CH 13

All the following actions represent fiscal policy EXCEPT A) a reduction in the money supply by the Federal Reserve. B) an increase in government spending. C) a reduction in individual income tax rates. D) an increase in corporate income tax rates.

A

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

A

An advantage of automatic stabilizers over discretionary fiscal policy is that A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. B) automatic stabilizers can be easily fine-tuned to move the economy to full employment. C) only the President is involved in implementing automatic stabilizers, instead of both the President and Congress. D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy.

A

In the short run, if the government attempts to increase aggregate demand, it should A) increase government spending and reduce taxes. B) decrease government spending and increase taxes. C) shift the long-run aggregate supply curve to the right. D) shift the short-run aggregate supply curve to the right.

A

In the traditional Keynesian model, an increase in government spending A) causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. B) causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. C) causes the C + I + G + X line to shift upward by more than the increase in government spending. D) causes no change in the C + I + G + X line.

A

The amount of time it takes Congress to debate the size of a tax cut is known as the A) action time lag. B) effect time lag. C) recognition time lag. D) Ricardian-equivalence time lag.

A

The fiscal policy of the United States is A) summarized in the budget of the U.S. federal government. B) the sum of the budgets of each state and municipality. C) published in the Federal Reserve Bankʹs Annual Report. D) announced by the President in his State of the Union message.

A

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option? A) A new cruise missile for the military B) Expanding the school lunch program C) Constructing more low income housing D) Providing textbooks for college students

A

The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is A) supply-side economics. C) the Ricardian equivalence theorem. B) demand-side economics. D) consistent with crowding out.

A

The recognition time lag is the time that elapses between A) when an economic problem manifests itself and it is officially acknowledged. B) the recognition of an economic problem and implementing policies to solve it. C) implementing policies to solve an economic problem and when the results of that policy can be measured. D) the beginning of the budgetary process and the final budget resolution.

A

The recognition time lag recognizes that it takes time A) to collect information about the state of the economy. B) to get politicians to agree on the best policy to enact. C) for any change in policy to take effect and for people to recognize that the policies are effective. D) for the politicians to enact the policy once the need for change has been recognized.

A

Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap? A) increases in taxes and cuts in government spending B) cuts in taxes C) increases in taxes and increases in government spending D) cuts in taxes and increases in government spending

A

Which of the following is NOT related to fiscal policy? A) passage of new securities laws B) decreasing marginal tax rates C) reducing the budget deficit D) increasing government expenditures

A

Which of the following would shift the aggregate demand curve to the right? A) An increase in government spending C) An increase in interest rates B) An increase in taxes D) An increase in input prices

A

According to the Keynesian approach, a decrease in taxes A) will increase consumption exactly by the amount of the taxes. B) will increase consumption by an amount of less than the change in taxes. C) will not impact consumption, as most consumption is autonomous. D) will decrease consumption, as the government will have to spend less.

B

During normal times, discretionary fiscal policy A) is more effective in influencing real GDP than at times of a recession. B) is probably not very effective in influencing real GDP due to time lags. C) is more effective in influencing real GDP than automatic stabilizers. D) works well because there are no lag problems in influencing real GDP.

B

During which time will fiscal policy be the most effective? A) Normal times C) In the middle of expansions B) Times of war D) Times of stagflation

B

Expansionary fiscal policy falls short of its goal. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim? A) An increase in consumer spending occurred. B) The interest rate increased. C) Saving decreased. D) The price level decreased.

B

Suppose the economy has a high level of unemployment. This would imply A) that the government should engage in expansionary fiscal policy and increase the tax rate. B) that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment. C) that fiscal policy has been ineffective and should be abandoned. D) that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment.

B

The action time lag is the time period that elapses A) between when an economic problem manifests itself and it is officially acknowledged. B) between the recognition of an economic problem and implementing policies to solve it. C) between implementing policies to solve an economic problem and when the results of that policy can be measured. D) between the beginning of the budgetary process and the final budget resolution

B

The concept that increased government spending will lead to lower investment and consumer spending is referred to as the A) inflationary effect. C) aggregate demand effect. B) crowding-out effect. D) Keynesian effect.

