Question 1

How might fiscal policy be used to correct a recessionary gap?

Accepted Answer

A)  The exchange rate would be adjusted to encourage imports. 
B)  The exchange rate would be adjusted to discourage imports. 
C)  The interest rate would be adjusted to encourage saving. 
D)  Taxes would be cut to stimulate aggregate demand. 
A)  The exchange rate would be adjusted to encourage imports. 
B)  The exchange rate would be adjusted to discourage imports. 
C)  The interest rate would be adjusted to encourage saving. 
D)  Taxes would be cut to stimulate aggregate demand.

Question 2

Government spending conducted for the purpose of achieving full employment or price stability is an example of

Accepted Answer

A)  monetary policy. 
B)  interest-rate policy. 
C)  exchange-rate policy. 
D)  fiscal policy. 
A)  monetary policy. 
B)  interest-rate policy. 
C)  exchange-rate policy. 
D)  fiscal policy.

Question 3

Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?

Accepted Answer

A)  nothing 
B)  Increase income taxes. 
C)  Increase government spending. 
D)  Reduce the nation's aggregate supply. 
A)  nothing 
B)  Increase income taxes. 
C)  Increase government spending. 
D)  Reduce the nation's aggregate supply.

Question 4

Expansionary fiscal policy fails to achieve the government's national economic goals. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim?

Accepted Answer

A)  An increase in consumer spending occurred. 
B)  The interest rate increased. 
C)  Saving decreased. 
D)  The price level decreased. 
A)  An increase in consumer spending occurred. 
B)  The interest rate increased. 
C)  Saving decreased. 
D)  The price level decreased.

Question 5

The traditional Keynesian approach to fiscal policy assumes

Accepted Answer

A)  current taxes are the only taxes taken into account by firms and consumers. 
B)  the focus of attention should be the long run. 
C)  prices are flexible while interest rates are not. 
D)  exchange rates are fixed. 
A)  current taxes are the only taxes taken into account by firms and consumers. 
B)  the focus of attention should be the long run. 
C)  prices are flexible while interest rates are not. 
D)  exchange rates are fixed.

Question 6

When a direct expenditure offset occurs with the implementation of an expansionary fiscal policy,

Accepted Answer

A)  the stimulative effect will be less than expected. 
B)  the stimulative effect will be more than expected. 
C)  the fiscal policy will not be discretionary. 
D)  the time lags associated with the implementation of fiscal policy will shorten. 
A)  the stimulative effect will be less than expected. 
B)  the stimulative effect will be more than expected. 
C)  the fiscal policy will not be discretionary. 
D)  the time lags associated with the implementation of fiscal policy will shorten.

Question 7

According to the Keynesian approach, a decrease in taxes

Accepted Answer

A)  will increase consumption exactly by the amount of the taxes. 
B)  will increase consumption by an amount of less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will decrease consumption, as the government will have to spend less. 
A)  will increase consumption exactly by the amount of the taxes. 
B)  will increase consumption by an amount of less than the change in taxes. 
C)  will not impact consumption, as most consumption is autonomous. 
D)  will decrease consumption, as the government will have to spend less.

Question 8

Keynes believed that the way to prevent recessions and depressions was to

Accepted Answer

A)  reduce spending when there is a recessionary gap. 
B)  only change tax rates as a means of regulating the economy. 
C)  maximize the crowding out effect. 
D)  increase aggregate demand through expansionary fiscal policy. 
A)  reduce spending when there is a recessionary gap. 
B)  only change tax rates as a means of regulating the economy. 
C)  maximize the crowding out effect. 
D)  increase aggregate demand through expansionary fiscal policy.

Question 9

-Refer to the above figure. If the relevant aggregate demand curve was AD2, the government could do all of the following to close the existing gap EXCEPT

Accepted Answer

A)  increase government spending on roads. 
B)  reduce marginal tax rates. 
C)  reduce corporate taxes. 
D)  reduce defense spending. 
A)  increase government spending on roads. 
B)  reduce marginal tax rates. 
C)  reduce corporate taxes. 
D)  reduce defense spending.

Question 10

-Consider the above figure. This curve suggests that as the government continues to raise the tax rate, the revenues that are collected will eventually

Accepted Answer

A)  increase. 
B)  decline. 
C)  approach infinity. 
D)  become negative. 
A)  increase. 
B)  decline. 
C)  approach infinity. 
D)  become negative.

Question 11

During normal times

Accepted Answer

A)  fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. 
B)  fiscal policy can immediately correct problems in the economy. 
C)  the Ricardian equivalence theorem makes fiscal policy very effective. 
D)  fiscal policy is not effective because of the recognition time lag. 
A)  fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. 
B)  fiscal policy can immediately correct problems in the economy. 
C)  the Ricardian equivalence theorem makes fiscal policy very effective. 
D)  fiscal policy is not effective because of the recognition time lag.

Question 12

Fiscal policy may end up being destabilizing to an economy because

Accepted Answer

A)  time lags are always too short for policy actions to take effect. 
B)  the economy is almost always at full employment. 
C)  the President may have different goals than Congress. 
D)  various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve. 
A)  time lags are always too short for policy actions to take effect. 
B)  the economy is almost always at full employment. 
C)  the President may have different goals than Congress. 
D)  various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.

