Question 1

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as

Accepted Answer

A)  the expenditure-offset theorem. 
B)  the Keynesian Cross. 
C)  the balanced budget multiplier. 
D)  the Ricardian equivalence theorem. 
A)  the expenditure-offset theorem. 
B)  the Keynesian Cross. 
C)  the balanced budget multiplier. 
D)  the Ricardian equivalence theorem.

Question 2

-Refer to the above figure. If the economy is currently operating at point C, then there is

Accepted Answer

A)  deflation. 
B)  a recessionary gap. 
C)  an inflationary gap. 
D)  unemployment. 
A)  deflation. 
B)  a recessionary gap. 
C)  an inflationary gap. 
D)  unemployment.

Question 3

If the government increases spending while holding taxes constant, we expect

Accepted Answer

A)  an increase in investment spending by businesses too, as they anticipate future economic growth. 
B)  a decrease in real saving as consumers follow suit and also increase borrowing. 
C)  planned real investment spending by businesses to increase. 
D)  interest rates to rise. 
A)  an increase in investment spending by businesses too, as they anticipate future economic growth. 
B)  a decrease in real saving as consumers follow suit and also increase borrowing. 
C)  planned real investment spending by businesses to increase. 
D)  interest rates to rise.

Question 4

The Laffer curve shows that as tax rates increase

Accepted Answer

A)  initially tax revenues increase, then decrease. 
B)  tax revenues decrease as the incidence of cheating on tax returns increases. 
C)  tax revenues increase as more individuals and businesses have to pay taxes. 
D)  tax revenues remain unchanged. 
A)  initially tax revenues increase, then decrease. 
B)  tax revenues decrease as the incidence of cheating on tax returns increases. 
C)  tax revenues increase as more individuals and businesses have to pay taxes. 
D)  tax revenues remain unchanged.

Question 5

An example of expansionary fiscal policy could be

Accepted Answer

A)  to increase the nation's money supply. 
B)  to reduce tax rates. 
C)  to reduce government spending. 
D)  to reduce interest rates. 
A)  to increase the nation's money supply. 
B)  to reduce tax rates. 
C)  to reduce government spending. 
D)  to reduce interest rates.

Question 6

All of the following are automatic stabilizers EXCEPT

Accepted Answer

A)  the federal income tax system. 
B)  welfare payments. 
C)  discretionary tax cuts. 
D)  unemployment compensation. 
A)  the federal income tax system. 
B)  welfare payments. 
C)  discretionary tax cuts. 
D)  unemployment compensation.

Question 7

When fiscal policy is used, time lags are variable and last anywhere from

Accepted Answer

A)  one to three weeks. 
B)  one to three months. 
C)  one to three years. 
D)  one to three decades. 
A)  one to three weeks. 
B)  one to three months. 
C)  one to three years. 
D)  one to three decades.

Question 8

The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity

Accepted Answer

A)  is greater than the effect of a permanent tax cut. 
B)  is the same as the effect of a permanent tax cut. 
C)  can be greater than or smaller than the effect of a permanent tax cut, depending on how the tax cut affects the government. 
D)  is smaller than the effect of a permanent tax cut. 
A)  is greater than the effect of a permanent tax cut. 
B)  is the same as the effect of a permanent tax cut. 
C)  can be greater than or smaller than the effect of a permanent tax cut, depending on how the tax cut affects the government. 
D)  is smaller than the effect of a permanent tax cut.

Question 9

The crowding out effect of expansionary fiscal policy refers to which of the following?

Accepted Answer

A)  a reduction in private sector planned investment 
B)  a reduction in interest rates 
C)  the reduction in the size of the budget deficit 
D)  the reduction in the size of the inflationary gap 
A)  a reduction in private sector planned investment 
B)  a reduction in interest rates 
C)  the reduction in the size of the budget deficit 
D)  the reduction in the size of the inflationary gap

Question 10

Which of the following are time lags that fiscal policy makers must cope with?

Accepted Answer

A)  recognition lags 
B)  action lags 
C)  effect lags 
D)  All of the above are correct. 
A)  recognition lags 
B)  action lags 
C)  effect lags 
D)  All of the above are correct.

Question 11

The Laffer curve shows a relationship between

Accepted Answer

A)  government spending and real Gross Domestic Product (GDP). 
B)  interest rates and investment spending. 
C)  the price level and real Gross Domestic Product (GDP). 
D)  tax rates and tax revenues. 
A)  government spending and real Gross Domestic Product (GDP). 
B)  interest rates and investment spending. 
C)  the price level and real Gross Domestic Product (GDP). 
D)  tax rates and tax revenues.

Question 12

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

Accepted Answer

A)  there being no government role in the economy. 
B)  an active government role in the economy. 
C)  achieving a command and control economy. 
D)  the long-run nature of the economy. 
A)  there being no government role in the economy. 
B)  an active government role in the economy. 
C)  achieving a command and control economy. 
D)  the long-run nature of the economy.