B

What do automatic stabilizers attempt to stabilize? A) long-run aggregate supply C) exports B) aggregate demand D) imports

B

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap? A) An increase in government spending C) A decrease in interest rates B) An increase in taxes D) An increase in the money supply

B

n the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT A) an increase in aggregate demand. C) an increase in consumption. B) a higher price level. D) higher real GDP.

B

Which of the following is NOT a fiscal policy action? A) increasing government expenditures on military hardware B) decreasing government spending on the arts C) raising the quantity of money in circulation D) lowering income tax rates

C

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

C

Contractionary fiscal policy will most likely A) involve cutting taxes. B) raise real GDP. C) reduce the price level. D) involve increasing government spending.

C

Fiscal policy is defined as A) the design of a tax system to transfer income from the rich to the poor. B) the use of Congressional power to pursue social and political goals. C) the discretionary changing of government expenditures and/or taxes to achieve national economic goals. D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.

C

In the United States economy, the progressive income tax and unemployment compensation are both A) destabilizers. C) automatic stabilizers. B) discretionary presidential effectors. D) time lag factors.

C

Provisions that cause changes in government spending and taxes that do not require action of the President or Congress are called A) discretionary fiscal policy. C) automatic stabilizers. B) discretionary stabilizers. D) private stabilization effects.

C

The Ricardian equivalence theorem states that A) an increase in government spending has no effect on aggregate supply. B) increases in government spending have a larger impact on real Gross Domestic Product (GDP) than decreases in taxes. C) an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. D) an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP) because it only affects the price index.

C

The crowding-out effect is A) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S. private sector. B) the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the U.S. private sector. C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the U.S. private sector. D) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the U.S. private sector.

C

When fiscal policy is used, time lags are variable and last anywhere from A) one to three weeks. B) one to three months. C) one to three years. D) one to three decades.

C

Whenever government spending is a substitute for private spending 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.

C

Which of the following fiscal policy actions would definitely cause a reduction in the size of an inflationary gap? A) cuts in taxes and increases in government spending B) increases in government spending C) increases in taxes D) cuts in taxes

C

According to supply-side economics, changes in marginal tax rates will have which of the following effects? A) change the incentive to work C) change the incentive to invest B) change the incentive to save D) all of the above

D

Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $50 billion, while the second option is to cut taxes by $50 billion. A Keynesian economist would argue for A) the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. B) the tax option because it is easier to pass. The effects on total spending would be identical. C) the spending option because it wonʹt affect the deficit the way the tax cut would. D) the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier.

D

The Keynesian approach assumes that A) there is no unemployment in the economy. B) the economy is self-regulating. C) the government budget is always in deficit. D) the price level is fixed.

D

The Laffer curve shows a relationship between A) inflation rates and unemployment rates. B) interest rates and investment spending. C) price level and real Gross Domestic Product (GDP). D) tax rates and tax revenues.

D

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will A) increase real Gross Domestic Product (GDP) in both the short and long run. B) decrease real Gross Domestic Product (GDP) in both the short and long run. C) decrease real Gross Domestic Product (GDP) in the short run, but increase it in the long run. D) have no effect on aggregate demand.

D

The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is A) fiscal policy. B) the recognition time lag. C) the effect time lag. D) the action time lag.

D

The balanced-budget multiplier is equal to A) the percentage increase in government expenditures. B) the reciprocal of the increase in government expenditures. C) the percentage increase in taxes. D) 1.

D

Which one of the following statements is NOT true? A) Expansionary fiscal policy is employed to offset recessionary gaps. B) Expansionary fiscal policy has an effect on interest rates. C) Crowding out dilutes the effect of expansionary fiscal policy. D) When crowding out occurs, fiscal policy is more effective.

D

A recession begins in July but government policy makers do not reach a consensus that a recession had in fact begun until October. This is an example of a(n) A) recognition time lag. C) effect time lag. B) action time lag. D) quick time lag.

A

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures. B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present. C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present. D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending.

A

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

A

According to the traditional Keynesian approach, if the government increases taxes, then A) real Gross Domestic Product (GDP) will fall and the price level will remain constant. B) real Gross Domestic Product (GDP) will fall but the price level will rise. C) both real Gross Domestic Product (GDP) and the price level will fall. D) real Gross Domestic Product (GDP) will remain constant but the price level will rise.

