Question 1

-Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?

Accepted Answer

A)  Raise government spending to stimulate investment, consumption and net exports. 
B)  Increase government spending while holding taxes constant. 
C)  Engage in contractionary fiscal policy by raising income taxes. 
D)  Reduce the interest rate to stimulate investment minimizing the crowding out effect. 
A)  Raise government spending to stimulate investment, consumption and net exports. 
B)  Increase government spending while holding taxes constant. 
C)  Engage in contractionary fiscal policy by raising income taxes. 
D)  Reduce the interest rate to stimulate investment minimizing the crowding out effect.

Question 2

-Consider the above figure. The curve shown is sometimes referred to as

Accepted Answer

A)  the Laffer curve. 
B)  the Ricardian curve. 
C)  the Keynesian curve. 
D)  the Phillips curve. 
A)  the Laffer curve. 
B)  the Ricardian curve. 
C)  the Keynesian curve. 
D)  the Phillips curve.

Question 3

In the traditional Keynesian model, a tax increase

Accepted Answer

A)  causes the C + I + G + X line to shift downward. 
B)  causes the C + I + G + X line to shift upward. 
C)  causes a leftward movement along the C + I + G + X line. 
D)  does not affect the C + I + G + X line. 
A)  causes the C + I + G + X line to shift downward. 
B)  causes the C + I + G + X line to shift upward. 
C)  causes a leftward movement along the C + I + G + X line. 
D)  does not affect the C + I + G + X line.

Question 4

What are direct expenditure offsets and how do they influence the effects of fiscal policy?

Accepted Answer

When government spending competes with t

Question 5

By definition, a direct expenditure offset will occur whenever

Accepted Answer

A)  the government increases spending in an area that competes with the private sector. 
B)  the government increases spending for the military. 
C)  the government increases spending to stimulate consumer spending. 
D)  the interest rate raises to offset the effects of fiscal policy. 
A)  the government increases spending in an area that competes with the private sector. 
B)  the government increases spending for the military. 
C)  the government increases spending to stimulate consumer spending. 
D)  the interest rate raises to offset the effects of fiscal policy.

Question 6

Which of the following is NOT a fiscal policy action?

Accepted Answer

A)  increasing government expenditures on military hardware 
B)  decreasing government spending on social welfare 
C)  decreasing the quantity of money in circulation 
D)  lowering income tax rates 
A)  increasing government expenditures on military hardware 
B)  decreasing government spending on social welfare 
C)  decreasing the quantity of money in circulation 
D)  lowering income tax rates

Question 7

Discretionary fiscal policy

Accepted Answer

A)  is not very effective in influencing real GDP during normal times because of time lags. 
B)  can be very effective in influencing real GDP during abnormal times, such as when a nation is at war. 
C)  may reassure investors and consumers that the federal government will be able to avert a major economic downturn. 
D)  all of the above. 
A)  is not very effective in influencing real GDP during normal times because of time lags. 
B)  can be very effective in influencing real GDP during abnormal times, such as when a nation is at war. 
C)  may reassure investors and consumers that the federal government will be able to avert a major economic downturn. 
D)  all of the above.

Question 8

Assuming that the Ricardian equivalence theorem is TRUE, which of the conditions below will hold?

Accepted Answer

A)  An increase in the government budget deficit will not affect aggregate demand. 
B)  Exports will not be considered part of aggregate demand. 
C)  Investment spending will not be considered part of aggregate demand. 
D)  The long-run aggregate supply curve will not be vertical. 
A)  An increase in the government budget deficit will not affect aggregate demand. 
B)  Exports will not be considered part of aggregate demand. 
C)  Investment spending will not be considered part of aggregate demand. 
D)  The long-run aggregate supply curve will not be vertical.

Question 9

-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to AD3, but the increase in spending only shifts the aggregate demand curve to AD2, then

Accepted Answer

A)  complete crowding out has occurred. 
B)  some crowding out has occurred. 
C)  the increased borrowing caused interest rates to fall. 
D)  the short-run aggregate supply curve is steeper than the figure indicates. 
A)  complete crowding out has occurred. 
B)  some crowding out has occurred. 
C)  the increased borrowing caused interest rates to fall. 
D)  the short-run aggregate supply curve is steeper than the figure indicates.

Question 10

Which of the following is a discretionary fiscal policy action?

Accepted Answer

A)  an increase in the amount of unemployment compensation because more people become unemployed 
B)  a progressive tax system that leads to an increase in income tax revenues from the rich 
C)  a deliberate tax increase when the economy experiences high inflation 
D)  an increase in Supplemental Security Income payments when more people become eligible for the benefits 
A)  an increase in the amount of unemployment compensation because more people become unemployed 
B)  a progressive tax system that leads to an increase in income tax revenues from the rich 
C)  a deliberate tax increase when the economy experiences high inflation 
D)  an increase in Supplemental Security Income payments when more people become eligible for the benefits

Question 11

The proposition that increases in government spending that raise the government budget deficit has no effect on aggregate demand is called the

Accepted Answer

A)  open-economy effect. 
B)  federalism effect. 
C)  Ricardian equivalence theorem. 
D)  interest-rate effect. 
A)  open-economy effect. 
B)  federalism effect. 
C)  Ricardian equivalence theorem. 
D)  interest-rate effect.

Question 12

Supply-side economics

Accepted Answer

A)  promotes expansionary fiscal policy by simultaneously increasing taxes and government spending. 
B)  promotes reducing taxes to create incentives to increase productivity. 
C)  is based on the crowding-out effects. 
D)  is based on the Ricardian equivalence theorem. 
A)  promotes expansionary fiscal policy by simultaneously increasing taxes and government spending. 
B)  promotes reducing taxes to create incentives to increase productivity. 
C)  is based on the crowding-out effects. 
D)  is based on the Ricardian equivalence theorem.

