Question 1

-Refer to the above figure. Suppose that the economy initially is operating along AD₁. If the government seeks to close the recessionary gap by raising government spending without any change in taxation, which moves the aggregate demand curve from AD₁ to AD₂, then to AD₃. Which of the following scenarios is TRUE?

Accepted Answer

A)  Interest rates fall and investment rises.
B)  Both interest rates and investment fall.
C)  Both interest rates and investment rise.
D)  Interest rates rise and investment falls.E) B) and D)
F) A) and B)

Question 2

-Refer to the above figure. A budget deficit occurs when real national income is

Accepted Answer

A)  Y₁.
B)  Y₂.
C)  Y₃.
D)  None of the above: cannot be determined given the information.E) None of the above
F) B) and C)

Question 3

Supply-side economics

Accepted Answer

A)  promotes expansionary fiscal policy by increasing government spending.
B)  promotes reducing taxes to create incentives to increase productivity.
C)  promotes increasing taxes to create additional revenue for government spending.
D)  is based on the Ricardian equivalence theorem.E) All of the above
F) None of the above

Question 4

-Refer to the above figure. If the economy is currently operating at point C, then there is

Accepted Answer

A)  a stable long-run equilibrium situation.
B)  a recessionary gap.
C)  an inflationary gap.
D)  unemployment.E) B) and D)
F) B) and C)

Question 5

A decrease in taxes will have no effect on real GDP if

Accepted Answer

A)  people look at changes in taxes only in the present.
B)  there is no crowding out.
C)  the Ricardian equivalence theorem holds.
D)  the tax decrease is offset by an increase in government spending.E) None of the above
F) All of the above

Question 6

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₁. This is an example of

Accepted Answer

A)  partial crowding-out effect.
B)  the free rider problem.
C)  laissez-faire.
D)  complete crowding-out effect.E) All of the above
F) B) and D)

Question 7

A direct expenditure offset occurs when an increase in government spending

Accepted Answer

A)  results in an increase in household saving for retirement.
B)  is followed by an increase in consumer spending
C)  results in a decrease in private spending.
D)  is followed by an increase in taxes.E) B) and C)
F) A) and C)

Question 8

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Accepted Answer

A)  a tax decrease passed into law by Congress
B)  an increase in the money supply by the Federal Reserve
C)  a decrease in government expenditures approved by Congress
D)  an agreement among major banks to raise interest ratesE) All of the above
F) None of the above

Question 9

Discretionary fiscal policy is so named because it

Accepted Answer

A)  is undertaken at the order of the nation's central bank.
B)  occurs automatically as the nation's level of GDP changes.
C)  involves specific changes in taxes and government spending undertaken by Congress and the president.
D)  involves secret advice given by the Council of Economic Advisers to the president.E) None of the above
F) B) and C)

Question 10

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Accepted Answer

A)   increase aggregate demand.
B)  decrease aggregate demand.
C)  have no effect on aggregate demand.
D)  affect only aggregate supply.E) B) and D)
F) B) and C)

Question 11

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

Accepted Answer

A)  change the incentive to work
B)  change the incentive to save
C)  change the incentive to invest
D)  all of the aboveE) B) and D)
F) All of the above

Question 12

According to the traditional Keynesian analysis, if the government increases spending by $10 million, then

Accepted Answer

A)  consumption will increase, and so total expenditures will increase by more than $10 million.
B)  consumption will decrease, and so total expenditures will increase by less than the $10 million.
C)  consumption will remain the same, and so total expenditures will increase by exactly $10 million.
D)  consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption.E) B) and C)
F) A) and B)

Question 13

A problem with using fiscal policy to fine-tune the economy is that

Accepted Answer

A)  agreeing on the appropriate fiscal policy is time consuming.
B)  fiscal policy impacts the economy too fast.
C)  fiscal policy impacts only urban areas of the nation.
D)  fiscal policy impacts only the largest states in the nation.E) None of the above
F) B) and C)

Question 14

The Ricardian equivalence theorem states that

Accepted Answer

A)  an increase in government spending by the federal government leads to offsetting reductions in state government spending.
B)  an increase in government spending financed by higher taxes has no effect on aggregate demand.
C)  spending on national defense is a direct expenditure offset.
D)  government spending financed by taxes is equivalent to government spending financed by borrowing.E) A) and D)
F) A) and C)

Question 15

Suppose that real GDP is initially $14 trillion and the government attempts to increase real GDP to $15 trillion. The marginal propensity to consume is 0.8, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. Which increase in government spending below could yield the desired level of real GDP?

