save today.

Question 16

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the

Accepted Answer

A)  inflationary effect. 
B)  crowding-out effect. 
C)  recessionary effect. 
D)  Keynesian effect. 
A)  inflationary effect. 
B)  crowding-out effect. 
C)  recessionary effect. 
D)  Keynesian effect.

Question 17

The action time lag is the time period that elapses

Accepted Answer

A)  between when an economic problem manifests itself and it is officially acknowledged. 
B)  between the recognition of an economic problem and implementing policies to solve it. 
C)  between implementing policies to solve an economic problem and when the results of that policy can be measured. 
D)  between the beginning of the budgetary process and the final budget resolution. 
A)  between when an economic problem manifests itself and it is officially acknowledged. 
B)  between the recognition of an economic problem and implementing policies to solve it. 
C)  between implementing policies to solve an economic problem and when the results of that policy can be measured. 
D)  between the beginning of the budgetary process and the final budget resolution.

Question 18

The crowding-out effect is

Accepted Answer

A)  the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the private sector. 
B)  the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the private sector. 
C)  the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector. 
D)  the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the private sector. 
A)  the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the private sector. 
B)  the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the private sector. 
C)  the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector. 
D)  the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the private sector.

Question 19

The crowding-out effect is

Accepted Answer

A)  due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve. 
B)  due to the government being more powerful in the markets when there is an increase in government spending. 
C)  a situation in which expansionary fiscal policy leads to a decrease in planned spending in the private sector. 
D)  only relevant when an inflationary gap is present. 
A)  due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve. 
B)  due to the government being more powerful in the markets when there is an increase in government spending. 
C)  a situation in which expansionary fiscal policy leads to a decrease in planned spending in the private sector. 
D)  only relevant when an inflationary gap is present.

Question 20

Fiscal policy is defined as

Accepted Answer

A)  the design of a tax system to transfer income from large corporations to the poor. 
B)  the use of Congressional power to pursue social and political goals. 
C)  the discretionary changing of government expenditures or taxes to achieve macroeconomic goals. 
D)  the use of the taxing power of the government to redistribute wealth in a socially acceptable manner. 
A)  the design of a tax system to transfer income from large corporations to the poor. 
B)  the use of Congressional power to pursue social and political goals. 
C)  the discretionary changing of government expenditures or taxes to achieve macroeconomic goals. 
D)  the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.

Exam 13: Fiscal Policy

During normal times, discretionary fiscal policy

If the economy is experiencing a recessionary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should

Discretionary fiscal policy in the United States

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

Explain the Ricardian equivalence theorem.

To close an inflationary gap through fiscal policy, the government should

In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result

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

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Fiscal policy involves which of the following?

According to the traditional Keynesian approach, a tax increase lowers aggregate demand because

-Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation?

An example of fiscal policy is

Once either expansionary or contractionary fiscal policy has been undertaken,

Which of the following is a basic assumption of the Ricardian equivalence theorem?

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the

The action time lag is the time period that elapses

The crowding-out effect is

The crowding-out effect is

Fiscal policy is defined as

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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