Question 1

Recessions may actually reduce health care spending.

Accepted Answer

A) True 
 B)False

Question 2

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A) higher; higher 
B) higher; lower 
C) lower; higher 
D) lower; lower

Question 3

How can tax simplification be beneficial to the economy?

Accepted Answer

The answer of How can tax simplification be beneficial to...

Question 4

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Accepted Answer

The answer of Give an example of an automatic stabilizer.Explain...

Question 5

Federal government purchases, as a percentage of GDP,

Accepted Answer

A) have risen since the early 1960s. 
B) have fallen since the early 1960s. 
C) have remained roughly the same since the early 1960s. 
D) rose from the early 1960s until the mid-1990s, and then fell. 
E) fell from the 1960s until the mid 1990s and the rose rapidly.

Question 6

Suppose the federal government increased spending by $10 billion and raised taxes by $10 billion to keep the budget balanced.What will happen to real equilibrium GDP?

Accepted Answer

A) Real equilibrium GDP will fall. 
B) Real equilibrium GDP will rise. 
C) There will be no change in real equilibrium GDP. 
D) Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value. 
E) Real equilibrium GDP will fall in proportion to the rise in the price level.

Question 7

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________.

Accepted Answer

A) aggregate demand; government spending 
B) aggregate supply; taxes 
C) aggregate demand; taxes 
D) aggregate supply; government spending 
E) aggregate supply; wage rates

Question 8

Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to consume equals 0.5.

Accepted Answer

The answer of Assuming a fixed amount of taxes and...

Question 9

When does the Government of Canada borrow? Why would the government have to borrow more than it estimated? When would the government repay what it borrowed, and who is it repaying?

Accepted Answer

The answer of When does the Government of Canada borrow?...

Question 10

The multiplier effect refers to the series of

Accepted Answer

A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. 
B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. 
C) autonomous increases in investment spending that result from an initial increase in induced expenditures. 
D) induced increases in investment spending that result from an initial increase in autonomous expenditures. 
E) induced increases in net exports that result from an initial increase in autonomous expenditures.

Question 11

An increase in government spending may expedite recovery from a recession in the short run, but in the long run, this policy may

Accepted Answer

A) reduce investment in new capital. 
B) make domestic businesses less competitive in international markets as the dollar appreciates in value. 
C) raise interest rates and reduce consumer expenditures on automobiles and new houses. 
D) reduce future consumption spending due to higher tax rates in the future. 
E) All of the above are correct.

Question 12

Consider a tax cut that affects not only consumer disposable income, but also after-tax earnings from labour supplied to labour markets and from financial assets acquired through saving.In the long run, we would expect this tax cut to

Accepted Answer

A) decrease the price level and increase real GDP. 
B) increase both the price level and the level of real GDP. 
C) increase the level of real GDP. 
D) increase the price level. 
E) decrease both the price level and real GDP.

Question 13

Three categories of federal government expenditures, in addition to government operations, are

Accepted Answer

A) debt charges, transfers to other levels of government, and transfer payments. 
B) interest on provincial debt, defense spending, and transfer payments. 
C) defense spending, budgets of federal agencies, and transfer payments. 
D) defense spending, income tax, and transfers. 
E) international aid, transfers to citizens, and lending to crown corporations.

Question 14

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

Accepted Answer

A) be at potential GDP. 
B) be above potential GDP. 
C) be below potential GDP. 
D) There is insufficient information given here to draw a conclusion.

Question 15

If policymakers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to

Accepted Answer

A) increase taxes. 
B) increase government spending. 
C) use expansionary fiscal policy. 
D) increase interest rates. 
E) increase transfers to other levels of government.

Question 16

Which of the following would be most likely to induce the federal government to conduct contractionary fiscal policy?

Accepted Answer

A) a significant decrease in oil prices 
B) a significant decrease in real GDP 
C) a significant increase in inflation 
D) a significant increase in labour productivity 
E) a significant rise in the labour force

Question 17

Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

Accepted Answer

A) partial crowding out; partial crowding out 
B) partial crowding out; complete crowding out 
C) complete crowding out; complete crowding out 
D) complete crowding out; partial crowding out 
E) no crowding out; complete crowding out

Question 18

If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it follow that the federal government acted to raise taxes or cut government spending in Year 2?

Accepted Answer

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Question 19

Figure 12.5  Alt text for Figure 12.5: In figure 12.5, a dynamic model of AD-AS.
Long description for Figure 12.5: The x-axis is labelled, real GDP (trillions of 2007 dollars).The y-axis is labelled, price level (CPI).6 lines are shown; SRAS1, SRAS2, AD1, AD2, LRAS1, and LRAS2.Line SRAS1 begins in the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the bottom center.Line AD2 follows the same slope as line AD1, but is plotted to the right.Line LRAS1 is perpendicular to the x-axis, and begins from the x-axis value 1.7.Line LRAS2 is perpendicular to the x-axis, and begins from x-axis value 1.9.Line LRAS1 intersects lines AD1 and SRAS1 at point A (1.7, 100).Lines AD2 and SRAS2 intersect at point B (1.86, 102).Points A and B are connected to their respective coordinates on the x and y-axes with dotted lines.Line LRAS2 intersects the lines SRAS1 and SRAS2 near the top end of these lines.Line LRAS2 intersects the lines AD1 and AD2 near the bottom end of these lines.
-Refer to Figure 12.5.In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B

Accepted Answer

A) the unemployment rate is very low. 
B) firms are operating below capacity. 
C) the economy is above full employment. 
D) income and profits are rising. 
E) there is pressure on wages and prices to rise.

Question 20

As a percentage of GDP, government expenditures ________ from 1960 to the early 1990s, ________ from 1992 to 2008, and have ________ since 2008.

Accepted Answer

A) rose; fell; risen 
B) fell; fell; risen 
C) rose; rose; fallen 
D) fell; rose; fallen 
E) rose; rose; risen

Exam 12: Fiscal Policy