Question 1

(1)  The composite index of leading indicators turns downward for three consecutive months; (2)  Economists reach agreement that the economy is moving into a recession; (3)  A tax cut is proposed in Parliament; (4)  The tax cut is passed by Parliament; (5)  Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.
-Refer to the above information. The recognition lag of fiscal policy is reflected in events:

Accepted Answer

A)   1 and 2.
B)   2 and 3.
C)   3 and 4.
D)   4 and 5.E) A) and D)
F) A) and C)

Question 2

d1. Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect? A)  an improvement in profit expectations by businesses B)  a decrease in saving C)  a decline in the interest rate D)  an increase in the marginal propensity to consume" class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. Initially assume that the investment demand curve is Id1. Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

Accepted Answer

A)   an improvement in profit expectations by businesses
B)   a decrease in saving
C)   a decline in the interest rate
D)   an increase in the marginal propensity to consumeE) None of the above
F) A) and B)

Question 3

The direction of discretionary fiscal policy cannot be examined by a simple look at the changes in the actual budget deficits or surpluses. This is because:

Accepted Answer

A)   those changes may reflect the changes in the general price level.
B)   those changes may reflect automatic changes in the tax revenues as a result of change in GDP.
C)   those changes may reflect the changes in the tax revenues as a result of change in imports.
D)   it is impossible to calculate the changes in the actual budget deficits or surpluses.E) C) and D)
F) B) and D)

Question 4

Which set of fiscal policies would tend to offset each other?

Accepted Answer

A)   a decrease in government spending and taxes
B)   a decrease in government spending and no change in taxes
C)   an increase in government spending and a decrease in taxes
D)   a decrease in government spending and an increase in taxesE) C) and D)
F) A) and C)

Question 5

Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with discretionary fiscal policy?

Accepted Answer

A)   a Parliamentary proposal to incur a federal surplus to be used for the retirement of public debt
B)   a reduction in agricultural subsidies and veterans' benefits
C)   a postponement of a highway construction program
D)   a reduction in federal tax rates on personal and corporate incomeE) All of the above
F) C) and D)

Question 6

-Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP)  of $40 is imposed in this economy, the marginal propensity to consume is:

Accepted Answer

A)   .8 before taxes and .6 after taxes.
B)   .8 both before and after taxes.
C)   .6 before taxes and .8 after taxes.
D)   .8 before taxes and .4 after taxes.E) A) and B)
F) None of the above

Question 7

The effectiveness of the built-in or automatic stabilizers is limited because:

Accepted Answer

A)   the stabilizers produce budget surpluses during recessions.
B)   transfer payments and subsidies increase during inflation and decrease during recessions.
C)   the offset which the stabilizers provide to a change in private spending is less than the change in private spending.
D)   the stabilizers raise the general price level regardless of the phase of the business cycle.E) A) and B)
F) A) and C)

Question 8

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a:

Accepted Answer

A)   leftward shift in the aggregate demand curve.
B)   rightward shift in the aggregate demand curve.
C)   rightward shift in the aggregate supply curve.
D)   movement along an existing aggregate supply curve.E) A) and B)
F) None of the above

Question 9

In Year 1, the actual budget deficit was $200 billion and the cyclically adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 was:

Accepted Answer

A)   proportional.
B)   inflationary.
C)   contractionary.
D)   expansionaryE) A) and B)
F) B) and C)

Question 10

The full-employment budget measures what the Federal budget deficit or surplus would be at full employment output with existing tax and spending decisions.

Accepted Answer

A) True 
 B)False

Question 11

An appropriate fiscal policy for a severe recession is:

Accepted Answer

A)   a decrease in government spending.
B)   a decrease in tax rates.
C)   appreciation of the dollar.
D)   an increase in interest rates.E) A) and B)
F) All of the above

Question 12

If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years,:

Accepted Answer

A)   fiscal policy is expansionary.
B)   fiscal policy is contractionary.
C)   fiscal policy is neutral.
D)   the tax system is progressive.E) A) and C)
F) None of the above

Question 13

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

Accepted Answer

A)   increases during a period of recession, rather than prosperity.
B)   is primarily for capital-type goods.
C)   is financed by borrowing.
D)   is financed by taxation.E) B) and C)
F) A) and B)

Question 14

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Accepted Answer

A)   increasing government spending by $25 billion.
B)   increasing government spending by $80 billion.
C)   decreasing taxes by $25 billion.
D)   decreasing taxes by $100 billion.E) None of the above
F) B) and D)

Question 15

The greatest expansionary impact of a budget deficit will occur when the:

Accepted Answer

A)   government finances the deficit by obtaining newly printed money.
B)   government borrows the money from the general public.
C)   economy is operating in the intermediate range of its aggregate supply curve.
D)   marginal propensity to save for the economy is high.E) C) and D)
F) B) and D)

Question 16

Which set of events would best explain the effects of a contractionary fiscal policy on net exports?

Accepted Answer

A)   It decreases domestic interest rates, causing the dollar to appreciate and net exports to decrease.
B)   It decreases domestic interest rates, causing the dollar to depreciate and net exports to increase.
C)   It decreases domestic interest rates, causing the dollar to depreciate and net exports to decrease.
D)   It increases domestic interest rates, causing the dollar to appreciate and net exports to decrease.E) A) and D)
F) All of the above

Question 17

The public debt is the accumulation of all deficits and surpluses which have occurred through time.

