Question 1

Which of the following is an example of a discretionary fiscal policy action?

Accepted Answer

A)  an increase in government spending to deal with a recession 
B)  a decrease in tax revenues as taxpayers' incomes decrease 
C)  increasing the minimum wage rate 
D)  raising regulations in the banking industry 
A)  an increase in government spending to deal with a recession 
B)  a decrease in tax revenues as taxpayers' incomes decrease 
C)  increasing the minimum wage rate 
D)  raising regulations in the banking industry

Question 2

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

Accepted Answer

A)  cuts in government spending 
B)  cuts in taxes 
C)  increases in taxes and increases in government spending 
D)  cuts in taxes and increases in government spending 
A)  cuts in government spending 
B)  cuts in taxes 
C)  increases in taxes and increases in government spending 
D)  cuts in taxes and increases in government spending

Question 3

If the price level is fixed, then a decrease in government spending will lead to

Accepted Answer

A)  a larger decrease in nominal GDP than in real GDP. 
B)  a smaller decrease in nominal GDP than in real GDP. 
C)  no decrease in either nominal GDP or real GDP. 
D)  a decrease in nominal GDP by the same amount as a decrease in real GDP. 
A)  a larger decrease in nominal GDP than in real GDP. 
B)  a smaller decrease in nominal GDP than in real GDP. 
C)  no decrease in either nominal GDP or real GDP. 
D)  a decrease in nominal GDP by the same amount as a decrease in real GDP.

Question 4

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an recessionary gap?

Accepted Answer

A)  a decrease in government spending 
B)  a decrease in taxes 
C)  an increase in interest rates 
D)  a decrease in the money supply 
A)  a decrease in government spending 
B)  a decrease in taxes 
C)  an increase in interest rates 
D)  a decrease in the money supply

Question 5

Deficit financing

Accepted Answer

A)  is when the government adjusts taxes to raise money to pay for government projects. 
B)  is the mechanism behind the Laffer curve. 
C)  is how the automatic stabilizers work. 
D)  is when discretionary fiscal policy leads to spending more than is collected in taxes. 
A)  is when the government adjusts taxes to raise money to pay for government projects. 
B)  is the mechanism behind the Laffer curve. 
C)  is how the automatic stabilizers work. 
D)  is when discretionary fiscal policy leads to spending more than is collected in taxes.

Question 6

-Refer to the above figure. Which panel is consistent with the Laffer curve?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 7

If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will

Accepted Answer

A)  generate higher prices in the short run, but will induce aggregate supply to increase in the long run. 
B)  generate an increase in real GDP and higher prices in both the short run and the long run. 
C)  generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase. 
D)  generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more. 
A)  generate higher prices in the short run, but will induce aggregate supply to increase in the long run. 
B)  generate an increase in real GDP and higher prices in both the short run and the long run. 
C)  generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase. 
D)  generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more.

Question 8

When television commentators refer to "tax and spend" policy, they are referring to

Accepted Answer

A)  fiscal policy. 
B)  monetary policy. 
C)  command and control policy. 
D)  automatic stabilizers. 
A)  fiscal policy. 
B)  monetary policy. 
C)  command and control policy. 
D)  automatic stabilizers.

Question 9

The period between the recognition of a problem and the implementation of a policy to solve the problem is

Accepted Answer

A)  the recognition lag. 
B)  the action lag. 
C)  the policy effect lag. 
D)  the political decision lag. 
A)  the recognition lag. 
B)  the action lag. 
C)  the policy effect lag. 
D)  the political decision lag.

Question 10

Direct expenditure offsets are

Accepted Answer

A)  the discretionary changing of government expenditures to achieve a higher employment level. 
B)  the decrease in planned investment that occurs as the result of an increase in interest rates. 
C)  the same as the Ricardian equivalence theorem. 
D)  the decrease in spending in the private sector in areas in which the government is competing. 
A)  the discretionary changing of government expenditures to achieve a higher employment level. 
B)  the decrease in planned investment that occurs as the result of an increase in interest rates. 
C)  the same as the Ricardian equivalence theorem. 
D)  the decrease in spending in the private sector in areas in which the government is competing.

Question 11

"Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE?

Accepted Answer

A)  yes, because theoretically nothing else can offset the effects of fiscal policy 
B)  yes, when the long-run aggregate supply curve is horizontal too 
C)  no, because crowding out could take place 
D)  no, because the increased spending may cause the price level to increase 
A)  yes, because theoretically nothing else can offset the effects of fiscal policy 
B)  yes, when the long-run aggregate supply curve is horizontal too 
C)  no, because crowding out could take place 
D)  no, because the increased spending may cause the price level to increase

Question 12

Which of the following would shift the aggregate demand curve to the right?

