Question 1

A contractionary fiscal policy either _____ government spending or _____ taxes.

Accepted Answer

A)  increases; increases
B)  decreases; increases
C)  increases; decreases
D)  decreases; decreasesE) B) and C)
F) A) and D)

Question 2

Changes in the budget balance:

Accepted Answer

A)  can be the result of fluctuations in the economy.
B)  can cause fluctuations in the economy.
C)  can be both the result of and the cause of changes in the economy.
D)  are always bad idea.E) B) and C)
F) None of the above

Question 3

The cyclically adjusted budget deficit:

Accepted Answer

A)  is no different from the actual budget deficit.
B)  fluctuates less than the actual budget deficit.
C)  fluctuates more than the actual budget deficit.
D)  remains unchanged throughout the business cycles.E) A) and D)
F) A) and B)

Question 4

Use the following to answer questions :
Figure: Fiscal Policy Choices 1 and there is: A) an inflationary gap. B) a recessionary gap. C) equilibrium at full employment. D) no gap." class="answers-bank-image d-inline" rel="preload" >
-(Figure: Fiscal Policy Choices)  Look at the figure Fiscal Policy Choices. In panel (a) , the economy is initially at output level Y1 and there is:

Accepted Answer

A)  an inflationary gap.
B)  a recessionary gap.
C)  equilibrium at full employment.
D)  no gap.E) All of the above
F) A) and B)

Question 5

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

Accepted Answer

A)  the government pays a higher price than households for the same goods and services.
B)  production of the goods and services the government purchases has a bigger impact on real GDP than production of consumer goods.
C)  many households fail to file their income tax and claim their refund.
D)  in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.E) C) and D)
F) B) and C)

Question 6

Which of the following is an automatic stabilizer?

Accepted Answer

A)  military spending
B)  unemployment compensation payments
C)  disability payments to war veterans
D)  Medicare paymentsE) B) and C)
F) A) and B)

Question 7

Use the following to answer questions:
Figure: Fiscal Policy Options 
-(Figure: Fiscal Policy Options)  Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD':

Accepted Answer

A)  a contractionary fiscal policy may be warranted.
B)  an expansionary fiscal policy may be warranted.
C)  the economy is in long-run equilibrium.
D)  the economy is experiencing an inflationary gap.E) A) and D)
F) B) and C)

Question 8

Use the following to answer questions:
Figure: Fiscal Policy Options 
-(Figure: Fiscal Policy Options)  Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

Accepted Answer

A)  increase; increase
B)  increase; decrease
C)  decrease; increase
D)  decrease; maintainE) B) and C)
F) B) and D)

Question 9

States that are required by their constitution to have annually balanced budgets are likely to _____ than those not required to balance their budget.

Accepted Answer

A)  have less severe business cycles
B)  have more severe business cycles
C)  grow faster
D)  have a better quality of lifeE) B) and C)
F) None of the above

Question 10

Economists generally believe that during an expansion, an economy should:

Accepted Answer

A)  balance its budget.
B)  run a budget deficit.
C)  run a budget surplus.
D)  be able to pay off all of its debt.E) B) and C)
F) A) and D)

Question 11

A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP.

Accepted Answer

A) True 
 B)False

Question 12

The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

Accepted Answer

A) True 
 B)False

Question 13

Most economists do not support a law that requires the federal budget to be balanced every year. Explain why.

Accepted Answer

Because of automatic stabilizers, the bu...

Question 14

When potential output is less than actual aggregate output:

Accepted Answer

A)  the economy faces an inflationary gap.
B)  the SRAS curve intersects the AD curve to the left of the LRAS curve.
C)  the government should follow an expansionary policy to correct the problem.
D)  a decrease in taxes would solve the problem.E) B) and C)
F) A) and B)

Question 15

An expansionary fiscal policy:

Accepted Answer

A)  usually decreases a government budget deficit or increases a government budget surplus.
B)  may include decreases in government spending.
C)  may include increases in taxes.
D)  may include decreases in taxes.E) C) and D)
F) All of the above

Question 16

Explain why a constitutional amendment requiring the federal government to balance the budget annually is a bad idea.

Accepted Answer

If the economy is in a recession, tax re...

Question 17

If government spending increases and taxes decrease:

Accepted Answer

A)  implicit liabilities will increase.
B)  implicit liabilities will decrease.
C)  the public debt will increase.
D)  the public debt will decrease.E) B) and D)
F) B) and C)

Question 18

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

Accepted Answer

A)  a decrease in government transfers.
B)  an increase in government spending.
C)  a decrease in government spending.
D)  an increase in the money supply to decrease interest rates.E) A) and D)
F) A) and C)

Question 19

Government tax revenue rises and falls with the business cycle as:

Accepted Answer

A)  the multiplier effect of taxes and government transfers.
B)  a discretionary fiscal policy.
C)  the multiplier effect of government purchases.
D)  an automatic stabilizer.E) B) and C)
F) A) and D)

Question 20

Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

Accepted Answer

A)  implicit liabilities.
B)  explicit liabilities.
C)  implicit assets.
D)  explicit assets.E) All of the above
F) None of the above

Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

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A contractionary fiscal policy either _____ government spending or _____ taxes.

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The cyclically adjusted budget deficit:

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States that are required by their constitution to have annually balanced budgets are likely to _____ than those not required to balance their budget.

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Government tax revenue rises and falls with the business cycle as:

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Which of the following is an automatic stabilizer?

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Use the following to answer questions: Figure: Fiscal Policy Options -(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD':

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The multiplier effect of an increase in transfer payments is smaller than that of an equal increase in government purchases of goods and services because some of the transfer payment is likely to be saved.

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Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:

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If government spending increases and taxes decrease:

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Changes in the budget balance:

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For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

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Economists generally believe that during an expansion, an economy should:

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Use the following to answer questions: Figure: Fiscal Policy Options -(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD', the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.

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Most economists do not support a law that requires the federal budget to be balanced every year. Explain why.

Correct AnswerverifiedBecause of automatic stabilizers, the bu...View AnswerShow Answer

An expansionary fiscal policy:

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When potential output is less than actual aggregate output:

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A change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP.

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Explain why a constitutional amendment requiring the federal government to balance the budget annually is a bad idea.

Correct AnswerverifiedIf the economy is in a recession, tax re...View AnswerShow Answer

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a) , the economy is initially at output level Y1 and there is:

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A contractionary fiscal policy either _ government spending or _ taxes.

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Use the following to answer questions: Figure: Fiscal Policy Options -(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD', the most appropriate discretionary fiscal policy is to _ government spending and _ income tax rates.

Correct Answer
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Correct Answer
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Because of automatic stabilizers, the bu...
View Answer

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Correct Answer
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Correct Answer
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If the economy is in a recession, tax re...
View Answer

Use the following to answer questions : Figure: Fiscal Policy Choices -(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a) , the economy is initially at output level Y₁ and there is:

Correct Answer
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