Question 1

An increase in government spending that is NOT financed by an increase in taxes will cause which of the following?

Accepted Answer

A)  an increase in interest rates and an increase in planned investment 
B)  an increase in interest rates and a reduction in planned investment 
C)  a reduction in interest rates and an increase in planned investment 
D)  a reduction in interest rates and a reduction in planned investment 
A)  an increase in interest rates and an increase in planned investment 
B)  an increase in interest rates and a reduction in planned investment 
C)  a reduction in interest rates and an increase in planned investment 
D)  a reduction in interest rates and a reduction in planned investment

Question 2

The period between the implementation of a policy and its intended result is known as

Accepted Answer

A)  the action time lag. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the data lag. 
A)  the action time lag. 
B)  the recognition time lag. 
C)  the effect time lag. 
D)  the data lag.

Question 3

The theory that government borrowing may function like an increase in taxes is known as

Accepted Answer

A)  the marginal propensity to consume. 
B)  the Ricardian equivalence theorem. 
C)  planned tax policy. 
D)  Congressional Tax policy. 
A)  the marginal propensity to consume. 
B)  the Ricardian equivalence theorem. 
C)  planned tax policy. 
D)  Congressional Tax policy.

Question 4

The Keynesian approach assumes that

Accepted Answer

A)  there is no unemployment in the economy. 
B)  the economy is self-regulating. 
C)  the government budget is always in deficit. 
D)  the price level does not change. 
A)  there is no unemployment in the economy. 
B)  the economy is self-regulating. 
C)  the government budget is always in deficit. 
D)  the price level does not change.

Question 5

The Ricardian equivalence theorem states that

Accepted Answer

A)  an increase in government spending has no effect on aggregate supply. 
B)  increases in government spending have a larger impact on real Gross Domestic Product (GDP) than decreases in taxes. 
C)  an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. 
D)  an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP) because it only affects the price index. 
A)  an increase in government spending has no effect on aggregate supply. 
B)  increases in government spending have a larger impact on real Gross Domestic Product (GDP) than decreases in taxes. 
C)  an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. 
D)  an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP) because it only affects the price index.

Question 6

Which of the following statements about fiscal policy is TRUE?

Accepted Answer

A)  Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. 
B)  Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. 
C)  Government can shift the aggregate demand curve inward by increasing spending. 
D)  Government can shift the aggregate demand curve outward by reducing spending. 
A)  Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. 
B)  Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. 
C)  Government can shift the aggregate demand curve inward by increasing spending. 
D)  Government can shift the aggregate demand curve outward by reducing spending.

Question 7

An increase in government spending will have no effect on real GDP if

Accepted Answer

A)  people look at changes in taxes only in the present. 
B)  there is no crowding out. 
C)  the Ricardian equivalence theorem holds. 
D)  the tax decrease is offset by an increase in government spending. 
A)  people look at changes in taxes only in the present. 
B)  there is no crowding out. 
C)  the Ricardian equivalence theorem holds. 
D)  the tax decrease is offset by an increase in government spending.

Question 8

In Country Z, the government simultaneously decreases its expenditures by $25 billion and decreases taxes by $25 billion. If the MPS is equal to 0.2, the government's action ________ real GDP by ________.

Accepted Answer

A)  decreases; $50 billion 
B)  decreases; $25 billion 
C)  increases; $50 billion 
D)  has no effect on; $0 
A)  decreases; $50 billion 
B)  decreases; $25 billion 
C)  increases; $50 billion 
D)  has no effect on; $0

Question 9

According to the traditional Keynesian analysis, if the government increases spending by $20 million, then

Accepted Answer

A)  consumption will increase, and so total expenditures will increase by more than $20 million. 
B)  consumption will decrease, and so total expenditures will increase by less than the $20 million. 
C)  consumption will remain the same, and so total expenditures will increase by exactly $20 million. 
D)  consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption. 
A)  consumption will increase, and so total expenditures will increase by more than $20 million. 
B)  consumption will decrease, and so total expenditures will increase by less than the $20 million. 
C)  consumption will remain the same, and so total expenditures will increase by exactly $20 million. 
D)  consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption.

Question 10

According to traditional Keynesian analysis, fiscal policy operates by

Accepted Answer

A)  informing business people about its plans for the economy so they will know how to adjust their behavior. 
B)  indirectly affecting aggregate demand through its effect on the money supply. 
C)  directly affecting aggregate demand. 
D)  directly affecting aggregate supply. 
A)  informing business people about its plans for the economy so they will know how to adjust their behavior. 
B)  indirectly affecting aggregate demand through its effect on the money supply. 
C)  directly affecting aggregate demand. 
D)  directly affecting aggregate supply.

Question 11

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

Accepted Answer

A)  the indirect effect. 
B)  the multiplier effect. 
C)  the crowding-out effect. 
D)  the Laffer effect. 
A)  the indirect effect. 
B)  the multiplier effect. 
C)  the crowding-out effect. 
D)  the Laffer effect.

