macro econ final ch.16

What is a potential drawback of automatic stabilizers? A) Automatic stabilizers can slow down an economy's recovery from a recession. B) Automatic stabilizers can speed up an economy's recovery from a recession. C) Automatic stabilizers require so much legislative action that they are rarely used. D) Automatic stabilizers require that the exact level of potential income is known to policymakers.

A) Automatic stabilizers can slow down an economy's recovery from a recession.

Which of the following is an example of an automatic stabilizer? A) Unemployment insurance B) Long-term contracts C) Open market operations D) Price controls

A) Unemployment insurance

Automatic stabilizers: A) counteract the business cycle. B) reinforce the business cycle. C) do not affect the business cycle. D) are also called "discretionary fiscal policy.

A) counteract the business cycle.

Politically, it is much easier for government to: A) increase spending and decrease taxes. B) increase taxes and decrease spending. C) decrease both spending and taxes. D) increase both spending and taxes.

A) increase spending and decrease taxes.

Crowding out makes expansionary fiscal policy: A) less effective because of higher interest rates and less private investment. B) more effective because of higher interest rates and less private investment. C) less effective because of lower interest rates and less private investment. D) more effective because of higher interest rates and more private investment.

A) less effective because of higher interest rates and less private investment.

The view that the government budget should always be balanced except in wartime is: A) sound finance. B) functional finance. C) the Ricardian equivalence theorem. D) public functional finance.

A) sound finance.

The theoretical proposition that government deficits do not affect the level of output because individuals realize that they have to pay the deficits in the future and therefore increase their savings is: A) the Ricardian equivalence theorem. B) the functional finance theorem. C) the functional equivalence theorem. D) the sound finance theorem.

A) the Ricardian equivalence theorem.

According to the Ricardian equivalence theorem, people increase savings when the government increases deficits because they recognize the link between government deficits and higher future taxes. A. True B. False

A. True

During the early 20th century, economists who held that the Ricardian equivalence theorem was theoretically true could support either sound or functional finance. A. True B. False

A. True

Reducing the budget deficit by cutting government spending could conceivably: A. increase income if interest rates fall enough and private investment is more productive than government spending. B. increase income if interest rates rise enough and government spending is more productive than private investment. C. decrease income if interest rates fall too much and private investment is more productive than government investment. D. decrease income if interest rates rise enough and private investment is more productive than government investment.

A. increase income if interest rates fall enough and private investment is more productive than government spending.

When interest rates go up, it is: A. more expensive for businesses to borrow, so investment falls. B. more expensive for businesses to borrow, so investment increases. C. cheaper for businesses to borrow, so investment falls. D. cheaper for businesses to borrow, so investment increases.

A. more expensive for businesses to borrow, so investment falls.

Expansionary fiscal policy that raises the budget deficit may: A. reduce business investment by increasing interest rates. B. reduce business investment by reducing interest rates. C. increase business investment by increasing interest rates. D. increase business investment by reducing interest rates.

A. reduce business investment by increasing interest rates.

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift AD closer to potential output, an economist with a typical functional finance view who acknowledges partial crowding out would conclude that the AD: A. shifts to the right due to higher government spending. B. shifts to the left due to higher government spending. C. does not shift since the higher government spending is offset by higher private consumption. D. does not shift since the higher government spending is offset by lower private consumption.

A. shifts to the right due to higher government spending.

The view that government should run either a deficit or surplus depending on the state of the economy is the view of: A) sound finance. B) functional finance. C) the Ricardian equivalence theorem. D) New Classical economists.

B) functional finance.

When the economy is in a recession, an economist who follows a functional finance principle will most likely advise the government to: A) do nothing, because it won't affect spending anyway. B) run a deficit. C) run a surplus. D) run a balanced budget, unless it is wartime.

B) run a deficit.

If the economy expands, automatic stabilizers will cause: A) tax receipts to fall and government spending to rise. B) tax receipts to rise and government spending to fall. C) both tax receipts and government spending to rise. D) both tax receipts and government spending to fall.

B) tax receipts to rise and government spending to fall.