Accepted Answer

A) True 
 B)False

Question 18

The crowding-out effect of borrowing to finance the public debt:

Accepted Answer

A)   decreases current spending for private investment.
B)   increases the privately owned stock of real capital.
C)   decreases the economic burden on future generations.
D)   increases incentives to work and save.E) A) and D)
F) A) and C)

Question 19

If government increases the size of its full-employment surplus, we can:

Accepted Answer

A)   assume that government is causing interest rates to rise.
B)   not determine government's impact on the economy without also knowing the status of the actual budget.
C)   assume that government is having a contractionary effect on the economy.
D)   assume that government is having an expansionary effect on the economy.E) None of the above
F) A) and B)

Question 20

If the full-employment deficit as a percentage of GDP is zero in one year, and 1 percent of GDP the next year, it can be concluded that:

Accepted Answer

A)   fiscal policy is expansionary.
B)   fiscal policy is contractionary.
C)   the federal government is borrowing money.
D)   the federal government is lending money.E) A) and B)
F) A) and C)

Exam 11: Fiscal Policy, Deficits, Surpluses, and Debt

-Refer to the above diagram. Initially assume that the investment demand curve is I_d1. Which of the following effects of a budget deficit might shift the investment demand curve from I_d1 to I_d2, wholly offsetting any crowding-out effect?

Correct Answer
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The public debt is the accumulation of all deficits and surpluses which have occurred through time.

Correct Answer
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In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a:

Correct Answer
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Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

Correct Answer
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Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with discretionary fiscal policy?

Correct Answer
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-Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:

Correct Answer
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The effectiveness of the built-in or automatic stabilizers is limited because:

Correct Answer
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If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years,:

Correct Answer
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Which set of events would best explain the effects of a contractionary fiscal policy on net exports?

Correct Answer
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If the full-employment deficit as a percentage of GDP is zero in one year, and 1 percent of GDP the next year, it can be concluded that:

Correct Answer
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If government increases the size of its full-employment surplus, we can:

Correct Answer
verified

An appropriate fiscal policy for a severe recession is:

Correct Answer
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Which set of fiscal policies would tend to offset each other?

Correct Answer
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The greatest expansionary impact of a budget deficit will occur when the:

Correct Answer
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The crowding-out effect of borrowing to finance the public debt:

Correct Answer
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The full-employment budget measures what the Federal budget deficit or surplus would be at full employment output with existing tax and spending decisions.

Correct Answer
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Correct Answer
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In Year 1, the actual budget deficit was $200 billion and the cyclically adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 was:

Correct Answer
verified

The direction of discretionary fiscal policy cannot be examined by a simple look at the changes in the actual budget deficits or surpluses. This is because:

Correct Answer
verified

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Correct Answer
verified

Exam 11: Fiscal Policy, Deficits, Surpluses, and Debt

-Refer to the above diagram. Initially assume that the investment demand curve is Id1. Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

Correct AnswerverifiedShow Answer

The public debt is the accumulation of all deficits and surpluses which have occurred through time.

Correct AnswerverifiedShow Answer

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a:

Correct AnswerverifiedShow Answer

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

Correct AnswerverifiedShow Answer

Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with discretionary fiscal policy?

Correct AnswerverifiedShow Answer

-Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:

Correct AnswerverifiedShow Answer

The effectiveness of the built-in or automatic stabilizers is limited because:

Correct AnswerverifiedShow Answer

If the cyclically adjusted budget deficit increases from $200 billion to $250 billion and GDP remains constant over the two years,:

Correct AnswerverifiedShow Answer

Which set of events would best explain the effects of a contractionary fiscal policy on net exports?

Correct AnswerverifiedShow Answer

If the full-employment deficit as a percentage of GDP is zero in one year, and 1 percent of GDP the next year, it can be concluded that:

Correct AnswerverifiedShow Answer

If government increases the size of its full-employment surplus, we can:

Correct AnswerverifiedShow Answer

An appropriate fiscal policy for a severe recession is:

Correct AnswerverifiedShow Answer

Which set of fiscal policies would tend to offset each other?

Correct AnswerverifiedShow Answer

The greatest expansionary impact of a budget deficit will occur when the:

Correct AnswerverifiedShow Answer

The crowding-out effect of borrowing to finance the public debt:

Correct AnswerverifiedShow Answer

The full-employment budget measures what the Federal budget deficit or surplus would be at full employment output with existing tax and spending decisions.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In Year 1, the actual budget deficit was $200 billion and the cyclically adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 was:

Correct AnswerverifiedShow Answer

The direction of discretionary fiscal policy cannot be examined by a simple look at the changes in the actual budget deficits or surpluses. This is because:

Correct AnswerverifiedShow Answer

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Correct AnswerverifiedShow Answer

-Refer to the above diagram. Initially assume that the investment demand curve is I_d1. Which of the following effects of a budget deficit might shift the investment demand curve from I_d1 to I_d2, wholly offsetting any crowding-out effect?

Correct Answer
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