Question 13

According to the permanent income hypothesis, taxpayers react to a one-time tax rebate

Accepted Answer

A)  by spending all of the tax rebate. 
B)  by spending more than the amount of the tax rebate. 
C)  by saving half of the tax rebate and spending the rest. 
D)  by saving all of the tax rebate. 
A)  by spending all of the tax rebate. 
B)  by spending more than the amount of the tax rebate. 
C)  by saving half of the tax rebate and spending the rest. 
D)  by saving all of the tax rebate.

Question 14

The Laffer curve indicates which of the following?

Accepted Answer

A)  There is an ideal interest rate that will maximize investment spending. 
B)  There is an ideal amount of government spending that will lead to full national employment. 
C)  There is an ideal tax-revenue-maximizing tax rate for government taxes. 
D)  There is an ideal income tax rate on individuals, depending on their consumption behavior. 
A)  There is an ideal interest rate that will maximize investment spending. 
B)  There is an ideal amount of government spending that will lead to full national employment. 
C)  There is an ideal tax-revenue-maximizing tax rate for government taxes. 
D)  There is an ideal income tax rate on individuals, depending on their consumption behavior.

Question 15

Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct?

Accepted Answer

A)  Real GDP will fall more in economy A than in economy B. 
B)  Real GDP will fall more in economy B than in economy A. 
C)  Real GDP will fall the same in both economies. 
D)  The effect on the relative size of the reduction in real GDP in the two economies is ambiguous. 
A)  Real GDP will fall more in economy A than in economy B. 
B)  Real GDP will fall more in economy B than in economy A. 
C)  Real GDP will fall the same in both economies. 
D)  The effect on the relative size of the reduction in real GDP in the two economies is ambiguous.

Question 16

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

Accepted Answer

A)  Increase government spending. 
B)  Decrease interest rates. 
C)  Increase the money supply. 
D)  all of the above 
A)  Increase government spending. 
B)  Decrease interest rates. 
C)  Increase the money supply. 
D)  all of the above

Question 17

An increase in government spending without any increase in taxes

Accepted Answer

A)  does not increase aggregate demand. 
B)  would effectively eliminate an inflationary gap. 
C)  causes investment spending to increase. 
D)  requires additional government borrowing. 
A)  does not increase aggregate demand. 
B)  would effectively eliminate an inflationary gap. 
C)  causes investment spending to increase. 
D)  requires additional government borrowing.

Question 18

In the traditional Keynesian model, if the government raises current taxes

Accepted Answer

A)  the C + I + G + X line will shift down but the aggregate demand curve will not shift. 
B)  the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. 
C)  the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. 
D)  the C + I + G + X line will shift up but the aggregate demand curve will not shift. 
A)  the C + I + G + X line will shift down but the aggregate demand curve will not shift. 
B)  the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. 
C)  the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. 
D)  the C + I + G + X line will shift up but the aggregate demand curve will not shift.

Question 19

Other things being equal, an increase in taxes will

Accepted Answer

A)  lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. 
B)  influence the short run aggregate supply curve but not the aggregate demand curve. 
C)  lead to a corresponding reduction in interest rates increasing the crowding out effect. 
D)  cause a decrease in aggregate demand due to decreases in consumption, investment, or net exports. 
A)  lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. 
B)  influence the short run aggregate supply curve but not the aggregate demand curve. 
C)  lead to a corresponding reduction in interest rates increasing the crowding out effect. 
D)  cause a decrease in aggregate demand due to decreases in consumption, investment, or net exports.

Question 20

The time required to collect information about the current state of the economy is known as

Accepted Answer

A)  the recognition lag. 
B)  the action lag. 
C)  the effect lag. 
D)  the fiscal lag. 
A)  the recognition lag. 
B)  the action lag. 
C)  the effect lag. 
D)  the fiscal lag.

Exam 13: Fiscal Policy

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as

-Refer to the above figure. If the economy is currently operating at point C, then there is

If the government increases spending while holding taxes constant, we expect

The Laffer curve shows that as tax rates increase

An example of expansionary fiscal policy could be

All of the following are automatic stabilizers EXCEPT

When fiscal policy is used, time lags are variable and last anywhere from

The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity

The crowding out effect of expansionary fiscal policy refers to which of the following?

Which of the following are time lags that fiscal policy makers must cope with?

The Laffer curve shows a relationship between

Fiscal policy to solve short-run economic problems supports the Keynesian notion of

According to the permanent income hypothesis, taxpayers react to a one-time tax rebate

The Laffer curve indicates which of the following?

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?

An increase in government spending without any increase in taxes

In the traditional Keynesian model, if the government raises current taxes

Other things being equal, an increase in taxes will

The time required to collect information about the current state of the economy is known 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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