If crowding out occurs, then expansionary fiscal policy will shift the aggregate demand curve: A) to the left by less than if crowding out did not occur (or possibly even to the right). B) to the right by less than if crowding out did not occur (or possibly even to the left). C) to the right by more than if crowding out did not occur. D) to the left by more than if crowding out did not occur.

B) to the right by less than if crowding out did not occur (or possibly even to the left).

Suppose one economist believes that the target rate of unemployment is 4 percent while another believes that it is 6 percent. If GDP is $5 trillion and the unemployment rate is 6 percent, then Okun's rule of thumb implies that the target output levels for these two economists will differ by: A. $100 billion. B. $200 billion. C. $300 billion. D. $400 billion.

B. $200 billion.

Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD0 to AD1 in an attempt to pull the economy out of the recession. An economist with a functional finance view who also recognizes that there will be a certain degree of crowding out would conclude that the economy will likely end up at point: A. A. B. B. C. C. D. D.

B. B.

If state governments began using a five-year rolling-average budgeting procedure as opposed to the current practice of no rolling average, which would the likely result be? A. State financing would become more procyclical B. Balanced-budget requirements in state constitutions would be much less procyclical C. The need for automatic stabilizers at the federal level would increase D. State governments would run a greater risk of running short of funds during recessions

B. Balanced-budget requirements in state constitutions would be much less procyclical

The 2008-2009 deficit stimulus spending by the federal government was an example of expansionary sound finance. A. True B. False

B. False

Unemployment compensation is: A. an automatic stabilizer because it rises as income increases, slowing an economic expansion. B. an automatic stabilizer because it falls as income increases, slowing an economic expansion. C. an automatic stabilizer because it falls as income decreases, slowing an economic contraction. D. not an automatic stabilizer.

B. an automatic stabilizer because it falls as income increases, slowing an economic expansion.

Fine tuning the economy with fiscal policy is: A. relatively simple because the government has access to the best information available. B. difficult because the government lacks important information about the economy. C. relatively simple because the political process usually works smoothly and without significant lags. D. difficult because economists have not developed any theoretical models of the macroeconomy.

B. difficult because the government lacks important information about the economy.

The government's running of a deficit or a surplus with the objective of affecting the level of output in the economy is called: A. public finance. B. fiscal policy. C. the Ricardian equivalence. D. sound finance.

B. fiscal policy.

If output is falling, a procyclical fiscal policy will result in: A. higher taxes and/or increased government spending. B. higher taxes and/or decreased government spending. C. lower taxes and/or increased government spending. D. lower taxes and/or decreased government spending.

B. higher taxes and/or decreased government spending.

During an economic contraction, automatic stabilizers: A. reduce both budget surpluses and deficits. B. reduce a budget surplus or increase a deficit. C. reduce a budget deficit or increase a surplus. D. increase both budget surpluses and deficits.

B. reduce a budget surplus or increase a deficit.

Generally speaking, the government implements fiscal policy in a: A. fast and accurate manner. B. slow and inaccurate manner. C. fast but inaccurate manner. D. slow but accurate manner.

B. slow and inaccurate manner.

Which of the following scenarios is not—according to the general view among economists—a reason to depart from using a policy of sound finance? A) Hyperinflation B) Depression C) A trade deficit D) Severely high unemployment combined with severely low output

C) A trade deficit

Which of the following statements about fiscal policy and its effects is true? A) Policy makers know the economy's level of potential output. B) Fiscal policy does not interfere with other government goals. C) Government tax and spending policies are not very flexible. D) Policy makers know the values of key macroeconomic variables like the spending multiplier.

C) Government tax and spending policies are not very flexible.

According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people: A) do not understand the relationship between deficits and aggregate demand. B) know that current deficits must be paid in the future and they reduce savings today. C) recognize that current deficits must be paid in the future and they increase savings today to pay future higher taxes. D) recognize that current deficits must be paid by future generations and they spend more today.

C) recognize that current deficits must be paid in the future and they increase savings today to pay future higher taxes.

Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below potential output. The government opts for an expansionary fiscal policy that shifts the AD curve from AD0 to AD1 in an attempt to pull the economy out of the recession. Not taking into account shifts in aggregate supply, an economist with a functional finance view who believes there will be no crowding out effect would conclude that the economy will end up at point: A. A. B. B. C. C. D. D.

