Question 1

If there is a deliberate change in government taxes and spending, it is called

Accepted Answer

A)  a recessionary gap. 
B)  an inflationary gap. 
C)  discretionary fiscal policy. 
D)  discretionary monetary policy. 
A)  a recessionary gap. 
B)  an inflationary gap. 
C)  discretionary fiscal policy. 
D)  discretionary monetary policy.

Question 2

A government proposal to increase marginal tax rates on the wealthiest 1 percent of U.S. residents is supposed to generate an additional $200 billion in tax revenues. It is likely that

Accepted Answer

A)  the actual revenue raised will exceed the $200 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. 
B)  the actual revenue raised will be more than $200 billion, because the short-run aggregate supply curve is upward sloping. 
C)  the actual revenue raised will be less than $200 billion, because some of the people will respond by working less and earning less income that can be taxed. 
D)  the actual revenue raised will be close to $200 billion, because the wealthy don't respond to work incentives the way poorer workers do. 
A)  the actual revenue raised will exceed the $200 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. 
B)  the actual revenue raised will be more than $200 billion, because the short-run aggregate supply curve is upward sloping. 
C)  the actual revenue raised will be less than $200 billion, because some of the people will respond by working less and earning less income that can be taxed. 
D)  the actual revenue raised will be close to $200 billion, because the wealthy don't respond to work incentives the way poorer workers do.

Question 3

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Accepted Answer

A)  a tax decrease passed into law by Congress 
B)  an increase in the money supply by the Federal Reserve 
C)  a decrease in government expenditures approved by Congress 
D)  an agreement among major banks to raise interest rates 
A)  a tax decrease passed into law by Congress 
B)  an increase in the money supply by the Federal Reserve 
C)  a decrease in government expenditures approved by Congress 
D)  an agreement among major banks to raise interest rates

Question 4

Explain how fiscal policy can correct a contractionary gap.

Accepted Answer

A contractionary gap can be cl

Question 5

Expansionary fiscal policy is used to

Accepted Answer

A)  flight inflation. 
B)  fight recessions. 
C)  encourage private saving. 
D)  make businesses more efficient. 
A)  flight inflation. 
B)  fight recessions. 
C)  encourage private saving. 
D)  make businesses more efficient.

Question 6

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 7

During which time will fiscal policy be the most effective?

Accepted Answer

A)  normal times 
B)  times of war 
C)  in the middle of expansions 
D)  times of stagflation 
A)  normal times 
B)  times of war 
C)  in the middle of expansions 
D)  times of stagflation

Question 8

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $100 billion, while the second option is to cut taxes by $100 billion. A Keynesian economist would argue for

Accepted Answer

A)  the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B)  the tax option because it is easier to pass. The effects on total spending would be identical. 
C)  the spending option because it won't affect the deficit the way the tax cut would. 
D)  the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier. 
A)  the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. 
B)  the tax option because it is easier to pass. The effects on total spending would be identical. 
C)  the spending option because it won't affect the deficit the way the tax cut would. 
D)  the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

Question 9

Which of the following is an example of fiscal policy?

Accepted Answer

A)  a reduction in the federal funds rate. 
B)  a reduction in the money supply. 
C)  a reduction in lump-sum taxes. 
D)  an increase in the government deficit due to more military spending in wartime. 
A)  a reduction in the federal funds rate. 
B)  a reduction in the money supply. 
C)  a reduction in lump-sum taxes. 
D)  an increase in the government deficit due to more military spending in wartime.

Question 10

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

Accepted Answer

A)  real Gross Domestic Product (GDP) will rise 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 rise. 
D)  real Gross Domestic Product (GDP) will remain constant but the price level will rise. 
A)  real Gross Domestic Product (GDP) will rise 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 rise. 
D)  real Gross Domestic Product (GDP) will remain constant but the price level will rise.

Question 11

When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to

Accepted Answer

A)  increase taxes. 
B)  decrease taxes. 
C)  increase government spending. 
D)  decrease the discount rate. 
A)  increase taxes. 
B)  decrease taxes. 
C)  increase government spending. 
D)  decrease the discount rate.

Question 12

-Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can

Accepted Answer

A)  boost taxes to shift LRAS through point A. 
B)  cut income tax rates to get the economy to point B. 
C)  raise income tax rates to get the economy to point C. 
D)  reduce government spending to get the economy to point D. 
A)  boost taxes to shift LRAS through point A. 
B)  cut income tax rates to get the economy to point B. 
C)  raise income tax rates to get the economy to point C. 
D)  reduce government spending to get the economy to point D.