Question 13

Suppose the economy has a low level of employment. This would imply

Accepted Answer

A)  that the government should engage in expansionary fiscal policy and increase the tax rate. 
B)  that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment. 
C)  that fiscal policy has been ineffective and should be abandoned. 
D)  that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment. 
A)  that the government should engage in expansionary fiscal policy and increase the tax rate. 
B)  that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment. 
C)  that fiscal policy has been ineffective and should be abandoned. 
D)  that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment.

Question 14

-Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD1 to AD2. Interest rates have started to rise. Which of the following statements is TRUE in the short run?

Accepted Answer

A)  Real GDP will be $14 trillion since the effect of government spending is not influenced by interest rates. 
B)  Real GDP will fall back to $11 trillion since the effect that increased government spending has on real GDP is short lived. 
C)  Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in interest rates. 
D)  Real GDP will end up somewhere between $11 and $14 trillion as businesses and consumers reduce their spending in response to the increase in interest rates. 
A)  Real GDP will be $14 trillion since the effect of government spending is not influenced by interest rates. 
B)  Real GDP will fall back to $11 trillion since the effect that increased government spending has on real GDP is short lived. 
C)  Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in interest rates. 
D)  Real GDP will end up somewhere between $11 and $14 trillion as businesses and consumers reduce their spending in response to the increase in interest rates.

Question 15

The traditional Keynesian approach concludes that an increase in government spending

Accepted Answer

A)  generates a greater increase in investment spending. 
B)  generates an equal increase in total spending because government spending makes up part of total spending. 
C)  generates a greater increase in total spending because consumption spending increases as incomes increase. 
D)  has no effect on total spending because consumers increase saving by an equal amount. 
A)  generates a greater increase in investment spending. 
B)  generates an equal increase in total spending because government spending makes up part of total spending. 
C)  generates a greater increase in total spending because consumption spending increases as incomes increase. 
D)  has no effect on total spending because consumers increase saving by an equal amount.

Question 16

The fiscal policy of the United States is

Accepted Answer

A)  summarized in the budget of the U.S. federal government. 
B)  the sum of the budgets of each state and municipality. 
C)  published in the Federal Reserve Bank's Annual Report. 
D)  decided each year by the head of the U.S. Department of the Treasury. 
A)  summarized in the budget of the U.S. federal government. 
B)  the sum of the budgets of each state and municipality. 
C)  published in the Federal Reserve Bank's Annual Report. 
D)  decided each year by the head of the U.S. Department of the Treasury.

Question 17

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Accepted Answer

A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  Ricardian equivalence. 
D)  Recognition time lag. 
A)  discretionary fiscal policy. 
B)  automatic stabilizers. 
C)  Ricardian equivalence. 
D)  Recognition time lag.

Question 18

The amount of time that it takes to identify a national economic problem is

Accepted Answer

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

Question 19

Which of the following conditions describes an inflationary gap?

Accepted Answer

A)  The short-run equilibrium level of real GDP is above the long-run level of real GDP. 
B)  The short-run equilibrium level of real GDP is below the long-run level of real GDP. 
C)  The actual interest rate is above the equilibrium interest rate. 
D)  The actual interest rate is below the equilibrium interest rate. 
A)  The short-run equilibrium level of real GDP is above the long-run level of real GDP. 
B)  The short-run equilibrium level of real GDP is below the long-run level of real GDP. 
C)  The actual interest rate is above the equilibrium interest rate. 
D)  The actual interest rate is below the equilibrium interest rate.

Question 20

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

Accepted Answer

A)  monetary policy. 
B)  discretionary fiscal policy. 
C)  automatic government budgetary policy. 
D)  a laissez-faire policy. 
A)  monetary policy. 
B)  discretionary fiscal policy. 
C)  automatic government budgetary policy. 
D)  a laissez-faire policy.

Exam 13: Fiscal Policy

How might fiscal policy be used to correct a recessionary gap?

Government spending conducted for the purpose of achieving full employment or price stability is an example of

Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down?

Expansionary fiscal policy fails to achieve the government's national economic goals. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim?

The traditional Keynesian approach to fiscal policy assumes

When a direct expenditure offset occurs with the implementation of an expansionary fiscal policy,

According to the Keynesian approach, a decrease in taxes

Keynes believed that the way to prevent recessions and depressions was to

-Refer to the above figure. If the relevant aggregate demand curve was AD2, the government could do all of the following to close the existing gap EXCEPT

-Consider the above figure. This curve suggests that as the government continues to raise the tax rate, the revenues that are collected will eventually

During normal times

Fiscal policy may end up being destabilizing to an economy because

Suppose the economy has a low level of employment. This would imply

-Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD1 to AD2. Interest rates have started to rise. Which of the following statements is TRUE in the short run?

The traditional Keynesian approach concludes that an increase in government spending

The fiscal policy of the United States is

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

The amount of time that it takes to identify a national economic problem is

Which of the following conditions describes an inflationary gap?

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising

The Nature of Economics

Scarcity and the World of Trade-Offs

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Extensions of Demand and Supply Analysis

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