Accepted Answer

A)  an increase in government spending 
B)  an increase in taxes 
C)  an increase in interest rates 
D)  an increase in labor productivity 
A)  an increase in government spending 
B)  an increase in taxes 
C)  an increase in interest rates 
D)  an increase in labor productivity

Question 13

In the traditional Keynesian model, an increase in government spending

Accepted Answer

A)  causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. 
B)  causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. 
C)  causes the C + I + G + X line to shift upward by more than the increase in government spending. 
D)  causes no change in the C + I + G + X line. 
A)  causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. 
B)  causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. 
C)  causes the C + I + G + X line to shift upward by more than the increase in government spending. 
D)  causes no change in the C + I + G + X line.

Question 14

The crowding-out effect refers to the tendency of expansionary fiscal policy to

Accepted Answer

A)  cause decreases in planned expenditures in the private sector. 
B)  cause households to save less. 
C)  replace low-skilled labor with higher-skilled labor. 
D)  cause firms to produce above their full capacity. 
A)  cause decreases in planned expenditures in the private sector. 
B)  cause households to save less. 
C)  replace low-skilled labor with higher-skilled labor. 
D)  cause firms to produce above their full capacity.

Question 15

The traditional Keynesian approach to fiscal policy assumes

Accepted Answer

A)  the price level is constant. 
B)  government expenditures are often substitutes for private expenditures. 
C)  the Ricardian equivalence theorem is correct. 
D)  the validity of supply-side economics. 
A)  the price level is constant. 
B)  government expenditures are often substitutes for private expenditures. 
C)  the Ricardian equivalence theorem is correct. 
D)  the validity of supply-side economics.

Question 16

The Ricardian equivalence theorem states that

Accepted Answer

A)  the effects of an increase in government spending are equivalent to the effects of an increase in the money supply. 
B)  an increase in government spending financed by higher taxes has no effect on aggregate demand. 
C)  spending on national defense is a direct expenditure offset. 
D)  government spending financed by taxes is equivalent to government spending financed by borrowing. 
A)  the effects of an increase in government spending are equivalent to the effects of an increase in the money supply. 
B)  an increase in government spending financed by higher taxes has no effect on aggregate demand. 
C)  spending on national defense is a direct expenditure offset. 
D)  government spending financed by taxes is equivalent to government spending financed by borrowing.

Question 17

If there is a dollar-for-dollar direct expenditure offset, then

Accepted Answer

A)  increases in aggregate demand will also increase long-run aggregate supply. 
B)  increases in government spending will not increase aggregate demand. 
C)  increases in aggregate demand will increase the price level, but leave real output unchanged. 
D)  increases in aggregate demand will increase real output, but leave the price level unchanged. 
A)  increases in aggregate demand will also increase long-run aggregate supply. 
B)  increases in government spending will not increase aggregate demand. 
C)  increases in aggregate demand will increase the price level, but leave real output unchanged. 
D)  increases in aggregate demand will increase real output, but leave the price level unchanged.

Question 18

Automatic stabilizers are fiscal policy measures that

Accepted Answer

A)  must be determined by the Congress in each budget. 
B)  do not require new legislation. 
C)  are determined by the Federal Reserve System. 
D)  are part of discretionary fiscal policy. 
A)  must be determined by the Congress in each budget. 
B)  do not require new legislation. 
C)  are determined by the Federal Reserve System. 
D)  are part of discretionary fiscal policy.

Question 19

The government wants to increase its spending to stimulate the economy. Taking into account direct expenditure offset effects, what is its best spending option?

Accepted Answer

A)  a new fighter jet for the military 
B)  expanding the school lunch program 
C)  constructing more low income housing 
D)  providing textbooks for college students 
A)  a new fighter jet for the military 
B)  expanding the school lunch program 
C)  constructing more low income housing 
D)  providing textbooks for college students

Question 20

Which of the following is NOT related to fiscal policy?

Accepted Answer

A)  passage of a new regulation on a specific industry 
B)  decreasing marginal tax rates 
C)  reducing the budget deficit 
D)  increasing government expenditures 
A)  passage of a new regulation on a specific industry 
B)  decreasing marginal tax rates 
C)  reducing the budget deficit 
D)  increasing government expenditures

Exam 13: Fiscal Policy

Which of the following is an example of a discretionary fiscal policy action?

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap?

If the price level is fixed, then a decrease in government spending will lead to

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an recessionary gap?

Deficit financing

-Refer to the above figure. Which panel is consistent with the Laffer curve?

If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will

When television commentators refer to "tax and spend" policy, they are referring to

The period between the recognition of a problem and the implementation of a policy to solve the problem is

Direct expenditure offsets are

"Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE?

Which of the following would shift the aggregate demand curve to the right?

In the traditional Keynesian model, an increase in government spending

The crowding-out effect refers to the tendency of expansionary fiscal policy to

The traditional Keynesian approach to fiscal policy assumes

The Ricardian equivalence theorem states that

If there is a dollar-for-dollar direct expenditure offset, then

Automatic stabilizers are fiscal policy measures that

The government wants to increase its spending to stimulate the economy. Taking into account direct expenditure offset effects, what is its best spending option?

Which of the following is NOT related to fiscal policy?

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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