Question 1

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation.It could:

Accepted Answer

A)  increase taxes by $10 billion.
B)  reduce government spending by $40 billion.
C)  reduce government spending by $5 billion.
D)  increase taxes by $20 billion.E) A) and B)
F) All of the above

Question 2

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Accepted Answer

A) True 
 B)False

Question 3

During the last decade, the gross federal public debt has:

Accepted Answer

A)  increased substantially.
B)  increased as a percentage of the GDP.
C)  increased slightly.
D)  decreased as a percentage of the GDP, but began to rise again in 2009 as a percentage of GDP.E) None of the above
F) B) and D)

Question 4

Refer to the above diagram.Automatic stability in this economy could be decreased by:

Accepted Answer

A)  shifting the government expenditure line upward but parallel to its current position.
B)  changing the tax system so that the tax line is shifted upward but parallel to its present position.
C)  changing the government expenditures line so that it has a negative slope.
D)  changing the tax system so that the tax line has a flatter slope.E) A) and B)
F) A) and C)

Question 5

(1)  The composite index of leading indicators turns downward for three consecutive months; (2)  Economists reach agreement that the economy is moving into a recession; (3)  A tax cut is proposed in Parliament; (4)  The tax cut is passed by Parliament; (5)  Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.Refer to the above information.The administrative lag of fiscal policy is reflected in events:

Accepted Answer

A)  1 and 2.
B)  2 and 3.
C)  3 and 4.
D)  4 and 5.E) B) and C)
F) None of the above

Question 6

Refer to the above data.If a lump-sum tax (the same tax amount at each level of GDP)  of $40 is imposed in this economy, the tax system:

Accepted Answer

A)  is regressive.
B)  is proportional.
C)  is progressive.
D)  may be either proportional or progressive.E) B) and D)
F) A) and C)

Question 7

Which of the following is not a criticism of the lag effect of fiscal policy?

Accepted Answer

A)  Inflation
B)  Recognition
C)  Administration
D)  OperationalE) A) and D)
F) A) and C)

Question 8

The following budget information is for a hypothetical economy.All data are in billions of dollars.  Refer to the above data.The budget deficit in year 3 is:

Accepted Answer

A)  $175 billion.
B)  $3050 billion.
C)  $100 billion.
D)  $295 billion.E) B) and C)
F) All of the above

Question 9

Which of the following best describes the notion of a "political business cycle"?

Accepted Answer

A)  Politicians are more willing to cut taxes and increase government spending than they are to do the reverse.
B)  Fiscal policy will result in alternating budget deficits and surpluses.
C)  Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.
D)  Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle.E) C) and D)
F) All of the above

Question 10

Which one of the following best describes the net export effect associated with an expansionary Canadian fiscal policy?

Accepted Answer

A)  domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports increase.
B)  domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports fall.
C)  domestic interest rate rises, foreign demand for dollars falls, dollar depreciates, and net exports increase.
D)  domestic interest rate rises, foreign demand for dollars increases, dollar appreciates, and net exports decline.E) A) and D)
F) None of the above

Question 11

In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPC is .75, then it could increase taxes by:

Accepted Answer

A)  $6 billion.
B)  $8 billion.
C)  $10 billion.
D)  $12 billion.E) A) and C)
F) C) and D)

Question 12

Refer to the above data.A 10 percent proportional tax on income would:

Accepted Answer

A)  affect neither the size of the multiplier nor the stability of the economy.
B)  increase the size of the multiplier and make the economy more stable.
C)  increase the size of the multiplier and make the economy less stable.
D)  reduce the size of the multiplier and make the economy more stable.E) A) and B)
F) A) and C)

Question 13

If taxation becomes more progressive, the built-in stability in the economy will increase.

Accepted Answer

A) True 
 B)False

Question 14

You are given the following information about aggregate demand at the existing price level for an economy: (1)  consumption = $400 billion; (2)  investment = $40 billion; (3)  government purchases = $90 billion; and (4)  net export = $25 billion.If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

Accepted Answer

A)  increase government spending and taxes
B)  decrease government spending and taxes
C)  decrease government spending and increase taxes
D)  increase government spending and decrease taxesE) B) and D)
F) B) and C)

Question 15

Contractionary fiscal policy is so named because it:

Accepted Answer

A)  involves a contraction of the nation's money supply.
B)  necessarily reduces the size of government.
C)  is aimed at reducing aggregate demand and thus achieving price stability.
D)  is expressly designed to contract real GDP.E) All of the above
F) A) and D)

Question 16

The degree of built-in stability in the above economy could be increased by:

Accepted Answer

A)  reducing government purchases so that the purchases line shifts downward but parallel to its present position.
B)  changing the tax system so that the tax line is shifted downward but parallel to its present position.
C)  changing the tax system so that the tax line has a greater slope.
D)  altering the government expenditures line so that it has a positive slope.E) B) and D)
F) A) and D)

Question 17

Payment of interest on the public debt will:

Accepted Answer

A)  increase our current domestic standard of living.
B)  not have any effect on the distribution of income.
C)  probably decrease the income inequality.
D)  probably increase the income inequality.E) None of the above
F) All of the above

Question 18

A decrease in government spending and taxes would be an example of fiscal policies that reinforce each other.

