Question 1

If private investment is relatively sensitive to interest rates, then a fiscal expansion financed by government bond sales will:

Accepted Answer

A)  have no effect on output.
B)  raise output by a relatively small amount.
C)  raise output by a relatively large amount.
D)  have an ambiguous effect on output.E) B) and D)
F) A) and B)

Question 2

Because automatic stabilizers lower transfer payments and raise tax receipts as an economy recovers from a recession, they:

Accepted Answer

A)  slow down the pace of an economic recovery.
B)  increase the pace of an economic recovery.
C)  do not affect the pace of an economic recovery.
D)  accelerate the recovery from a recession until inflation starts to develop, at which point they slow the recovery.E) C) and D)
F) B) and C)

Question 3

The government's running of a deficit or a surplus with the objective of affecting the level of output in the economy is called:

Accepted Answer

A)  public finance.
B)  fiscal policy.
C)  the Ricardian equivalence.
D)  sound finance.E) B) and C)
F) None of the above

Question 4

Automatic stabilizers are government programs or policies that will counteract the business cycle without any new government action.

Accepted Answer

A) True 
 B)False

Question 5

In the early 2000s, car sales in China slowed because the government had been restricting credit growth.This action is consistent with the effects of:

Accepted Answer

A)  contractionary fiscal or monetary policy.
B)  contractionary fiscal policy but not contractionary monetary policy.
C)  contractionary monetary policy but not contractionary fiscal policy.
D)  expansionary fiscal policy.E) All of the above
F) B) and D)

Question 6

Automatic stabilizers cause:

Accepted Answer

A)  deeper recessions and more rapid expansions.
B)  deeper recessions and slower expansions.
C)  shallower recessions and slower expansions.
D)  shallower recessions and more rapid expansions.E) All of the above
F) A) and D)

Question 7

The provisions in state constitutions requiring them to balance their budgets mean that:

Accepted Answer

A)  state governments often behave procyclically because lower revenues during recessions means lower state spending.
B)  state government spending acts as an automatic stabilizer for the national economy.
C)  state governments can follow a functional finance approach with greater consistency than the federal government, which has no such requirement.
D)  state governments can only use monetary policy to affect their economies.E) All of the above
F) A) and B)

Question 8

As income increases during the recovery from a recession, automatic stabilizers will:

Accepted Answer

A)  increase taxes and increase government spending, increasing the overall size of the government.
B)  reduce taxes and increase government spending, accelerating the recovery.
C)  increase taxes and decrease government spending, slowing the recovery.
D)  reduce taxes on high-income individuals and raise taxes on the poor, increasing economic inequality.E) A) and B)
F) None of the above

Question 9

Economists who believe in sound finance would say that in a recession, the government should:

Accepted Answer

A)  run a budget deficit because the Ricardian equivalence theorem is true both in theory and in practice.
B)  run a budget deficit despite the truth of the Ricardian equivalence theorem.
C)  maintain a balanced budget because the Ricardian equivalence theorem is true in practice.
D)  maintain a balanced budget for political and moral reasons.E) A) and C)
F) B) and C)

Question 10

In practice, economists:

Accepted Answer

A)  agree about what the level of potential output is but disagree about what policies are appropriate.
B)  disagree about what the level of potential output is but agree about what policies are appropriate.
C)  agree about what the level of potential output is and about what policies are appropriate.
D)  disagree about what the level of potential output is and about what policies are appropriate.E) B) and C)
F) A) and B)

Question 11

When inflation and unemployment are both higher than desired, most economists believe that the government should:

Accepted Answer

A)  adopt contractionary monetary policies that reduce both inflation and unemployment.
B)  adopt expansionary fiscal policies that reduce both inflation and unemployment.
C)  determine whether reducing inflation is more or less important than reducing unemployment and adopt a policy that targets the more important goal.
D)  not act as it is impossible to reduce either inflation or unemployment under these circumstances.E) C) and D)
F) None of the above

Question 12

As the economy contracts, tax revenues:

Accepted Answer

A)  fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.
B)  rise and transfer payments rise, causing the economy to contract by more than it would in the absence of automatic stabilizers.
C)  fall and transfer payments fall, causing the economy to contract by more than it would in the absence of automatic stabilizers.
D)  rise and transfer payments fall, causing the economy to contract by less than it would in the absence of automatic stabilizers.E) B) and D)
F) A) and B)

Question 13

If the government knew the precise values of the multiplier and potential income, fine-tuning the economy would:

Accepted Answer

A)  be possible.
B)  be much easier but mistakes would still occur occasionally.
C)  still be very difficult.
D)  be more difficult.E) None of the above
F) A) and B)

Question 14

According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people:

Accepted Answer

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.E) A) and C)
F) C) and D)

Question 15

The elimination of automatic stabilizers would decrease the need for other fiscal policies.

Accepted Answer

A) True 
 B)False

Question 16

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 called:

Accepted Answer

A)  purchasing power parity.
B)  functional finance.
C)  the Ricardian equivalence theorem.
D)  sound finance.E) B) and C)
F) A) and C)

Question 17

Activist fiscal policies:

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 18

Crowding out:

Accepted Answer

A)  increases the multiplier effect, so that an increase in government spending raises income by more.
B)  increases the multiplier effect, so that an increase in government spending raises income by less.
C)  decreases the multiplier effect, so that an increase in government spending raises income by more.
D)  decreases the multiplier effect, so that an increase in government spending raises income by less.E) B) and C)
F) A) and B)

Question 19

If the government knew the level of potential income and had sufficient information about the economy (i.e., the mpe, and such), it could fine-tune the economy.

Accepted Answer

A) True 
 B)False

Question 20

Contractionary fiscal policy that reduces the budget deficit may:

Accepted Answer

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.E) A) and D)
F) All of the above

Exam 32: The Fiscal Policy Dilemma

Economists who believe in sound finance would say that in a recession, the government should:

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The government's running of a deficit or a surplus with the objective of affecting the level of output in the economy is called:

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Automatic stabilizers cause:

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In the early 2000s, car sales in China slowed because the government had been restricting credit growth.This action is consistent with the effects of:

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The provisions in state constitutions requiring them to balance their budgets mean that:

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Contractionary fiscal policy that reduces the budget deficit may:

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Crowding out:

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If the government knew the precise values of the multiplier and potential income, fine-tuning the economy would:

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As income increases during the recovery from a recession, automatic stabilizers will:

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Automatic stabilizers are government programs or policies that will counteract the business cycle without any new government action.

Correct AnswerverifiedShow Answer

In practice, economists:

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According to the Ricardian equivalence theorem, government deficits do not affect the level of output because people:

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The elimination of automatic stabilizers would decrease the need for other fiscal policies.

Correct AnswerverifiedShow Answer

If the government knew the level of potential income and had sufficient information about the economy (i.e., the mpe, and such), it could fine-tune the economy.

Correct AnswerverifiedShow Answer

If private investment is relatively sensitive to interest rates, then a fiscal expansion financed by government bond sales will:

Correct AnswerverifiedShow Answer

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 called:

Correct AnswerverifiedShow Answer

Activist fiscal policies:

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Because automatic stabilizers lower transfer payments and raise tax receipts as an economy recovers from a recession, they:

Correct AnswerverifiedShow Answer

When inflation and unemployment are both higher than desired, most economists believe that the government should:

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As the economy contracts, tax revenues:

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