A

All of the following are automatic fiscal stabilizers EXCEPT A) a congressionally mandated decrease in tax rates to stimulate the economy. B) a decrease in unemployment compensation payments during an expansion. C) a decrease in overall tax revenues during a recession. D) an increase in unemployment expenditures during a recession.

A

An increase in government spending would cause which of the following to happen? A) The aggregate demand curve would shift to the right. B) The aggregate demand curve would shift to the left. C) The aggregate supply curve would shift to the right. D) The aggregate supply curve would shift to the left.

A

Automatic stabilizers are A) provisions that cause changes in government spending and taxes without new action by Congress or the President. B) policies set by certain committees in Congress. C) tools used by the Presidentʹs Council of Economic Advisers. D) provisions that cause the aggregate supply curve to be upward sloping.

A

By definition, a direct expenditure offset will occur whenever A) the government increases spending in an area that competes with the private sector. B) the government increases spending for the military. C) the interest rate rises. D) the interest rate falls.

A

Discretionary fiscal policy A) may not have desired effects on real GDP because of the time lags. B) may not have desired effects on real GDP because it leads to increases in aggregate demand. C) may not have desired effects on real GDP because it leads to increases in aggregate demand. D) would have a larger effect on real GDP if the multiplier was smaller.

A

Fiscal policy during periods of relatively low unemployment and low inflation have A) little effect due to time lags and the crowding-out effect. B) significant effect due to the timely intervention of the president and congress. C) significant effect because the changes in fiscal policy gives investors confidence in the economy. D) little effect because the global market makes up fifty percent of aggregate spending.

A

If an increase in government spending causes an increase in government borrowing, this could induce A) an increase in interest rates, which would cause private domestic investment to fall. B) an increase in interest rates, which would cause private domestic investment to rise. C) an increase in interest rates but no effect on private domestic investment. D) a decrease in interest rates, which would cause private domestic investment to rise.

A

If other factors are held constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector? A) There will be an increase in the interest rate. B) There will be a decrease in the interest rate. C) The crowding out effect will be cancelled out. D) There will be an increase in net exports.

A

If the crowding-out effect is complete and the marginal propensity to save is 0.25, then an increase in government spending of $100 billion will generate how much more real GDP? A) $0 B) $25 billion C) $100 billion D) $400 billion

A

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should A) reduce aggregate demand by cutting government spending or raising taxes. B) reduce aggregate demand by increasing government spending or cutting taxes. C) increase aggregate supply by cutting government spending or raising taxes. D) increase aggregate supply by increasing government spending or lowering taxes.

A

If the federal government borrows from the private sector to pay for increased budget deficits and interest rates increase, this will cause A) a decrease in planned investment and planned consumption. B) an increase in planned investment and planned consumption. C) a decrease in planned investment and an increase in planned consumption. D) an increase in planned investment and a decrease in planned consumption.

A

If the government increases spending and there is a complete direct expenditure offset, then A) aggregate demand and real Gross Domestic Product (GDP) will not change. B) aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase. C) the price level will drop. D) the government spending multiplier will be greater than zero.

A

In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result, A) the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag. B) the full effect of the fiscal policy change would not be felt until after March 2011 because of the recognition time lag. C) the full effect of the fiscal policy change would be felt by March 2011 because people anticipated the spending and changed their behavior accordingly. D) the full effect of the fiscal policy change would be felt when the last of the funds were spent by the government.

A

In the short run, expansionary fiscal policy usually will A) increase the price level and increase real GDP. B) increase the price level and decrease real GDP. C) decrease the price level and increase real GDP. D) decrease the price level and decrease real GDP.

A

In the traditional Keynesian model, if the government cuts taxes, then A) both consumption and real Gross Domestic Product (GDP) will increase. B) both consumption and real Gross Domestic Product (GDP) will decrease. C) consumption will increase but Gross Domestic Product (GDP) will decrease. D) consumption will decrease but Gross Domestic Product (GDP) will increase.