Accepted Answer

A) True 
 B)False

Question 19

The cyclically adjusted budget tells us:

Accepted Answer

A)  that in a full-employment economy the federal budget should be in balance.
B)  that tax revenues should vary inversely with GDP.
C)  what the size of the federal budget deficit or surplus would be if the economy was at full employment.
D)  the actual budget deficit or surplus realized in any given year.E) A) and B)
F) B) and C)

Question 20

What percentage of the public debt is held by foreign individuals and institutions?

Accepted Answer

A)  22 percent
B)  2 percent
C)  70 percent
D)  90 percentE) A) and D)
F) A) and C)

Exam 13: B: Fiscal Policy, Deficits, Surpluses, and Debt

Payment of interest on the public debt will:

Correct Answer
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What percentage of the public debt is held by foreign individuals and institutions?

Correct Answer
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In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPC is .75, then it could increase taxes by:

Correct Answer
verified

Which of the following best describes the notion of a "political business cycle"?

Correct Answer
verified

The cyclically adjusted budget tells us:

Correct Answer
verified

Refer to the above diagram.Automatic stability in this economy could be decreased by:

Correct Answer
verified

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation.It could:

Correct Answer
verified

Correct Answer
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Contractionary fiscal policy is so named because it:

Correct Answer
verified

Which of the following is not a criticism of the lag effect of fiscal policy?

Correct Answer
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Refer to the above data.If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:

Correct Answer
verified

If taxation becomes more progressive, the built-in stability in the economy will increase.

Correct Answer
verified

Correct Answer
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The degree of built-in stability in the above economy could be increased by:

Correct Answer
verified

Which one of the following best describes the net export effect associated with an expansionary Canadian fiscal policy?

Correct Answer
verified

The following budget information is for a hypothetical economy.All data are in billions of dollars. Refer to the above data.The budget deficit in year 3 is:

Correct Answer
verified

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Correct Answer
verified

Refer to the above data.A 10 percent proportional tax on income would:

Correct Answer
verified

During the last decade, the gross federal public debt has:

Correct Answer
verified

A decrease in government spending and taxes would be an example of fiscal policies that reinforce each other.

Correct Answer
verified

Exam 13: B: Fiscal Policy, Deficits, Surpluses, and Debt

Payment of interest on the public debt will:

Correct AnswerverifiedShow Answer

What percentage of the public debt is held by foreign individuals and institutions?

Correct AnswerverifiedShow Answer

In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPC is .75, then it could increase taxes by:

Correct AnswerverifiedShow Answer

Which of the following best describes the notion of a "political business cycle"?

Correct AnswerverifiedShow Answer

The cyclically adjusted budget tells us:

Correct AnswerverifiedShow Answer

Refer to the above diagram.Automatic stability in this economy could be decreased by:

Correct AnswerverifiedShow Answer

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation.It could:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Contractionary fiscal policy is so named because it:

Correct AnswerverifiedShow Answer

Which of the following is not a criticism of the lag effect of fiscal policy?

Correct AnswerverifiedShow Answer

Refer to the above data.If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:

Correct AnswerverifiedShow Answer

If taxation becomes more progressive, the built-in stability in the economy will increase.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The degree of built-in stability in the above economy could be increased by:

Correct AnswerverifiedShow Answer

Which one of the following best describes the net export effect associated with an expansionary Canadian fiscal policy?

Correct AnswerverifiedShow Answer

The following budget information is for a hypothetical economy.All data are in billions of dollars. Refer to the above data.The budget deficit in year 3 is:

Correct AnswerverifiedShow Answer

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Correct AnswerverifiedShow Answer

Refer to the above data.A 10 percent proportional tax on income would:

Correct AnswerverifiedShow Answer

During the last decade, the gross federal public debt has:

Correct AnswerverifiedShow Answer

A decrease in government spending and taxes would be an example of fiscal policies that reinforce each other.

Correct AnswerverifiedShow Answer

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