ECON 101 Chapter 37 MC Questions

When the government sells bonds, some of the funds that would have gone to private investments go to the government. This situation is called

crowding out.

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

$200,000

Crowding out I. limits increases in aggregate demand due to fiscal policy. II. affects expansionary fiscal policy. III. increases the multiplier effect. A) I and II only B) II and III only C) I and III only D) I, II, and III

A) I and II only

Examples of expansionary fiscal policy include increases I. in government spending. II. in income taxes. III. of the money supply. A) I only B) II only C) I and II only D) I and III only

A) I only

When expansionary fiscal policy increases income and consumer spending, the subsequent increase in AD is called the ________ effect. A) expansionary B) secondary C) multiplier D) None of these answers is correct.

C) multiplier

An increase in government spending growth will cause inflation to fall in A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.

D) neither the short run nor the long run.

In working to correct a recession with fiscal policy, the government can A) wait for wages and prices to become more flexible. B) increase the money supply. C) increase its expenditures and/or decrease taxes to raise the Solow growth curve. D) raise its expenditures and/or lower taxes to increase aggregate demand.

D) raise its expenditures and/or lower taxes to increase aggregate demand.

Fiscal policy is well-suited to counteract a recession or depression when A) unemployment is low. B) taxes are high. C) a real negative shock occurs. D) resources are underutilized.

D) resources are underutilized.

Which of the following refers to the decrease in private spending when government spending increases? A) the multiplier effect B) the timing effect C) the automatic stabilizing effect D) the crowding out effect

D) the crowding out effect

Which of the following is NOT a lag associated with fiscal policy? A) the time it takes to implement a policy once it's decided B) the time to recognize a recession once the data are collected C) the time it takes to assess whether the policy has worked D) the time it takes to assess whether to use fiscal or monetary policy

D) the time it takes to assess whether to use fiscal or monetary policy

Under which of the following scenarios would expansionary fiscal policy work best? A) when two real shocks have occurred B) when the economy is at equilibrium in the long run C) when the economy has had a large negative supply shock D) when AD is low compared to the long-run equilibrium position of the economy

D) when AD is low compared to the long-run equilibrium position of the economy

When consumers save their tax cut for a future tax increase they are adhering to

Ricardian equivalence.

(Figure: A Real Shock) If after a real shock the economy is operating at Point Y, in the absence of crowding out, fiscal policy that shifted AD0 to AD2 would move the economy to Point:

V.

The largest component of GDP is

consumption spending.

If Ricardian equivalence is correct, any tax cut will cause consumer spending to

remain unchanged

An increase in government spending growth will cause the Solow growth curve to

remain unchanged.

A decrease in consumption growth will cause aggregate demand to

shift inward.

An increase in government spending growth will cause the AD curve to

shift outward.

(Figure: Aggregate Demand and Fiscal Policy) For an economy in a recession at Point Z, what will happen in the long run in the absence of any government action to counter the recession? A) Wages will become flexible, and the economy will return to the long-run growth rate. B) Wages will remain sticky and aggregate demand will fall further. C) Aggregate demand will rise above the long-run Solow growth curve. D) The economy will remain in a recession.

A) Wages will become flexible, and the economy will return to the long-run growth rate.

When an increase in government spending leads to a decrease in private spending it is called A) crowding out. B) a drop in the bucket. C) bad timing. D) None of the answers is correct.

A) crowding out.

When using fiscal policy to fight a recession, the government will A) decrease taxes and/or increase government expenditures. B) increase taxes and/or decrease government expenditures. C) institute technological advancement in the economy. D) decrease government expenditures.

A) decrease taxes and/or increase government expenditures.

(Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, effective short-run fiscal policy would take which action to correct an economy in recession at Point Z? A) increase aggregate demand, returning the economy to Point X. B) increase the Solow growth curve to a level above 3 percent. C) decrease the Solow growth curve to a level below 2 percent. D) increase aggregate demand to move the economy to Point W.

A) increase aggregate demand, returning the economy to Point X.

When consumers are very reluctant to spend in a recessionary environment, the government's most effective strategy is to A) increase spending through bond financing. B) decrease income taxes. C) decrease corporate taxes. D) do nothing; the economy will self-correct in the short run.

A) increase spending through bond financing.