A

In the traditional Keynesian model, if the government increases spending, then A) consumption will increase, and so real Gross Domestic Product (GDP) will increase by more than the increase in government spending. B) consumption will decrease, and so real Gross Domestic Product (GDP) will increase by less than the increase in government spending. C) consumption will remain the same, and so real Gross Domestic Product (GDP) will increase by the same amount of the increase in government spending. D) consumption will increase or decrease, and so real Gross Domestic Product (GDP) will increase or decrease depending on the change in consumption.

A

In the traditional Keynesian model, if the government increases spending, then A) real Gross Domestic Product (GDP) will rise and the price level will remain constant. B) real Gross Domestic Product (GDP) will increase and the price level will fall. C) both real Gross Domestic Product (GDP) and the price level will rise. D) real Gross Domestic Product (GDP) will remain constant and the price level will rise.

A

One characteristic of built-in or automatic stabilizers is that A) they require no new legislative action by Congress to have an effect. B) they automatically produce surpluses during recessions and deficits during inflation. C) they have no effect on the distribution of income. D) they reduce the size of the public debt during times of recession.

A

Supply-side economists argue that A) lower tax rates sometimes lead to increased tax revenues. B) higher tax rates lead to increased productivity. C) lower tax rates lead to a drop in real Gross Domestic Product (GDP). D) lower tax rates always lead to lower tax revenues.

A

Supply-side economists argue that decreasing marginal tax rates A) increases productivity and shifts the AS curve to the right. B) increases productivity and shifts the AS curve to the left. C) increases productivity and shifts the AD curve to the left. D) due to the Ricardian equivalence, has no impact on the economy.

A

Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap? A) Increase government spending. C) Increase the money supply. B) Decrease interest rates. D) all of the above

A

Suppose the government increases lump-sum taxes. This causes A) disposable income to decrease, which causes consumption spending to decrease and aggregate demand to decrease. B) government spending to decrease, which causes aggregate demand to decrease. C) consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. D) disposable income to decrease, which causes aggregate supply to decrease.

A

The Keynesian perspective on the effect of an increase in taxes is that this policy action A) generates reductions in consumption and in saving. B) generates reductions in consumption and an increase in saving to pay for the new taxes. C) has no impact on consumption. D) increases current consumption and reduces future consumption.

A

The Laffer curve shows that as tax rates increase A) initially tax revenues increase, then decrease. B) tax revenues decrease as the incidence of cheating on tax returns increases. C) tax revenues increase as more individuals and businesses have to pay taxes. D) tax revenues remain unchanged.

A

The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues. A supply-side economist would argue that the actual revenue raised will be A) less than $100 billion because some people will respond by working less. B) exactly $100 billion because there are no offsetting factors to a tax increase. C) more than $100 billion, because lower income people will work harder when they perceive the tax system to be fairer. D) more than $100 billion because interest rates will also be affected.

A

The time required to collect information about the current state of the economy is known as A) the recognition time lag. B) the action time lag. C) the effect time lag. D) the fiscal lag.

A

The traditional Keynesian approach to fiscal policy assumes A) current taxes are the only taxes taken into account by firms and consumers. B) the focus of attention should be the long run. C) prices are flexible while interest rates are not. D) exchange rates are fixed.

A

The traditional Keynesian approach to fiscal policy assumes A) the price level is constant. B) government expenditures are often substitutes for private expenditures. C) the Ricardian equivalence theorem is correct. D) the validity of supply-side economics.

A

To the extent that a direct expenditure offset results from an expansionary fiscal policy, A) the stimulative effect will be less than anticipated. B) the stimulative effect will be more than anticipated. C) the fiscal policy will not be discretionary. D) the time lags associated with the implementation of fiscal policy will shorten.

A

Typical goals for fiscal policy are A) high employment and price stability. B) high prices for consumers and low prices for businesses. C) running high deficits and raising consumer prices. D) increasing the money supply so the government can spend more.

A

When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to A) increase taxes. C) increase government spending. B) decrease taxes. D) decrease the discount rate.

A

Which of the following actions could be undertaken if the government wants to reduce an inflationary gap? A) Increase taxes and reduce government spending. B) Reduce taxes and increase government spending. C) Increase taxes and increase government spending. D) Reduce taxes and reduce government spending.

