Question 1

-The figure above shows tax revenues and government expenditures in the economy of Meadowlake. Potential GDP is $15 trillion. If real GDP is $11 trillion, then the government has a_________

Accepted Answer

A)  structural deficit 
B)  cyclical surplus 
C)  structural surplus 
D)  cyclical deficit

Question 2

Using fiscal policy, to increase real GDP and employment the government could _________expenditure on goods and services or _________ taxes.

Accepted Answer

A)  increase; decrease 
B)  decrease; decrease 
C)  increase; increase 
D)  decrease; increase

Question 3

Once supply side effects are taken into account, tax cuts for labor income can change
I. the supply of labor
II. potential GDP.

Accepted Answer

A)  I and II 
B)  I only 
C)  II only 
D)  Neither I nor II.

Question 4

A tax cut decreases government saving and can thereby crowd out investment.

Accepted Answer

A) True 
 B)False

Question 5

When an economy is above full employment and the government has a budget deficit, that deficit_________

Accepted Answer

A)  is equal to the structural deficit minus the cyclical deficit 
B)  is equal to the cyclical deficit minus the structural deficit 
C)  is less than the structural deficit 
D)  exceeds the structural deficit

Question 6

Taxes and government expenditures that, without need for additional government action, change in response to changes in the level of economic activity are examples of

Accepted Answer

A)  cyclically balanced budgets. 
B)  built-in monetary stabilizers. 
C)  discretionary fiscal variables. 
D)  automatic fiscal policy.

Question 7

A cyclical surplus is a

Accepted Answer

A)  budget surplus only because real GDP is equal to potential GDP. 
B)  nominal, as opposed to real, budget surplus. 
C)  budget surplus only because real GDP is greater than potential GDP. 
D)  budget surplus only because real GDP is less than potential GDP.

Question 8

The sum of past budget deficits minus the sum of past budget surpluses refers to

Accepted Answer

A)  the cyclically unbalanced budget. 
B)  the national debt. 
C)  the structural national debt. 
D)  the federal government net worth.

Question 9

The supply side effects of a change in taxes on labor income means that_________ in taxes on labor income shift the _________

Accepted Answer

A)  an increase; labor supply curve leftward 
B)  a decrease; labor demand curve leftward 
C)  an increase; labor supply curve rightward 
D)  a decrease; labor demand curve rightward

Question 10

The actual budget deficit is equal to the

Accepted Answer

A)  structural deficit minus the cyclical deficit. 
B)  structural deficit. 
C)  structural deficit plus the cyclical deficit. 
D)  cyclical deficit.

Question 11

-Economic data for a mythical economy in the years 2006 -2010 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at less than full employment, the government has a

Accepted Answer

A)  budget deficit. 
B)  procyclical policy. 
C)  balanced budget. 
D)  budget surplus.

Question 12

Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive,

Accepted Answer

A)  the country will experience a budget surplus. 
B)  government debt will decrease. 
C)  government debt will increase. 
D)  interest payments on the debt immediately will decrease.

Question 13

$$\begin{array} { | l | l | } 
\hline \text { Component } & \begin{array} { l } 
\text { Dollars } \
\text { (billion) }
\end{array} \
\hline \text { Personal income taxes } & 500 \
\hline \text { Social security taxes } & 400 \
\hline \text { Corporate income taxes } & 150 \
\hline \text { Indirect taxes } & 75 \
\hline \text { Transfer payments } & 1,200 \
\hline \begin{array} { l } 
\text { Expenditure on goods and } \
\text { services }
\end{array} & 225 \
\hline \text { Debt interest } & 75 \
\hline
\end{array}$$
-The table above has data for a country?s government budget. Government outlays for the economy equal__________ billion.

Accepted Answer

A)  $1500 
B)  $1425 
C)  $1275 
D)  $1200

Question 14

In 2011, the federal government of Happy Isle had tax revenues of $1 million, and spent $500,000 on transfer payments, $250,000 on goods and services and $300,000 on debt interest. In 2011, the government of Happy Isle had a __________.

Accepted Answer

A)  budget deficit of $1,050,000 
B)  budget deficit of $50,000 
C)  budget surplus of $50,000 
D)  balanced budget

Question 15

$\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Labor } \
\text { (millions of hours per } \
\text { year) }
\end{array} & \begin{array}{l}
\text { Real GDP } \
\text { (millions of 2005 dollars) }
\end{array} \\hline 200 & 6,800 \
\hline 240 & 7,680 \
\hline 280 & 8,400 \
\hline 320 & 8,960 \
\hline 360 & 9,360 \
\hline
\end{array}$
The table above shows the aggregate production function in the economy of Prescottia. The people of Prescottia pay no taxes and are willing to work 248 million hours a year for a real wage rate of $8 an hour, and for each dollar increase in the real wage, they are willing to work 4 million additional hours per year.
a) Draw the economyʹs aggregate production function. $$\begin{array} { | l | l | } 
\hline \begin{array} { l } 
\text { Wage rate } \
\text { (dollars per hour) }
\end{array} & \begin{array} { l } 
\text { Quantity of labor demanded } \
\text { (millions of hours per year) }
\end{array} \
\hline 24 & 200 \
\hline 20 & 240 \
\hline 16 & 280 \
\hline 12 & 320 \
\hline
\end{array}$$ 
b) Prescottiaʹs demand for labor schedule is in the table above. Draw Prescottiaʹs demand for labor and supply of labor curves.
c) What are the economyʹs full-employment quantity of labor and real wage rate? What is the countryʹs potential GDP?
d) Suppose that Prescottiaʹs government introduces a 25 percent income tax. Using your graph, what happens to the demand for labor? What happens to the supply of labor? Explain.
e) After the tax is imposed, what happens to Prescottiaʹs full-employment quantity of labor? What happens to Prescottiaʹs potential GDP?

Accepted Answer

The answer of \(\begin{array}{|l|l|}
\hline \begin{array}{l}
\text { Labor } \
\text {...

Question 16

Fiscal policy

Accepted Answer

A)  involves changing taxes and government spending. 
B)  involves changing the money supply. 
C)  involves changing interest rates. 
D)  is enacted by the Federal Reserve.

Question 17

-In the above figure,

Accepted Answer

A)  any surpluses are cyclical surpluses. 
B)  the structural deficit equals zero. 
C)  any deficits are cyclical deficits. 
D)  All of the above answers are correct.

Question 18

Generational accounting shows that the present value of the governmentʹs commitments to pay benefits are _________the present value of its taxes.

Accepted Answer

A)  not comparable to 
B)  less than 
C)  equal to 
D)  greater than

Question 19

The difference between automatic fiscal policy and discretionary fiscal policy is that

Accepted Answer

A)  the President initiates discretionary fiscal policy. 
B)  Congress initiates automatic fiscal policy. 
C)  Congress must pass laws implementing discretionary fiscal policy. 
D)  the President has nothing to do with discretionary fiscal policy.

Question 20

How can discretionary fiscal policy be used to close a recessionary gap?

Accepted Answer

The answer of How can discretionary fiscal policy be used...

Exam 13: Fiscal Policy