Question 1

Suppose the government pursues expansionary fiscal policy by lowering tax rates.What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?

Accepted Answer

The answer of Suppose the government pursues expansionary fiscal policy...

Question 2

Suppose the economy is at an equilibrium on the LRAS curve and the government increases spending.In the short run one would expect

Accepted Answer

A) output and prices to increase. 
B) output to remain constant and prices to increase. 
C) output to increase and prices to remain constant. 
D) output and prices to remain constant.

Question 3

Suppose the economy is currently in short-run and long-run equilibrium.Describe the process of how the government "crowds out" private investment even further than if in a recession.

Accepted Answer

The answer of Suppose the economy is currently in short-run...

Question 4

When interest rates decrease in Canada,the value of the dollar is likely to

Accepted Answer

A) increase and net exports are likely to decline. 
B) decrease and net exports are likely to increase. 
C) increase and net exports are likely to increase. 
D) remain constant and net exports are likely to remain unchanged.

Question 5

During which time should the multiplier be largest?

Accepted Answer

A) Normal times 
B) Times of war 
C) In the middle of expansions 
D) Times of stagflation

Question 6

If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium,the full long-run effect of this fiscal policy will be to

Accepted Answer

A) increase real GDP. 
B) increase the price level. 
C) increase either the real GDP or the price level,depending on the length of the time lag. 
D) decrease both real GDP and the price level.

Question 7

A country reports that its government spending is $950 billion while tax revenues total $500 billion.Does the country have a budget surplus or deficit and what is the surplus or deficit?

Accepted Answer

The answer of A country reports that its government spending...

Question 8

If the government wants to increase real GDP levels,it could

Accepted Answer

A) increase government expenditures. 
B) increase taxes. 
C) decrease government expenditures. 
D) decrease government expenditures and increase taxes.

Question 9

Suppose there are two policy options facing a vote in Parliament.In the first,government spending will increase $50 billion,while the second option is to cut taxes by $50 billion.A Keynesian economist would argue for

Accepted Answer

A) the tax option because it also affects the incentives workers face.Long-run aggregate supply will increase with the tax cut,but not with the spending increase. 
B) the tax option because it is easier to pass.The effects on total spending would be identical. 
C) the spending option because it won't affect the deficit the way the tax cut would. 
D) the spending option because it has a bigger impact on total spending.The spending directly raises total spending plus it works through the multiplier,while the tax cut only works through the multiplier.

Question 10

Automatic stabilizers are

Accepted Answer

A) provisions that cause changes in government spending and taxes that do not take the action of Parliament. 
B) the policies set by certain committees in Parliament. 
C) the tools used by the Prime Minister's Council of Economic Advisers. 
D) provisions that cause the aggregate supply curve to be upward sloping.

Question 11

If the government decreases taxes,then the

Accepted Answer

A) short-run aggregate supply curve shifts to the right. 
B) long-run aggregate supply curve shifts to the left. 
C) aggregate demand curve shifts to the right. 
D) aggregate demand curve shifts to the left.

Question 12

The crowding-out effect refers to the tendency of expansionary fiscal policy to

Accepted Answer

A) cause decreases in planned investment or planned consumption in the private sector. 
B) cause households to save less. 
C) replace low skilled labour with higher skilled labour. 
D) cause firms to produce beyond capacity.

Question 13

If the economy is at an output level below the LRAS curve,which of the following fiscal policies would likely lead to a higher equilibrium level of real GDP in the short run?

Accepted Answer

A) decrease government spending 
B) increase taxes 
C) increase government spending and/or reduce taxes 
D) decrease government spending and/or increase taxes

Question 14

Explain,along with an appropriate graphical representation,what a fiscal policy is and how it is implemented through a change in government spending and a change in taxes.

Accepted Answer

The answer of Explain,along with an appropriate graphical representation,what a...

Question 15

Fiscal policy may end up being destabilizing to an economy because

Accepted Answer

A) there is never a long enough time lag. 
B) the economy is almost always at full employment. 
C) the Prime Minister may have different goals than Parliament. 
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem that it was supposed to solve.

Question 16

Suppose there is a contractionary gap and the economy is in equilibrium on the SRAS at an output level beyond the economy's long-run real GDP.In the short run,if the government increases spending then

Accepted Answer

A) output will decrease but prices will rise. 
B) output will increase but prices will fall. 
C) output and prices will fall. 
D) output and prices will rise.

Question 17

The possibility of indirect crowding out suggests that,if the government wants to engage in expansionary policy,it must

Accepted Answer

A) increase spending less than the simple Keynesian model would predict. 
B) increase spending more than the simple Keynesian model would predict. 
C) reduce taxes rather than increase government spending. 
D) both reduce taxes and reduce spending to be able to achieve full employment.

Question 18

Lower marginal tax rates can increase total tax revenues is a tenet of

Accepted Answer

A) deficit financing. 
B) the supply-side economics argument. 
C) the flat -tax proposition. 
D) mercantilism.

Question 19

Explain how fiscal policy can correct a contractionary gap.

Accepted Answer

The answer of Explain how fiscal policy can correct a...

Question 20

If the economy is at an output level above the LRAS curve,which of the following fiscal policies would likely lead to a lower equilibrium level of real GDP in the short run?

Accepted Answer

A) increase government spending 
B) decrease taxes 
C) increase government spending and/or reduce taxes 
D) decrease government spending and/or increase taxes

Exam 11: Fiscal Policy and the Public Debt