Question 1

According to Professor Baotai Wang who examined the crowding out phenomenon in
Canada between 1961-2000, as discussed in the Case in Point, government expenditures for health and education

Accepted Answer

A)  increased human capital and encouraged private sector investment, leading to crowding in. 
B)  did not increase the rate of return on private investment and therefore led to crowding out. 
C)  increased human capital and generated strong supply-side effects. 
D)  led to only small increases in human capital.

Question 2

All of the following are examples of transfer payments except

Accepted Answer

A)  welfare benefits to the poor. 
B)  dividend payments to the wealthy. 
C)  Social Security payments to the elderly. 
D)  unemployment compensation to the unemployed.

Question 3

Suppose the government increases the corporate income tax rate. This is

Accepted Answer

A)  an expansionary fiscal policy that will shift the aggregate demand curve to the right by an amount equal to the initial change in corporate income tax revenue times the spending multiplier. 
B)  a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier. 
C)  a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in the corporate income tax rate times the spending multiplier. 
D)  an automatic fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier.

Question 4

Use the following to answer questions .
Exhibit: Supply-Side Economics 
-(Exhibit: Supply-Side Economics) If the economy is initially at Y1, supply-side economists would
Advocate

Accepted Answer

A)  lower taxes to encourage people to work more. 
B)  reductions in investment tax credits to stimulate capital formation. 
C)  tax increases to encourage more people to work. 
D)  increased transfer payments to help the unemployed.

Question 5

Automatic stabilizers are an example of discretionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 6

A contractionary fiscal policy will reduce a government budget deficit or increase a government budget surplus and reduce borrowing by the Treasury.

Accepted Answer

A) True 
 B)False

Question 7

Use the following to answer questions .
Exhibit: Supply-Side Economics 
-(Exhibit: Supply-Side Economics) At income level Y1, there is a(n)

Accepted Answer

A)  inflationary gap, and expansionary policies may be initiated. 
B)  recessionary gap, and contractionary policies may be initiated. 
C)  recessionary gap. 
D)  recessionary gap, and the Fed is likely to decrease the money supply.

Question 8

A reduction in tax rates may result in a short-term reduction in government revenues, but it will also leave people with more disposable income.

Accepted Answer

A) True 
 B)False

Question 9

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Accepted Answer

A)  $12,000 billion. 
B)  $3,000 billion. 
C)  $1,400 billion. 
D)  $350 billion.

Question 10

Changes in expenditures and taxes that occur through automatic stabilizers

Accepted Answer

A)  shift the aggregate demand curve to the right in the event of an economic expansion. 
B)  shift the aggregate demand curve to the left in the event of an economic contraction. 
C)  do not shift the aggregate demand curve. 
D)  cause a movement up along the aggregate demand curve the event of an economic expansion and a movement down along the aggregate demand curve the event of an economic contraction.

Question 11

The term "crowding out" refers to the phenomenon that occurs when increased government
Spending

Accepted Answer

A)  raises the price level and reduces consumption. 
B)  leads to higher interest rates which reduces private investments. 
C)  leads to higher bond prices which decreases the demand for Treasury bonds. 
D)  leads to increased budget deficits that ultimately warrant increases in income taxes.

Question 12

The government has a balanced budget if

Accepted Answer

A)  its total revenues are equal to its total expenditures. 
B)  its total revenues are less than its total expenditures. 
C)  its total revenues are greater than its total expenditures. 
D)  the money supply is less than total expenditures.

Question 13

Consider two fiscal policy actions.
I. a $400 billion reduction in income taxes
II. a $400 billion increase in government purchases
Which policy will have a bigger impact on aggregate demand?

Accepted Answer

A)  Both policies will have the exact same impact. 
B)  Policy II because it affects aggregate demand directly. 
C)  Policy I because it affects disposable income directly. 
D)  Policy I because it works through consumption which is the largest component of aggregate demand.

Question 14

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Accepted Answer

A)  will shift the aggregate demand curve to the left by $120 billion. 
B)  will shift the aggregate demand curve to the left by $6,000 billion. 
C)  will shift the aggregate supply curve to the left by $120 billion. 
D)  will shift the aggregate supply curve to the left by $6,000 billion.

Question 15

Which of the following statements is true about fiscal policy lags?