Question 13

Suppose the government decreases lump-sum taxes. This causes

Accepted Answer

A)  disposable income to increase, which causes consumption spending to decrease and aggregate demand to increase. 
B)  government spending to decrease, which causes aggregate demand to decrease. 
C)  consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. 
D)  disposable income to decrease, which causes aggregate supply to decrease. 
A)  disposable income to increase, which causes consumption spending to decrease and aggregate demand to increase. 
B)  government spending to decrease, which causes aggregate demand to decrease. 
C)  consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. 
D)  disposable income to decrease, which causes aggregate supply to decrease.

Question 14

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 a higher output level. 
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 a higher output level.

Question 15

In the traditional Keynesian model, if the government decreases spending, then

Accepted Answer

A)  consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by more than the increase in government spending. 
B)  consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by less than the increase in government spending. 
C)  consumption will remain the same, and so real Gross Domestic Product (GDP) will increase by the same amount of the increase in government spending. 
D)  consumption will increase or decrease, and so real Gross Domestic Product (GDP) will increase or decrease depending on the change in consumption. 
A)  consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by more than the increase in government spending. 
B)  consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by less than the increase in government spending. 
C)  consumption will remain the same, and so real Gross Domestic Product (GDP) will increase by the same amount of the increase in government spending. 
D)  consumption will increase or decrease, and so real Gross Domestic Product (GDP) will increase or decrease depending on the change in consumption.

Question 16

-Refer to the above figure. As the real national income expands from Y2 to Y3,

Accepted Answer

A)  a budget surplus occurs. 
B)  a budget deficit occurs. 
C)  tax revenues fall. 
D)  government transfers rise. 
A)  a budget surplus occurs. 
B)  a budget deficit occurs. 
C)  tax revenues fall. 
D)  government transfers rise.

Question 17

Discretionary fiscal policy is best described as

Accepted Answer

A)  a deliberate action to move the economy toward full employment and price stability more quickly than it might otherwise. 
B)  a deliberate attempt to improve the functioning of free markets. 
C)  an automatic change in income transfer payments to keep the economy at full employment. 
D)  the design of a tax system that automatically stabilizes economic activity over time. 
A)  a deliberate action to move the economy toward full employment and price stability more quickly than it might otherwise. 
B)  a deliberate attempt to improve the functioning of free markets. 
C)  an automatic change in income transfer payments to keep the economy at full employment. 
D)  the design of a tax system that automatically stabilizes economic activity over time.

Question 18

In Country X, the government simultaneously increases its expenditures by $100 billion and increases taxes by $100 billion. If the MPS is equal to 0.4, the government's action ________ real GDP by ________.

Accepted Answer

A)  increases; $250 billion 
B)  decreases; $250 billion 
C)  increases; $100 billion 
D)  has no effect on; $0 
A)  increases; $250 billion 
B)  decreases; $250 billion 
C)  increases; $100 billion 
D)  has no effect on; $0

Question 19

Provisions that cause changes in government spending and taxes that do NOT require action of the President or Congress are called

Accepted Answer

A)  discretionary fiscal policy. 
B)  discretionary stabilizers. 
C)  automatic stabilizers. 
D)  private stabilization effects. 
A)  discretionary fiscal policy. 
B)  discretionary stabilizers. 
C)  automatic stabilizers. 
D)  private stabilization effects.

Question 20

According the traditional Keynesian approach, an increase in government spending is effective in raising real Gross Domestic Product (GDP) if

Accepted Answer

A)  the price level is fixed. 
B)  the price level is flexible. 
C)  the price level does not exist. 
D)  Ricardian equivalence occurs, regardless of the price level. 
A)  the price level is fixed. 
B)  the price level is flexible. 
C)  the price level does not exist. 
D)  Ricardian equivalence occurs, regardless of the price level.

Exam 13: Fiscal Policy

If there is a deliberate change in government taxes and spending, it is called

A government proposal to increase marginal tax rates on the wealthiest 1 percent of U.S. residents is supposed to generate an additional $200 billion in tax revenues. It is likely that

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Explain how fiscal policy can correct a contractionary gap.

Expansionary fiscal policy is used to

The Laffer curve

During which time will fiscal policy be the most effective?

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $100 billion, while the second option is to cut taxes by $100 billion. A Keynesian economist would argue for

Which of the following is an example of fiscal policy?

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

When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to

-Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can

Suppose the government decreases lump-sum taxes. This causes

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

In the traditional Keynesian model, if the government decreases spending, then

-Refer to the above figure. As the real national income expands from Y2 to Y3,

Discretionary fiscal policy is best described as

In Country X, the government simultaneously increases its expenditures by $100 billion and increases taxes by $100 billion. If the MPS is equal to 0.4, the government's action ________ real GDP by ________.

Provisions that cause changes in government spending and taxes that do NOT require action of the President or Congress are called

According the traditional Keynesian approach, an increase in government spending is effective in raising real Gross Domestic Product (GDP) if

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

In Country X, the government simultaneously increases its expenditures by $100 billion and increases taxes by $100 billion. If the MPS is equal to 0.4, the government's action real GDP by .