Fiscal Policy and Debt

23. When the economy booms, tax revenues rise faster than income. a. True b. False

a. True

Automatic stabilizers are most associated with the _____ balanced budget. a. cyclically b. annually c. continually 3 d. functionally

a. cyclically

(Figure: Determining Fiscal Policy) The best discretionary fiscal policy option is: a. expansionary fiscal policy that leads to full employment. b. contractionary fiscal policy that leads to full employment. c. a combination of expansionary and contractionary fiscal policies to achieve full employment and stable prices. d. only fiscal policies that lead to a lower price level.

a. expansionary fiscal policy that leads to full employment.

Traditionally, government has used ____ to influence the ____ side of the economy a. government purchases and taxes; demand b. spending; supply c. supply management; demand d. demand management; supply

a. government purchases and taxes; demand

Automatic stabilizers a. reduce the problems caused by lags, using fiscal policy as a stabilization tool b. are changes in fiscal policy that act to stimulate ad automatically when the economy goes into recession c. are changes in fiscal policy that act to restrain ad automatically when the economy is growing too fast d. all of the above are correct

a. reduce the problems caused by lags, using fiscal policy as a stabilization tool

Most of the tax revenue of the U.S. government comes from sales taxes. a. True b. False

b. False

How does the government finance budget deficits? a. The Federal Reserve creates new money b. It issues debt to government agencies, private institutions, and private investors c. It is primary financed by foreign investors d. It does nothing to finance budget deficits

b. It issues debt to government agencies, private institutions, and private investors

_____ government spending, _____ transfer payments, and _____ taxes are all examples of contractionary fiscal policy. a. Reducing; increasing; raising b. Reducing; reducing; raising c. Reducing; reducing; reducing d. Raising; increasing; raising

b. Reducing; reducing; raising

What approach to federal finance would you agree with if you wanted the federal government to restrict spending or raise taxes during booms and use surpluses from the booms to offset deficits during recessions? a. annually balanced budget b. cyclically balanced budget c. functional finance d. trade balanced budget

b. cyclically balanced budget

An increase in taxes combined with a decrease in government purchases would a. increase AD b. decrease AD c. leave AD unchanged d. have an indeterminate effect on AD

b. decrease AD

Federal spending that is authorized by permanent laws and does not go through the annual appropriation process is called _____ spending. a. discretionary b. mandatory c. long-term d. infrastructure

b. mandatory

If the government wanted to use fiscal policy to increase aggregate demand, which of the following might be an appropriate policy action? a. Decrease taxes b. Increase government purchases of goods and services c. Both a and b d. None of the above

c. Both a and b

According to the Laffer curve, decreasing tax rates a. on income will always increase tax revenues b. on income will always decrease tax revenues c. are more likely to increase tax revenues the higher tax rates are to start with d. are more likely to increase tax revenues the lower tax rates are to start with

c. are more likely to increase tax revenues the higher tax rates are to start with

The multiplier effect is based on the fact that ____ by one person is (are) ____ to another a. income; income b. expenditures; expenditures c. expenditures; income d. income; expenditures

c. expenditures; income

If the government wanted to offset the effect of a boom in consumer and investor confidence on AD, it might a. decrease government purchases b. decrease taxes c. increase taxes d. do either a or c

c. increase taxes d. do either a or c

When government debt is financed internally, future generations will a. inherit a lower tax liability b. inherit neither higher taxes nor interest payment liability c. inherit higher taxes d. do none of the above

c. inherit higher taxes

12. According to the crowding-out effect, if the President and Congress increase government spending during a recession a. the demand for money falls, driving interest rates down b. the demand for money rises, driving interest rates up c. the supply of money rises, driving interest rates up d. the supply of money falls, driving interest rates down

c. the supply of money rises, driving interest rates up

The multiplier is a. 1/MPC b. (1 − MPC)/1 c. 1/(MPC − 1) d. 1/(1 − MPC)

d. 1/(1 − MPC)

If the marginal propensity to consume is two-thirds, the multiplier is a. 30 b. 66 c. 1.5 d. 3

d. 3

The federal government buys $20 million worth of computers from Apple. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal? a. AD will increase $12 million b. AD will increase $13.3 million c. AD will increase $20 million d. AD will increase $50 million e. AD will not change

d. AD will increase $50 million

The government sometimes uses fiscal policy to a. control the money supply b. stimulate the economy during a contraction c. curb a potentially inflationary expansion d. both b and c are correct

d. both b and c are correct

Higher budget deficits would tend to a. raise interest rates b. reduce investment c. reduce growth rate of the capital stock d. do all of the above

d. do all of the above

The focus of supply-side fiscal policies is on: a. short-run increases in output. b. long-run balanced budgets. c. long-run trade balances. d. long-run economic growth.

d. long-run economic growth.