A

Which of the following is an example of a discretionary fiscal policy action? A) increasing government spending to deal with a recession B) a decrease in tax revenues as taxpayersʹ incomes decrease C) increasing the minimum wage rate D) raising regulations in the health care industry

A

Which of the following statements about fiscal policy is true? A) Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. B) Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. C) Government can shift the aggregate demand curve inward by increasing spending. D) Government can shift the aggregate demand curve outward by reducing spending.

A

ccording to the traditional Keynesian approach, if the government increases spending by $5 million and raises current taxes by $5 million at the same time, then A) real GDP will increase by $5 million. B) real GDP will decrease by $5 million. C) real GDP will decrease by more than $5 million. D) real GDP will remain the same.

A

n the traditional Keynesian model, a tax cut A) causes the C + I + G + X line to shift upward. B) causes the C + I + G + X line to shift downward. C) causesamovementalongtheC+I+G+Xline. D) does not affect the C + I + G + X line.

A

According to the traditional Keynesian approach, a tax cut raises aggregate demand because A) taxes are part of the C + I + G + X line. B) disposable income available to consumers increases. C) taxpayers anticipate a tax increase in the future. D) a tax cut always results in a balanced budget.

B

According to traditional Keynesian economics, expansionary fiscal policy initiated by the federal government A) is never appropriate. B) is an appropriate way to prevent recessions and depressions. C) is an appropriate way to slow down an over-heated economy. D) will always fail due to crowding out effects.

B

An increase in government spending that is not financed by an increase in taxes will cause which of the following? A) an increase in interest rates and an increase in planned investment B) an increase in interest rates and a reduction in planned investment C) a reduction in interest rates and an increase in planned investment D) a reduction in interest rates and a reduction in planned investment

B

Fiscal policy refers to the A) manipulation of the money supply in order to increase the amount of paper currency in circulation. B) adjustment of government spending and taxes in order to achieve certain national economic goals. C) adjustment of national income data to account for price level changes. D) changing the way unemployment data is calculated so as to make it appear that unemployment is lower than it actually is.

B

Fiscal policy to solve short-run economic problems supports the Keynesian notion of A) there being no government role in the economy. B) an active government role in the economy. C) the need for autocratic rule. D) the long-run nature of the economy.

B

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the governmentʹs action would result in A) an increase in real Gross Domestic Product (GDP). B) a direct expenditure offset. C) a Ricardian dilemma. D) a reduction of the government deficit.

B

If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to A) increase real Gross Domestic Product (GDP). B) increase the price level. C) increase either the real Gross Domestic Product (GDP) or the price level, depending on the length of the time lag. D) decrease both real Gross Domestic Product (GDP) and the price level.

B

If the government increases spending but does not raise taxes, A) aggregate demand will increase without any effect on the price level. B) borrowing by the government will take place. C) the government will have to sell some assets, such as oil and national parks. D) the government will have to either lower expenditures or raise taxes the next year.

B

If there is a dollar-for-dollar direct expenditure offset, then A) increases in aggregate demand will also increase long-run aggregate supply. B) increases in government spending will not increase aggregate demand. C) increases in aggregate demand will increase the price level, but leave real output unchanged. D) increases in aggregate demand will increase real output, but leave the price level unchanged.

B

In Country Z, the government simultaneously decreases its expenditures by $20 billion and decreases taxes by $20 billion. If the MPS is equal to 0.2, the governmentʹs action ________ real GDP by ________. A) decreases; $100 billion C) decreases; $80 billion B) decreases; $20 billion D) has no effect on; $0

B

In Country Z, the government simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion. If the MPS is equal to 0.2, the governmentʹs action ________ real GDP by ________. A) increases; $125 billion C) increases; $100 billion B) increases; $25 billion D) has no effect on; $0

B

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

B

One part of the supply-side argument is that A) lower marginal tax rates are required to induce Congress to reduce government spending. B) lower marginal tax rates can increase total tax revenues. C) the marginal tax rate should be set at 50 percent. D) the relevant aggregate supply curve is close to horizontal.

B

Supply-side economics focuses on tax cuts to stimulate A) aggregate demand by reducing saving. B) aggregate supply by increasing production. C) government spending. D) military research.