Consumers are more likely to spend tax rebates that they believe are A) permanent. B) temporary. C) large. D) small.

A) permanent.

Economists believe that government spending sometimes increases growth for all of these reasons EXCEPT A) spending can lower inflation and keep prices and wages steady. B) spending can put all of the factors of production to greater use. C) spending can encourage additional private investment. D) spending can increase consumer confidence.

A) spending can lower inflation and keep prices and wages steady.

The multiplier effect is the A) subsequent consumer spending that increases AD from expansionary fiscal policy. B) subsequent consumer spending that increases AD from contractionary fiscal policy. C) increase in GDP from an increase in the money supply and decrease in taxes. D) increase in GDP from increased consumer savings and private investment.

A) subsequent consumer spending that increases AD from expansionary fiscal policy.

Figure: Aggregate Demand Conditions Beginning at Point A in the diagram, a decrease in consumption growth will cause real growth to fall in A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.

A) the short run only.

Fiscal policy is a good option to stimulate an economy when A) unemployment is very high. B) the economy is very close to the long-run Solow growth curve. C) a real shock occurs. D) Each of these answers is correct

A) unemployment is very high.

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits? A) Consumers overspent the rebate and fell into debt. B) Consumers used much of the rebate to pay off existing debt. C) Consumers spent the money on frivolous items that did not have a multiplier effect. D) Consumers decided to save all of their rebate money.

B) Consumers used much of the rebate to pay off existing debt.

Crowding out occurs when I. the government borrows money from the public that firms would have used for investment funds. II. the government sells bonds, raising interest rates and causing people to save more and consume less. III. an economy is closed and does not trade with the outside world. A) I only B) I and II only C) II and III only D) I, II, and III

B) I and II only

Under which of the following circumstances should an economic advisor for a small economy recommend a large increase in government spending? I. The country is in a recession that seems to be turning into a depression. II. The government has a record high budget deficit. III. A lot of infrastructure has been destroyed by a hurricane. A) I and II only B) I and III only C) II only D) I, II, and III

B) I and III only

When consumers reduce spending, the reduction in velocity of money is split between A) a decrease in growth and an increase in inflation. B) a decrease in growth and a decrease in inflation. C) a decrease in money supply and a decrease in growth. D) a decrease in money supply and decrease in inflation.

B) a decrease in growth and a decrease in inflation.

Expansionary fiscal policy can reduce real growth if the increase in government spending A) causes a large enough increase in private spending. B) causes a large enough decrease in private spending. C) is believed to be temporary. D) is believed to be permanent.

B) causes a large enough decrease in private spending.

As the recession continued in early 2009, consumer confidence most likely A) increased. B) decreased. C) remained constant. D) became too difficult to calculate accurately.

B) decreased.

Which of the following is NOT an automatic stabilizer? A) greater access to credit B) defense spending C) progressive tax system D) welfare program

B) defense spending

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing? A) real business cycle policy B) fiscal policy C) monetary policy D) growth policy

B) fiscal policy

The time necessary to recognize that an economic problem exists is called a(n) A) legislative lag. B) recognition lag. C) implementation lag. D) Each of these answers is correct.

B) recognition lag.

Fiscal policy is most effective in keeping both inflation and real growth stable when there is a A) shock to the Solow growth curve. B) shock to aggregate demand. C) real shock. D) change in expected inflation that shifts the SRAS curve

B) shock to aggregate demand.

Other things being equal, a decrease in government spending growth causes A) the dynamic AD curve to shift to the right. B) the dynamic AD curve to shift to the left. C) the Solow growth curve to shift to the right. D) the Solow growth curve to shift to the left.

B) the dynamic AD curve to shift to the left.

Which of the following is TRUE of the difference between a tax cut and a tax rebate? A) A tax cut only increases the incentive to spend, while a tax rebate only increases the incentive to work. B) A tax cut only increases the incentive to work, while a tax rebate only increases spending. C) A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend. D) A tax cut only increases the incentive to spend, but a tax rebate increases the incentive to work and the incentive to spend.

C) A tax cut increases the incentive to work and the incentive to spend, while a tax rebate only increases the incentive to spend.

