Question 1

The discretionary change of government expenditures or taxes to achieve national economic goals is

Accepted Answer

A)  crowding-out policy. 
B)  Ricardian-equivalence theorem. 
C)  supply-side economics. 
D)  fiscal policy. 
A)  crowding-out policy. 
B)  Ricardian-equivalence theorem. 
C)  supply-side economics. 
D)  fiscal policy.

Question 2

Because of crowding out

Accepted Answer

A)  expansionary fiscal policy during a recession must involve a tax increase. 
B)  expansionary fiscal policy during a recession is reinforced by private investment spending. 
C)  the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates. 
D)  expansionary fiscal policy is completely achieved even with a decline in investment spending. 
A)  expansionary fiscal policy during a recession must involve a tax increase. 
B)  expansionary fiscal policy during a recession is reinforced by private investment spending. 
C)  the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates. 
D)  expansionary fiscal policy is completely achieved even with a decline in investment spending.

Question 3

Suppose that real GDP is initially $100 trillion and the government attempts to increase real GDP to $101 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. How much increase in real government spending could lead to the desired level of real GDP?

Accepted Answer

A)  $200 billion 
B)  $250 billion 
C)  $500 billion 
D)  $1 trillion 
A)  $200 billion 
B)  $250 billion 
C)  $500 billion 
D)  $1 trillion

Question 4

-Refer to the above figure. Suppose that the economy initially is operating along AD1. If the government seeks to close the recessionary gap by raising government spending without any change in taxation, which moves the aggregate demand curve from AD1 to AD2, then to AD3. Which of the following scenarios is TRUE?

Accepted Answer

A)  Interest rates fall and investment rises. 
B)  Both interest rates and investment fall. 
C)  Both interest rates and investment rise. 
D)  Interest rates rise and investment falls. 
A)  Interest rates fall and investment rises. 
B)  Both interest rates and investment fall. 
C)  Both interest rates and investment rise. 
D)  Interest rates rise and investment falls.

Question 5

To offset the indirect crowding-out effects, 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 6

In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT

Accepted Answer

A)  an increase in aggregate demand. 
B)  an increase in the price level. 
C)  an increase in consumption. 
D)  higher real GDP. 
A)  an increase in aggregate demand. 
B)  an increase in the price level. 
C)  an increase in consumption. 
D)  higher real GDP.

Question 7

Supply-side theory asserts that high marginal tax rates

Accepted Answer

A)  encourage private saving. 
B)  encourage business investment. 
C)  raise additional tax revenues. 
D)  discourage work effort. 
A)  encourage private saving. 
B)  encourage business investment. 
C)  raise additional tax revenues. 
D)  discourage work effort.

Question 8

Supply-side economics focuses on tax cuts to stimulate

Accepted Answer

A)  aggregate demand by reducing saving. 
B)  aggregate supply by increasing production. 
C)  government spending. 
D)  household consumption. 
A)  aggregate demand by reducing saving. 
B)  aggregate supply by increasing production. 
C)  government spending. 
D)  household consumption.

Question 9

Which one of the following is TRUE about the effects of fiscal policy?

Accepted Answer

A)  A decrease government spending will increase aggregate supply. 
B)  A tax change does not have any direct or indirect effects on aggregate demand. 
C)  An increase in government spending will increase aggregate demand. 
D)  An increase in government spending will reduce aggregate demand. 
A)  A decrease government spending will increase aggregate supply. 
B)  A tax change does not have any direct or indirect effects on aggregate demand. 
C)  An increase in government spending will increase aggregate demand. 
D)  An increase in government spending will reduce aggregate demand.

Question 10

According to the Keynesian approach, an increase in taxes

Accepted Answer

A)  will reduce consumption exactly by the amount of the taxes. 
B)  will reduce consumption by an amount less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will increase consumption, as the government will spend the extra tax revenue and that increases consumption. 
A)  will reduce consumption exactly by the amount of the taxes. 
B)  will reduce consumption by an amount less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will increase consumption, as the government will spend the extra tax revenue and that increases consumption.

Question 11

Automatic stabilizers

Accepted Answer

A)  work counter-cyclically to moderate the business cycle. 
B)  often make any downturn in the economy worse. 
C)  must be determined by the Congress in each budget. 
D)  are never altered. 
A)  work counter-cyclically to moderate the business cycle. 
B)  often make any downturn in the economy worse. 
C)  must be determined by the Congress in each budget. 
D)  are never altered.

Question 12

In the traditional Keynesian model, a decrease in government spending lowers total planned real expenditures by more than the original decrease in government spending because

Accepted Answer

A)  consumption spending depends negatively on real GDP. 
B)  consumption spending depends positively on real GDP. 
C)  consumption spending is not related to real GDP. 
D)  of the crowding-out effect on consumption spending. 
A)  consumption spending depends negatively on real GDP. 
B)  consumption spending depends positively on real GDP. 
C)  consumption spending is not related to real GDP. 
D)  of the crowding-out effect on consumption spending.

Question 13

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use fiscal policy to close the existing gap, it should

Accepted Answer

A)  increase taxes. 
B)  decrease taxes. 
C)  increase the money supply. 
D)  increase government spending. 
A)  increase taxes. 
B)  decrease taxes. 
C)  increase the money supply. 
D)  increase government spending.

Question 14

The amount of time it takes the government to determine the size of a tax policy is known as the

Accepted Answer

A)  action time lag. 
B)  effect time lag. 
C)  recognition time lag. 
D)  Ricardian-equivalence time lag. 
A)  action time lag. 
B)  effect time lag. 
C)  recognition time lag. 
D)  Ricardian-equivalence time lag.

Exam 13: Fiscal Policy

The discretionary change of government expenditures or taxes to achieve national economic goals is

Because of crowding out

To offset the indirect crowding-out effects, a government engaging in expansionary policy aimed at eliminating a recessionary gap could

In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT

Supply-side theory asserts that high marginal tax rates

Supply-side economics focuses on tax cuts to stimulate

Which one of the following is TRUE about the effects of fiscal policy?

According to the Keynesian approach, an increase in taxes

Automatic stabilizers

In the traditional Keynesian model, a decrease in government spending lowers total planned real expenditures by more than the original decrease in government spending because

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use fiscal policy to close the existing gap, it should

The amount of time it takes the government to determine the size of a tax policy is known as the

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

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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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