Accepted Answer

A)  $100 billion
B)  $125 billion
C)  $200 billion
D)  $400 billionE) B) and C)
F) A) and C)

Question 16

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Accepted Answer

A)  discretionary fiscal policy.
B)  automatic stabilizers.
C)  Ricardian equivalence.
D)  Recognition time lag.E) B) and D)
F) A) and C)

Question 17

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

Accepted Answer

A)  decreasing interest rates
B)  increasing the money supply
C)  decreasing taxes
D)  a simultaneous and equal reduction in taxes and reduction in government spendingE) A) and C)
F) B) and C)

Question 18

What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy?

Accepted Answer

Automatic stabilizers are provisions of ...

Question 19

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

Accepted Answer

A)  an increase in aggregate demand equivalent to the full impact of all of the coupons redeemable.
B)  no increase in aggregate demand due to the Ricardian equivalence theorem.
C)  no increase in aggregate demand because there would be no direct expenditure offset.
D)  an increase in aggregate demand but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset.E) A) and C)
F) A) and D)

Question 20

Whenever government spending is a substitute for private spending

Accepted Answer

A)  interest rates will rise.
B)  the Ricardian equivalence theorem holds.
C)  the effects of expansionary fiscal policy are dampened.
D)  there is a direct multiplier effect.E) C) and D)
F) A) and B)

Exam 12: Fiscal Policy

Supply-side economics

Correct Answer
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What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy?

Correct Answer
verified
Automatic stabilizers are provisions of ...
View Answer

A direct expenditure offset occurs when an increase in government spending

Correct Answer
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Correct Answer
verified

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Correct Answer
verified

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

Correct Answer
verified

Correct Answer
verified

A decrease in taxes will have no effect on real GDP if

Correct Answer
verified

According to the traditional Keynesian analysis, if the government increases spending by $10 million, then

Correct Answer
verified

Discretionary fiscal policy is so named because it

Correct Answer
verified

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

Correct Answer
verified

Whenever government spending is a substitute for private spending

Correct Answer
verified

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Correct Answer
verified

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Correct Answer
verified

-Refer to the above figure. If the economy is currently operating at point C, then there is

Correct Answer
verified

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₁. This is an example of

Correct Answer
verified

-Refer to the above figure. A budget deficit occurs when real national income is

Correct Answer
verified

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

Correct Answer
verified

The Ricardian equivalence theorem states that

Correct Answer
verified

A problem with using fiscal policy to fine-tune the economy is that

Correct Answer
verified

Exam 12: Fiscal Policy

Supply-side economics

Correct AnswerverifiedShow Answer

What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy?

Correct AnswerverifiedAutomatic stabilizers are provisions of ...View AnswerShow Answer

A direct expenditure offset occurs when an increase in government spending

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts

Correct AnswerverifiedShow Answer

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this recessionary gap?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A decrease in taxes will have no effect on real GDP if

Correct AnswerverifiedShow Answer

According to the traditional Keynesian analysis, if the government increases spending by $10 million, then

Correct AnswerverifiedShow Answer

Discretionary fiscal policy is so named because it

Correct AnswerverifiedShow Answer

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

Correct AnswerverifiedShow Answer

Whenever government spending is a substitute for private spending

Correct AnswerverifiedShow Answer

Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as

Correct AnswerverifiedShow Answer

Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?

Correct AnswerverifiedShow Answer

-Refer to the above figure. If the economy is currently operating at point C, then there is

Correct AnswerverifiedShow Answer

-Refer to the above figure. Suppose that the economy starts at AD₁. If the government reduces taxes, then the economy goes to AD₂, but then falls back to AD₁. This is an example of

Correct AnswerverifiedShow Answer

-Refer to the above figure. A budget deficit occurs when real national income is

Correct AnswerverifiedShow Answer

According to supply-side economics, changes in marginal tax rates will have which of the following effects?

Correct AnswerverifiedShow Answer

The Ricardian equivalence theorem states that

Correct AnswerverifiedShow Answer

A problem with using fiscal policy to fine-tune the economy is that

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
Automatic stabilizers are provisions of ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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