Question 12

The various time lags involved with fiscal policy imply that

Accepted Answer

A)  fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. 
B)  fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. 
C)  fiscal policy may often be destabilizing if the policy effects occur after the need is over. 
D)  when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP. 
A)  fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. 
B)  fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. 
C)  fiscal policy may often be destabilizing if the policy effects occur after the need is over. 
D)  when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP.

Question 13

In the United States economy, the progressive income tax and unemployment compensation are both

Accepted Answer

A)  destabilizers. 
B)  discretionary presidential effectors. 
C)  automatic stabilizers. 
D)  time lag factors. 
A)  destabilizers. 
B)  discretionary presidential effectors. 
C)  automatic stabilizers. 
D)  time lag factors.

Question 14

The effect time lag of fiscal policy refers to

Accepted Answer

A)  the time needed for Congress to enact a policy. 
B)  the delay in recognizing an economic problem. 
C)  the time between the onset of a policy and when the policy has impact on the economy. 
D)  the difficulty in getting the President and the Congress to agree on an appropriate policy. 
A)  the time needed for Congress to enact a policy. 
B)  the delay in recognizing an economic problem. 
C)  the time between the onset of a policy and when the policy has impact on the economy. 
D)  the difficulty in getting the President and the Congress to agree on an appropriate policy.

Question 15

Which of the following best explains why the federal tax rebates in the 2000s had almost no effects on aggregate demand?

Accepted Answer

A)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets. 
A)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. 
B)  According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. 
C)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. 
D)  According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets.

Question 16

Which one of the following is NOT an automatic stabilizer?

Accepted Answer

A)  the income tax system 
B)  the system of national defense procurement 
C)  the system of welfare payments 
D)  unemployment compensation programs 
A)  the income tax system 
B)  the system of national defense procurement 
C)  the system of welfare payments 
D)  unemployment compensation programs

Question 17

Which of the following actions could be undertaken if the government wants to close an inflationary gap?

Accepted Answer

A)  Increase taxes and reduce government spending. 
B)  Reduce taxes and increase government spending. 
C)  Increase taxes and increase government spending. 
D)  Reduce taxes and reduce government spending. 
A)  Increase taxes and reduce government spending. 
B)  Reduce taxes and increase government spending. 
C)  Increase taxes and increase government spending. 
D)  Reduce taxes and reduce government spending.

Question 18

All the following actions represent fiscal policy EXCEPT

Accepted Answer

A)  an increase in the money supply. 
B)  a decrease in government spending. 
C)  a reduction in individual income tax rates. 
D)  an increase in corporate income tax rates. 
A)  an increase in the money supply. 
B)  a decrease in government spending. 
C)  a reduction in individual income tax rates. 
D)  an increase in corporate income tax rates.

Question 19

If the federal government borrows from households to pay for increased budget deficits, this will cause

Accepted Answer

A)  a decrease in planned investment and planned consumption. 
B)  an increase in planned investment and planned consumption. 
C)  a decrease in planned investment and an increase in planned consumption. 
D)  an increase in planned investment and a decrease in planned consumption. 
A)  a decrease in planned investment and planned consumption. 
B)  an increase in planned investment and planned consumption. 
C)  a decrease in planned investment and an increase in planned consumption. 
D)  an increase in planned investment and a decrease in planned consumption.

Question 20

If the crowding-out effect is complete and the marginal propensity to save is 0.1, then an increase in government spending of $400 billion will generate how much more real GDP?

Accepted Answer

A)  $0 
B)  $40 billion 
C)  $100 billion 
D)  $400 billion 
A)  $0 
B)  $40 billion 
C)  $100 billion 
D)  $400 billion

Exam 13: Fiscal Policy

An increase in government spending that is NOT financed by an increase in taxes will cause which of the following?

The period between the implementation of a policy and its intended result is known as

The theory that government borrowing may function like an increase in taxes is known as

The Keynesian approach assumes that

The Ricardian equivalence theorem states that

Which of the following statements about fiscal policy is TRUE?

An increase in government spending will have no effect on real GDP if

In Country Z, the government simultaneously decreases its expenditures by $25 billion and decreases taxes by $25 billion. If the MPS is equal to 0.2, the government's action ________ real GDP by ________.

According to the traditional Keynesian analysis, if the government increases spending by $20 million, then

According to traditional Keynesian analysis, fiscal policy operates by

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called

The various time lags involved with fiscal policy imply that

In the United States economy, the progressive income tax and unemployment compensation are both

The effect time lag of fiscal policy refers to

Which of the following best explains why the federal tax rebates in the 2000s had almost no effects on aggregate demand?

Which one of the following is NOT an automatic stabilizer?

Which of the following actions could be undertaken if the government wants to close an inflationary gap?

All the following actions represent fiscal policy EXCEPT

If the federal government borrows from households to pay for increased budget deficits, this will cause

If the crowding-out effect is complete and the marginal propensity to save is 0.1, then an increase in government spending of $400 billion will generate how much more real GDP?

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 Z, the government simultaneously decreases its expenditures by $25 billion and decreases taxes by $25 billion. If the MPS is equal to 0.2, the government's action real GDP by .