B

The period between the recognition of a problem and the implementation of a policy to solve the problem is A) the recognition lag. B) the action time lag. C) the effect time lag. D) the fine tuning lag.

B

To compensate for the possibility of indirect crowding out, a government engaging in expansionary policy aimed at eliminating a recessionary gap could A) increase spending less than the simplest Keynesian model would predict. B) increase spending more than the simplest Keynesian model would predict. C) reduce taxes rather than increase government spending. D) both reduce taxes and reduce spending to be able to achieve full employment.

B

Unemployment compensation programs are called automatic stabilizers because payments increase during A) expansionary periods. C) both recessions and expansions. B) recessions. D) wartime only.

B

When real Gross Domestic Product (GDP) falls, which of the following will automatically occur? A) A decrease in all tax rates B) A decrease in income tax revenues C) A decrease in unemployment compensation expenditures D) An increase in income tax revenues

B

When supply-side policy is successful in pushing up equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates A) a decrease in aggregate demand. C) a decrease in employment. B) an increase in aggregate supply. D) a decrease in saving.

B

When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising A) monetary policy B) discretionary fiscal policy C) a Ricardian policy D) a laissez-faire policy

B

Which of the following actions could be undertaken if the government wants to close a recessionary gap? A) Increase taxes and reduce government spending. B) Reduce taxes and increase government spending. C) Increase taxes and increase government spending. D) Reduce taxes and reduce government spending.

B

A direct expenditure offset occurs when an increase in government spending 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.

C

A government proposal to increase marginal tax rates on the wealthiest 2 percent of U.S. residents is supposed to generate an additional $100 billion in tax revenues. It is likely that A) the actual revenue raised will exceed the $100 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. B) the actual revenue raised will be more than $100 billion, because the short-run aggregate supply curve is upward sloping. C) the actual revenue raised will be less than $100 billion, because some of the people will respond by working less and earning less income that can be taxed. D) the actual revenue raised will be close to $100 billion, because the wealthy donʹt respond to work incentives the way poorer workers do.

C

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve, A) an increase in tax rates increases tax revenues. B) a reduction in tax rates reduces tax revenues. C) a reduction in tax rates increases tax revenues. D) any variation in tax rates has no effect on tax revenues.

C

Automatic stabilizers are designed to A) promote global trade. B) simplify the tax system. C) moderate changes in disposable income. D) stabilize the bi-partisan budget process.

C

Because of crowding out, A) expansionary fiscal policy during a recession must involve a tax increase. B) expansionary fiscal policy during a recession is reinforced by private investment spending. C) expansionary fiscal policy is diluted by the decline in investment spending caused by higher interest rates. D) expansionary fiscal policy is completely achieved even with a decline in investment spending.

C

In the traditional Keynesian model, if the government increases government spending, A) the C + I + G + X line will shift down but the aggregate demand curve will not shift. B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. D) the C + I + G + X line will shift up but the aggregate demand curve will not shift.

C

Once either expansionary or contractionary fiscal policy has been undertaken, A) aggregate demand will respond quickly and the problems in the economy will be corrected. B) aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. C) a time lag exists between implementation and the results of the policy. D) taxes will need to be adjusted because of the recognition time lag.

C

Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely A) increase government borrowing and increase interest rates. B) generate extra tax revenues to cover the extra spending. C) reduce interest rates and increase planned investment. D) reduce interest rates, increase in planned investment, and increase real GDP.

C

Suppose that real GDP is initially $13 trillion and the government attempts to increase real GDP to $14 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. How much increase in real government spending could lead to the desired level of real GDP? A) $200 billion B) $250 billion C) $500 billion D) $1 trillion

C

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

C

The effect time lag is the time period that elapses A) between when an economic problem manifests itself and it is officially acknowledged. B) between the recognition of an economic problem and implementing policies to solve it. C) between implementing policies to solve an economic problem and when the results of that policy can be measured. D) between the beginning of the budgetary process and the final budget resolution.

C

The effect time lag of fiscal policy refers to A) the time needed for Congress to enact a policy. B) the delay in recognizing an economic problem. C) the time between the onset of a policy and when the policy has impact on the economy. D) the difficulty in getting the President and the Congress to agree on an appropriate policy.