Accepted Answer

A)  Automatic stabilizers have a much shorter impact lag than discretionary fiscal policy. 
B)  Although the recognition lag is equally long for discretionary fiscal policy and for automatic stabilizers, the latter avoid implementation lag because automatic stabilizers are triggered automatically. 
C)  Unlike discretionary fiscal policy, automatic stabilizers respond automatically to changes in the economy, thus avoiding the recognition and implementation lags. 
D)  Although automatic stabilizers have a much shorter lag, discretionary fiscal policy instruments have a more potent impact on the economy because they are more precise.

Question 16

The impact of instituting investment tax credits is

Accepted Answer

A)  to stimulate private sector investments and increase aggregate demand. 
B)  to stimulate private production and increase aggregate supply. 
C)  to encourage individuals to save in an effort to increase funds available for investment. 
D)  to curtail in excessive lending by financial institutions.

Question 17

The impact of expansionary fiscal policy is weakened because of crowding out.

Accepted Answer

A) True 
 B)False

Question 18

An inflationary gap can be closed with

Accepted Answer

A)  using an expansionary monetary policy. 
B)  using a policy action such as a reduction in taxes. 
C)  using a policy action such as a reduction in government purchases. 
D)  imposing price controls to prevent prices from rising.

Question 19

Which of the following contributes to implementation lag for discretionary fiscal policy?

Accepted Answer

A)  the time it takes to secure legislative approval for policy actions 
B)  the time it takes for economic agents to respond to policy actions 
C)  the difficulty of collecting economic data in a timely manner 
D)  the time it takes to borrow funds to finance the fiscal policy

Question 20

An increase in business taxes is likely to reduce aggregate demand because of a decrease in private investment.

Accepted Answer

A) True 
 B)False

Exam 12: Government and Fiscal Policy

According to Professor Baotai Wang who examined the crowding out phenomenon in Canada between 1961-2000, as discussed in the Case in Point, government expenditures for health and education

All of the following are examples of transfer payments except

Suppose the government increases the corporate income tax rate. This is

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy is initially at Y₁, supply-side economists would Advocate

Automatic stabilizers are an example of discretionary fiscal policy.

A contractionary fiscal policy will reduce a government budget deficit or increase a government budget surplus and reduce borrowing by the Treasury.

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) At income level Y₁, there is a(n)

A reduction in tax rates may result in a short-term reduction in government revenues, but it will also leave people with more disposable income.

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Changes in expenditures and taxes that occur through automatic stabilizers

The term "crowding out" refers to the phenomenon that occurs when increased government Spending

The government has a balanced budget if

Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Which of the following statements is true about fiscal policy lags?

The impact of instituting investment tax credits is

The impact of expansionary fiscal policy is weakened because of crowding out.

An inflationary gap can be closed with

Which of the following contributes to implementation lag for discretionary fiscal policy?

An increase in business taxes is likely to reduce aggregate demand because of a decrease in private investment.

Exam 12: Government and Fiscal Policy

According to Professor Baotai Wang who examined the crowding out phenomenon in Canada between 1961-2000, as discussed in the Case in Point, government expenditures for health and education

All of the following are examples of transfer payments except

Suppose the government increases the corporate income tax rate. This is

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy is initially at Y1, supply-side economists would Advocate

Automatic stabilizers are an example of discretionary fiscal policy.

A contractionary fiscal policy will reduce a government budget deficit or increase a government budget surplus and reduce borrowing by the Treasury.

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) At income level Y1, there is a(n)

A reduction in tax rates may result in a short-term reduction in government revenues, but it will also leave people with more disposable income.

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Changes in expenditures and taxes that occur through automatic stabilizers

The term "crowding out" refers to the phenomenon that occurs when increased government Spending

The government has a balanced budget if

Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Which of the following statements is true about fiscal policy lags?

The impact of instituting investment tax credits is

The impact of expansionary fiscal policy is weakened because of crowding out.

An inflationary gap can be closed with

Which of the following contributes to implementation lag for discretionary fiscal policy?

An increase in business taxes is likely to reduce aggregate demand because of a decrease in private investment.

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) If the economy is initially at Y₁, supply-side economists would Advocate

Use the following to answer questions . Exhibit: Supply-Side Economics -(Exhibit: Supply-Side Economics) At income level Y₁, there is a(n)