Examples of automatic stabilizers include I. food stamps. II. unemployment benefits. III. implementation lags. A) I only B) II only C) I and II only D) II and III only

C) I and II only

Mistimed contractionary fiscal policy can cause A) a real shock. B) rising interest rates. C) a recession. D) inflation.

C) a recession.

Fiscal policies that help an economy in a recession without additional actions by policy makers are called A) consumption smoothers. B) Ricardian equalizers. C) automatic stabilizers. D) Each of these answers is correct.

C) automatic stabilizers.

Government spending becomes a more effective policy tool when A) the economy is above the Solow growth curve. B) the government raises taxes to finance spending. C) consumers are pessimistic and not spending. D) interest rates in the economy are rising simultaneously

C) consumers are pessimistic and not spending.

If consumption decreases, the existence of the government spending multiplier effect means that in order to counter the recession A) the government cannot use fiscal policy. B) the government is forced to use both tax cuts and increases in G. C) fiscal policy needs to raise G by less than the decrease in C. D) fiscal policy needs to raise G by more than the decrease in C.

C) fiscal policy needs to raise G by less than the decrease in C.

The time necessary for the government to put a fiscal policy plan in place is called a(n) A) legislative lag. B) recognition lag. C) implementation lag. D) Each of these answers is correct.

C) implementation lag.

Fiscal policy is A) equally effective in dealing with real shocks as with aggregate demand shocks. B) more effective in dealing with real shocks than with aggregate demand shocks. C) less effective in dealing with real shocks than with aggregate demand shocks. D) not effective in dealing with either real shocks or aggregate demand shocks.

C) less effective in dealing with real shocks than with aggregate demand shocks.

If, in the best case scenario, increased government spending were used to revive the economy from a recession, the increased spending would A) be offset by a decrease in inflation. B) be a little more than the fall in consumer confidence in order to help make up for lost GDP. C) not need to be as large as the fall in consumer consumption. D) be exactly the same as the fall in consumer consumption.

C) not need to be as large as the fall in consumer consumption.

The tax rebate of 2008 had a relatively small impact because taxpayers primarily used the rebate to A) purchase their annual Christmas gifts. B) take vacations. C) reduce their debts. D) Each of these answers is correct.

C) reduce their debts.

Fiscal policy can offset a positive shock to aggregate demand by raising A) the discount rate. B) the growth rate of the money supply. C) taxes. D) government spending.

C) taxes.

Which of these is a form of fiscal policy? A) changes in government spending. B) tax rebates. C) tax cuts. D) Each of these answers is correct

D) Each of these answers is correct

Expansionary fiscal policy today might mean A) increased taxes in the future. B) contractionary fiscal policy in the future. C) increased public borrowing in the future. D) Each of these answers is correct.

D) Each of these answers is correct.

Fiscal policy involving ____________ is designed to influence business cycle fluctuations. A) the taxation of income B) government spending C) government borrowing D) Each of these answers is correct.

D) Each of these answers is correct.

Which of the following poses a limit to fiscal policy? A) crowding out B) size of government expenditures C) timing lags D) Each of these answers is correct.

D) Each of these answers is correct.

If the government increases its spending, financing methods that can cause crowding out include I. raising individual income taxes. II. raising corporate investment taxes. III. selling bonds. A) III only B) I and II only C) II and III only D) I, II, and III

D) I, II, and III

The difficulties of using fiscal policy to affect the economy include I. the automatic stabilizing effect. II. the crowding out effect. III. the time lag in policy effects. A) I only B) II only C) I and II only D) II and III only

D) II and III only

When the government sells more bonds, what else happens? A) Interest rates go down and consumer spending rises. B) Interest rates go down and savings go up. C) Interest rates go up and consumer spending rises. D) Interest rates go up and savings go up.

D) Interest rates go up and savings go up.

The time necessary for a fiscal policy plan to have an impact is called a(n) A) legislative lag. B) recognition lag. C) implementation lag. D) None of these answers is correct.

D) None of these answers is correct.

Ricardian equivalence A) will occur more when consumers practice consumption smoothing. B) does not occur when a political administration is set to change. C) has not occurred in the United States. D) is less significant when consumers deem tax cuts or rebates as permanent.

D) is less significant when consumers deem tax cuts or rebates as permanent.

The primary tools of fiscal policy are

government expenditure and taxation.

When consumers cut back on spending what falls?

the velocity of money