C

The existence of automatic stabilizers will A) reduce the recognition lag of discretionary fiscal policy. B) eliminate recessions. C) reduce the size of recessionary and inflationary gaps. D) cause the effects of shocks to aggregate demand to have a larger effect on GDP.

C

The proposition that decreases in taxes that raise the government budget deficit has no effect on aggregate demand is called the A) open-economy effect. C) Ricardian equivalence theorem. B) federalism effect. D) interest-rate effect.

C

The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called A) the indirect effect. C) the crowding-out effect. B) the interest rate effect. D) the Laffer effect.

C

The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, was formulated by A) John Maynard Keynes C) David Ricardo. B) Jean Baptiste Say. D) Adam Smith.

C

The time that elapses between the implementation of a policy and its intended result is referred to as A) the action time lag. B) the recognition time lag. C) the effect time lag. D) the data lag.

C

The various time lags involved with fiscal policy imply that A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. B) fiscal policy is most effective as a short-run measure to fine tune the economyʹs quarterly ups and downs. C) fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over. D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP.

C

Three candidates for political office disagree over the benefits of enlarging the federal budget deficit. Candidate C says the stimulation package is needed to increase employment and real GDP; Candidate D says it will only cause higher prices; and Candidate F says it will have no effect on either real GDP or the price level. How do the three candidates differ with respect to the condition of the economy and the effects of fiscal policy? A) Candidate C thinks the simple Keynesian model is applicable, while D thinks the expansionary policy will fully crowd out private investment. F believes the economy is experiencing a recessionary gap. B) Candidate C thinks the simple Keynesian model is applicable; D thinks the short-run aggregate supply curve is horizontal; and F thinks the expansionary policy will generate lower interest rates. C) Candidate C thinks the economy is below the full-employment real GDP and that the short-run aggregate supply curve is horizontal. Candidate D believes the economy is at full employment. Candidate F believes the expansionary policy will result only in direct fiscal offsets. D) Candidate C thinks the short-run aggregate supply curve is upward sloping; D thinks interest rates will rise; and F thinks the economy is at full employment.

C

Which of the following is an example of fiscal policy? A) a reduction in the federal funds rate. B) a reduction in the money supply. C) a reduction in lump-sum taxes. D) an increase in the physical stock of capital.

C

Which of the following represent expansionary fiscal policy? A) a reduction in government spending B) an increase in average individual income tax rates C) a cut in corporate income tax rates D) an increase in marginal individual income tax rates

C

ʺExpansionary fiscal policy is always 100 percent effective when the short -run aggregate supply curve is horizontal.ʺ Is this statement true? A) Yes, because theoretically nothing else can offset the effects of fiscal policy. B) Yes, when the long-run aggregate supply curve is horizontal too. C) No, because crowding out could take place. D) No, because the increased spending may cause the price level to increase.

C

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because A) the crowding out effect does not apply to taxes. B) lower tax rates have no effect on the opportunity cost of labor. C) the aggregate supply curve will shift inward to the left if the tax rates are lowered. D) the lower marginal tax rates will be applied to a growing tax base due to economic growth.

D

According to the Laffer curve, increases in the tax rate will lead to a(n) A) steady decrease in tax revenues. B) steady increase in tax revenues. C) initial decrease in tax revenues and then an increase in tax revenues. D) initial increase in tax revenues and then a decrease in tax revenues.

D

An increase in government spending without an accompanying increase in taxes A) does not increase aggregate demand. B) would effectively eliminate an inflationary gap. C) causes investment spending to increase. D) requires additional government borrowing.

D

Deficit financing A) is when the government adjusts taxes to raise money to pay for government projects. B) is the mechanism behind the Laffer curve. C) is how the automatic stabilizers work. D) is when discretionary fiscal policy leads to spending more than is collected in taxes.

D

Direct expenditure offsets are A) the discretionary changing of government expenditures to achieve a higher employment level. B) the decrease in planned investment that occurs as the result of an increase in interest rates. C) the same as the Ricardian equivalence theorem. D) the decrease in spending in the private sector in areas in which the government is competing.

