Fiscal Policy Quiz

Countercyclical discretionary fiscal policy calls for: A) surpluses during both recessions and periods of demand-pull inflation. B) surpluses during recessions and and deficits during periods of demand-pull inflation. C) deficits during recessions and and surpluses during periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation.

C) deficits during recessions and and surpluses during periods of demand-pull inflation.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to: A) reduce aggregate demand. B) reduce aggregate supply. C) affect neither aggregate supply nor aggregate demand. D) increase aggregate demand.

D) increase aggregate demand.

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A) increasing taxes by $4 billion. B) decreasing taxes by $4 billion. C) increasing government spending by $40 billion. D) increasing government spending by $4 billion.

D) increasing government spending by $4 billion.

Discretionary fiscal policy refers to: A) any change in government spending or taxes that destabilises the economy. B) the authority that the president has to change personal income tax rates. C) the changes in taxes and transfers that occur as GDP changes. D) intentional changes in taxes and government expenditures made by Congress to stabilise the economy.

D) intentional changes in taxes and government expenditures made by Congress to stabilise the economy.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is negative $80 billion. To achieve full-employment output (exactly), government should: A) reduce government expenditures by $40 billion. B) increase government expenditures by $80 billion. C) reduce taxes by $40 billion. D) reduce taxes by $80 billion.

D) reduce taxes by $80 billion.

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift: A) leftward by $50 billion at each price level. B) rightward by $10 billion at each price level. C) leftward by $40 billion at each price level. D) rightward by $50 billion at each price level.

D) rightward by $50 billion at each price level.

Which of the following best describes the built-in stabilisers as they function in the United States? A) The size of the multiplier varies inversely with the level of GDP. B) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises. C) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D) Personal and corporate income tax collections automatically fall and transfers and subsidies rise as GDP rises.

B) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the: A) budget deficit. B) budget surplus C) Federal Reserve. D) public debt.

B) budget surplus

The determinants of the aggregate demand: A) demonstrate why real output and the price level are inversely related. B) explain shifts in the aggregate demand curve. C) explain why the aggregate demand curve is downsloping. D) include input prices and resource productivity.

B) explain shifts in the aggregate demand curve.

Expansionary fiscal policy is so named because it: A) necessarily expands the size of the government. B) is designed to expand real GDP. C) involves an expansion of the nation's money supply. D) is aimed at achieving greater price stability.

B) is designed to expand real GDP.

Graphically, cost-push inflation is shown as a: A) leftward shift of the AD curve. B) leftward shift of the AS curve. C) rightward shift of the AS curve. D) rightward shift of the AD curve.

B) leftward shift of the AS curve.

The political business cycle refers to the possibility that: A) incumbent politicians will be reelected regardless of the state of the economy. B) politicians will manipulate the economy to enhance their chances of being reelected. C) there is more inflation during Democratic administrations that during Republican administrations. D) recessions collide with election years.

B) politicians will manipulate the economy to enhance their chances of being reelected.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full-employment under these conditions, the government should: A) discourage private investment by increasing corporate income taxes. B) reduce tax rates and/or increase government spending. C) decrease government expenditures. D) encourage personal saving by increasing the interest rate on government bonds.

B) reduce tax rates and/or increase government spending.

Graphically, demand-pull inflation is shown as a: A) leftward shift of the AS curve along an upsloping AD curve. B) rightward shift of the AD curve along an upsloping AS curve. C) leftward shift of the AS curve along a downsloping AD curve. D) rightward shift of the AD curve along a downsloping AS curve.

B) rightward shift of the AD curve along an upsloping AS curve.

The federal budget deficit if found by: A) cumulating the differences between government spending and tax revenues over all years since the nation's founding. B) subtracting government tax revenues from government spending in a particular year. C) subtracting government revenues from the noninvestment-type government spending in a year. D) subtracting government tax revenues plus government borrowing from government spending in a particular year.

B) subtracting government tax revenues from government spending in a particular year.

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The recognition lag pf fiscal policy is reflected in events: A) 1 and 2. B) 3 and 4. C) 4 and 5. D) 2 and 3.

A) 1 and 2.

Which of the following would not shift the aggregate demand curve: A) A change in the price level. B) An increase in personal income tax rates. C) A decline in the interest rate at each possible price level. D) Depreciation of the international value of the dollar.

A) A change in the price level.

An appropriate fiscal policy for severe demand-pull inflation is: A) a tax rate increase. B) a reduction in interest rates. C) depreciation of the dollar. D) an increase in government spending.

A) a tax rate increase.

The determinants of aggregate supply: A) include resource prices and resource productivity. B) explain the three distinct ranges of the aggregate supply curve. C) are consumption, investment, government, and net export spending. D) explain why real domestic output and the price level are directly related.

A) include resource prices and resource productivity.

A rightward shift in the aggregate supply curve is best explained by an increase in: A) productivity. B) the price of imported resources. C) business taxes. D) nominal wages.

A) productivity.