Econ 102 Miyoung Oh Midterm 3 Practice Test 2

The theory of Ricardian equivalence argues that expansionary fiscal policy:

Will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes.

Refer to Figure: Short-Run Equilibrium. It reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:

Y1-YP.

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

Refer to Figure: Short-Run Equilibrium. Appropriate fiscal policy action is:

A decrease in transfer payments.

The difference between a budget deficit and government debt is that:

A deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

Refer to Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1; right; increase; increase

Fiscal policies that require no government action but that are expansionary when the economy contracts and contractionary when the economy expands are known as:

Automatic stabilizers.

What can the federal government do to finance a deficit?

Borrow funds

The basic equation of national income accounting is GDP = C + I + G + X - IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects:

C.

Which factor is NOT a tool of fiscal policy?

Changes in the money supply

Some argue that budget deficits will lead to reduced private spending because:

Consumers, anticipating higher taxes, will reduce consumption to save money to pay the future taxes.

Refer to Figure: Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

Contractionary; left

Suppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand.

Decrease; expansionary; increase

Which statement is CORRECT?

Discretionary fiscal policy indicates deliberate action by policy makers.

Discretionary fiscal policy refers to changes in:

Government spending or taxes to close a recessionary or inflationary gap.

Refer to Figure: Inflationary and Recessionary Gaps. At E1, the economy:

Has a recessionary gap

Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate.

High; increase; increase

If the economy is at full employment, expansionary fiscal policy is most likely to lead to:

Higher inflation rates

Refer to Figure: Inflationary and Recessionary Gaps. A movement from AD3 to AD1 could be caused by:

Higher tax rates

7. If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

Increase government purchases; AD; right

Refer to Figure: Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by:

Increased government purchases

After passage of the stimulus in 2009 government borrowing _____, and interest rates_____.

Increased; remained very low

A cut in taxes _____, shifting the aggregate demand curve to the _____.

Increases disposable income and consumption; right

Time lags associated with policy decision making and implementation suggest that:

Increases in spending to fight a recessionary gap may occur too late.

Suppose that the government increases spending more than is necessary to close a recessionary gap. What is the MOST likely result?

Inflation will increase.

What was the main financial problem that the government of Greece faced in 2009?

It had a large budget deficit, but most of its creditors were unwilling to make loans to Greece or charged extremely high interest rates to compensate them for the risk of loss.

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

Lags in deciding on and implementing a policy change.

Do economists believe that the budget should be balanced each fiscal year?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

Refer to Figure: Short- and Long-Run Equilibrium II. Which action would be the appropriate response on the part of the government upon viewing the state of the economy?

Raise tax rates to close the inflationary gap

If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

Recessionary; expansionary

An automatic stabilizer that works when the economy contracts is a:

Rise in government transfers as more people receive unemployment insurance benefits.

Sources of federal tax revenue do NOT include:

Sales taxes

Sources of state and local revenue do NOT include:

Social insurance taxes

Medicaid, Medicare, and Social Security are examples of:

Transfer payments

Suppose the government increases taxes by more than is necessary to close an inflationary gap. What is the MOST likely result?

The economy will move into a recession.

Which type of payment is NOT a government transfer payment?

The federal payroll

If government spending increases and taxes decrease:

The public debt will increase.