Question 13

Automatic stabilizers are

Accepted Answer

A)  provisions that cause changes in government spending and taxes without new action by Congress or the President. 
B)  policies set by certain committees in Congress. 
C)  tools used by the President's Council of Economic Advisers. 
D)  provisions that cause the aggregate supply curve to be upward sloping. 
A)  provisions that cause changes in government spending and taxes without new action by Congress or the President. 
B)  policies set by certain committees in Congress. 
C)  tools used by the President's Council of Economic Advisers. 
D)  provisions that cause the aggregate supply curve to be upward sloping.

Question 14

According to the traditional Keynesian approach, if the government increases spending by $10 million and raises current taxes by $10 million at the same time, then

Accepted Answer

A)  real GDP will increase by $10 million. 
B)  real GDP will decrease by $10 million. 
C)  real GDP will decrease by more than $10 million. 
D)  real GDP will remain the same. 
A)  real GDP will increase by $10 million. 
B)  real GDP will decrease by $10 million. 
C)  real GDP will decrease by more than $10 million. 
D)  real GDP will remain the same.

Question 15

According to the Ricardian equivalence theorem, an increase in government spending without any tax increase will not increase aggregate demand because

Accepted Answer

A)  consumers will consume less and save more to prepare for increased taxes in the future. 
B)  the private sector is more likely than the public sector to spend any extra income on national defense. 
C)  consumers will increase their consumption proportionately more than Keynesian economists believe they will. 
D)  consumers will save less than they otherwise would have. 
A)  consumers will consume less and save more to prepare for increased taxes in the future. 
B)  the private sector is more likely than the public sector to spend any extra income on national defense. 
C)  consumers will increase their consumption proportionately more than Keynesian economists believe they will. 
D)  consumers will save less than they otherwise would have.

Question 16

Fiscal policy during periods of relatively low unemployment and low inflation have

Accepted Answer

A)  little effect due to time lags and the crowding-out effect. 
B)  significant effect due to the timely intervention of the president and congress. 
C)  significant effect because the changes in fiscal policy gives investors confidence in the economy. 
D)  little effect because the global market makes up fifty percent of aggregate spending. 
A)  little effect due to time lags and the crowding-out effect. 
B)  significant effect due to the timely intervention of the president and congress. 
C)  significant effect because the changes in fiscal policy gives investors confidence in the economy. 
D)  little effect because the global market makes up fifty percent of aggregate spending.

Question 17

-Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?

Accepted Answer

A)  Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B. 
B)  Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending. 
C)  Point C is a long-run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B. 
D)  Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B. 
A)  Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B. 
B)  Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending. 
C)  Point C is a long-run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B. 
D)  Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B.

Question 18

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Accepted Answer

A)  increase real Gross Domestic Product (GDP) in both the short and long run. 
B)  decrease real Gross Domestic Product (GDP) in the short run, but increase it in the long run. 
C)  increase real Gross Domestic Product (GDP) in the short run, but decrease it in the long run. 
D)  have no effect on real Gross Domestic Product (GDP) in either the short run or the long run. 
A)  increase real Gross Domestic Product (GDP) in both the short and long run. 
B)  decrease real Gross Domestic Product (GDP) in the short run, but increase it in the long run. 
C)  increase real Gross Domestic Product (GDP) in the short run, but decrease it in the long run. 
D)  have no effect on real Gross Domestic Product (GDP) in either the short run or the long run.

Question 19

Fiscal policy includes all of the following EXCEPT

Accepted Answer

A)  changing taxes. 
B)  changing government spending. 
C)  policies that influence aggregate demand. 
D)  policies that influence the rate of growth of the money supply. 
A)  changing taxes. 
B)  changing government spending. 
C)  policies that influence aggregate demand. 
D)  policies that influence the rate of growth of the money supply.

Question 20

According to traditional Keynesian economics, contractionary fiscal policy initiated by the federal government

Accepted Answer

A)  is never appropriate. 
B)  is an appropriate way to prevent recessions and depressions. 
C)  is an appropriate way to slow down an over-heated economy. 
D)  will always fail due to crowding out effects. 
A)  is never appropriate. 
B)  is an appropriate way to prevent recessions and depressions. 
C)  is an appropriate way to slow down an over-heated economy. 
D)  will always fail due to crowding out effects.

Exam 13: Fiscal Policy

-Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?

-Consider the above figure. The curve shown is sometimes referred to as

In the traditional Keynesian model, a tax increase

What are direct expenditure offsets and how do they influence the effects of fiscal policy?

By definition, a direct expenditure offset will occur whenever

Which of the following is NOT a fiscal policy action?

Discretionary fiscal policy

Assuming that the Ricardian equivalence theorem is TRUE, which of the conditions below will hold?

-Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to AD3, but the increase in spending only shifts the aggregate demand curve to AD2, then

Which of the following is a discretionary fiscal policy action?

The proposition that increases in government spending that raise the government budget deficit has no effect on aggregate demand is called the

Supply-side economics

Automatic stabilizers are

According to the traditional Keynesian approach, if the government increases spending by $10 million and raises current taxes by $10 million at the same time, then

According to the Ricardian equivalence theorem, an increase in government spending without any tax increase will not increase aggregate demand because

Fiscal policy during periods of relatively low unemployment and low inflation have

-Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct?

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Fiscal policy includes all of the following EXCEPT

According to traditional Keynesian economics, contractionary fiscal policy initiated by the federal government

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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