C. C.

Which of the following is an automatic stabilizer? A. Military expenditures B. Social Security benefits C. Unemployment compensation D. Property taxes

C. Unemployment compensation

During an economic expansion, automatic stabilizers: A. reduce both budget surpluses and deficits. B. reduce a budget surplus or increase a deficit. C. reduce a budget deficit or increase a surplus. D. increase both budget surpluses and deficits.

C. reduce a budget deficit or increase a surplus.

When the economy is experiencing inflation, an economist who follows a functional finance principle is most likely to suggest that the government should: A. do nothing. B. run a deficit. C. run a surplus. D. run a balanced budget.

C. run a surplus.

Most of the government budget is mandatory spending through programs like Medicare and Social Security, and much of the rest is politically difficult to alter. Because of this: A. fiscal policy is always undertaken only when there is a national crisis that motivates voters to seek change. B. fiscal policy that involves raising taxes is more likely to be implemented than fiscal policy that involves borrowing money. C. the amount of spending is unlikely to be implemented as economists suggest. D. most spending is geared to perform as an automatic stabilizer, so that Congress is in fact largely irrelevant when it comes to providing a fiscal response to a recession.

C. the amount of spending is unlikely to be implemented as economists suggest.

Activist fiscal policies: A. generally produce balanced budgets. B. usually produce budget surpluses. C. usually produce budget deficits. D. do not have any systematic effect on budget surpluses or deficits.

C. usually produce budget deficits.

Which of the following is not one of the assumptions of the AS/AD model? A) Financing the debt does not have any offsetting effects. B) The government knows the economy's potential output. C) The size of the government debt doesn't matter. D) Fiscal policy negatively affects other government goals.

D) Fiscal policy negatively affects other government goals.

Balanced budget amendments in many states constitutions serve as: A) an important countercyclical tool. B) an effective way of shortening recessions. C) an automatic stabilizer. D) an automatic destabilizer.

D) an automatic destabilizer.

The government lacks flexibility in changing spending and taxes: A) because the budget process usually begins a year and a half before the fiscal year begins. B) because nearly two-thirds of government spending is mandated by programs like Medicare and Social Security. C) because proper fiscal policy sometimes conflicts with the political pressure policymakers face. D) for all of these reasons.

D) for all of these reasons.

There is general agreement among economists that if an economy is headed towards a depression, the appropriate fiscal policy: A) is sound finance. B) is sound finance, unless the country is also currently at war. C) is functional finance, and fiscal policy should be contractionary. D) is functional finance, and fiscal policy should be expansionary.

D) is functional finance, and fiscal policy should be expansionary.

According to most economists, fiscal policy is: A) effective only when potential output is perfectly known. B) least useful in a serious economic crisis. C) always ineffective because of crowding out. D) not an effective tool for fine tuning the economy.

D) not an effective tool for fine tuning the economy.

A key difference between functional finance and sound finance is that in the sound finance approach the government should: A) take on a more active role in managing the economy. B) take on a more active role in managing the economy, but only in wartime. C) take on a less active role in managing the economy because of extensive crowding out. D) take on a less active role in managing the economy since the budget should be balanced except in wartime.

D) take on a less active role in managing the economy since the budget should be balanced except in wartime.

Which of the following would not be considered an automatic stabilizer? A. Welfare payments B. Unemployment compensation C. Income tax D. Defense spending

D. Defense spending

Procyclical fiscal policies: A. reduce cyclical fluctuations in the economy, but not as effectively as countercyclical fiscal policies. B. reduce cyclical fluctuations in the economy more effectively than countercyclical fiscal policies. C. reduce cyclical fluctuations in the economy about as effectively as countercyclical fiscal policies. D. increase cyclical fluctuations in the economy.

D. increase cyclical fluctuations in the economy.

According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people: A. do not understand the relationship between deficits and aggregate demand. B. know that current deficits must be paid in the future and therefore reduce savings today. C. recognize that current deficits must be paid by future generations and therefore spend more today. D. recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes.

D. recognize that current deficits must be paid in the future and therefore increase savings today to pay higher future taxes.