D

Discretionary fiscal policy A) is not very effective in influencing real GDP during normal times because of time lags. B) can be very effective in influencing real GDP during abnormal times, such as when a nation is at war. C) may reassure investors and consumers that the federal government will be able to avert a major economic downturn. D) all of the above

D

Discretionary fiscal policy is A) automatic changes in government expenditures and interest rates that achieve certain national economic goals. B) deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. C) used to achieve full employment by changing monetary growth targets. D) changes in support for research and education in order to achieve certain national economic goals.

D

During normal times, A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. B) fiscal policy can immediately correct problems in the economy. C) the Ricardian equivalence theorem makes fiscal policy very effective. D) fiscal policy is not effective because of the recognition time lag.

D

Fiscal policy includes all of the following EXCEPT A) changing taxes. B) changing government spending. C) policies that influence aggregate demand. D) policies that influence the rate of growth of the quantity of money in circulation.

D

Fiscal policy may end up being destabilizing to an economy because A) there is never a long enough time lag. B) the economy is almost always at full employment. C) the President may have different goals than Congress. D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.

D

If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will A) generate higher prices in the short run, but will induce aggregate supply to increase in the long run. B) generate an increase in real GDP and higher prices in both the short run and the long run. C) generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase. D) generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more.

D

If the government increases spending while holding taxes constant, we expect A) an increase in investment spending by businesses too, as they anticipate future economic growth. B) a decrease in real saving as consumers follow suit and also increase borrowing. C) planned real investment spending by businesses to increase. D) interest rates to rise.

D

If the government pays for a new library in your neighborhood that you regularly visit, and you stop going to Barnes and Noble to buy books, this is an example of A) the free rider problem. C) laissez-faire. B) externalities. D) a direct expenditure offset.

D

If the price level is fixed, then an increase in government spending will lead to A) a larger increase in nominal GDP than in real GDP. B) a smaller increase in nominal GDP than in real GDP. C) no increase in either nominal GDP or real GDP. D) an increase in nominal GDP by the same amount as an increase in real GDP.

D

In January 2009, the President submitted a bill to Congress that was designed to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to September 2010. Consequently, A) the economy should have been at full employment by December 2009. B) the full impact of the bill would be felt by March 2009 because people anticipated the effects of the increased spending. C) the full impact of the bill would be felt by the end of September 2010. D) the full effect of the spending would be felt some time after September 2010 because the full multiplier effects could not be felt until all the increase in spending took place.

D

Other things being equal, a reduction in taxes will A) lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. B) influence the short run aggregate supply curve but not the aggregate demand curve. C) lead to a corresponding reduction in interest rates increasing the crowding out effect. D) cause an increase in aggregate demand due to increases in consumption, investment, or net exports.

D

Suppose that Congress passes a budget that increases government spending. Also, suppose that this increase in government spending causes an increase in interest rates and a reduction in planned investment. The effect of this fiscal policy action on planned investment is known as which of the following? A) cost-push inflation C) automatic stabilizers B) demand-pull inflation D) none of the above

D

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? A) $100 billion B) $125 billion C) $200 billion D) $400 billion

D

The discretionary change of government expenditures or taxes to achieve national economic goals is A) a recessionary gap B) Ricardian-equivalence theory C) supply-side economics D) fiscal policy

D

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 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.

D

The government might engage in expansionary fiscal policy if it wanted to A) reduce the price level. B) reduce real GDP. C) shift the aggregate demand curve to the left. D) reduce the level of unemployment.

D

What does research tell us about the impact of Ricardian equivalence effects on the economy? A) There is no evidence of any impact of Ricardian equivalence effects. B) Ricardian equivalence effects have a huge impact on aggregate demand. C) There is a very small impact on both aggregate demand and aggregate supply. D) Ricardian equivalence effects may exist, but their magnitudes are unclear.

D

Which of the following are lags that fiscal policy makers must cope with? A) Recognition time lags. B) Action time lags. C) Effect time lags. D) All of the above are correct.

D

Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct? A) Real GDP will fall more in economy A than in economy B. B) Real GDP will fall more in economy B than in economy A. C) Real GDP will fall the same in both economies. D) The effect on the relative size of the reduction in real GDP in the two economies is ambiguous

b