Question 1

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 2

If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap,it may fail to achieve its objective if:

Accepted Answer

A)   the households think of it as a permanent policy.
B)   the households think of it as a temporary policy.
C)   the households think of it as a 10 year program.
D)   the households think of it as a loss of revenue for the government.E) A) and C)
F) C) and D)

Question 3

-Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.The tax system of this economy is such that:

Accepted Answer

A)   it is regressive.
B)   it is progressive.
C)   tax revenues equal 50 percent of GDP.
D)   it tends to destabilize the economy.E) C) and D)
F) B) and D)

Question 4

A major advantage of the built-in or automatic stabilizers is that they:

Accepted Answer

A)   simultaneously stabilize the economy and reduce the absolute size of the public debt.
B)   automatically produce surpluses during recessions and deficits during inflations.
C)   require no discretionary budgetary policy.
D)   guarantee that the federal budget will be balanced over the course of the business cycle.E) None of the above
F) A) and B)

Question 5

An increase in the public debt will:

Accepted Answer

A)   increase incentives to work and bear risk.
B)   probably increase the inequality in the distribution of income.
C)   decrease the Canadian debt held by citizens and institutions in foreign nations.
D)   decrease the potential for higher taxation in CanadaE) None of the above
F) A) and D)

Question 6

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 C)
F) A) and D)

Question 7

An increase in taxes and a decrease in government spending would be characteristic of a contractionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 8

If the MPC in the economy is .75,government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

d1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2,wholly offsetting any crowding-out effect? A)  an improvement in profit expectations by businesses B)  a decrease in saving C)  a decline in the interest rate D)  an increase in the marginal propensity to consume" class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2,wholly offsetting any crowding-out effect?

Accepted Answer

A)   an improvement in profit expectations by businesses
B)   a decrease in saving
C)   a decline in the interest rate
D)   an increase in the marginal propensity to consumeE) A) and D)
F) C) and D)

Question 11

Expansionary fiscal policy is so-named because it involves an expansion of the nation's money supply.

Accepted Answer

A) True 
 B)False

Question 12

If fiscal policy leads to higher interest rates,the dollar may appreciate and net exports fall.

Accepted Answer

A) True 
 B)False

Question 13

The greatest expansionary impact of a budget deficit will occur when the:

Accepted Answer

A)   government finances the deficit by obtaining newly printed money.
B)   government borrows the money from the general public.
C)   economy is operating in the intermediate range of its aggregate supply curve.
D)   marginal propensity to save for the economy is high.E) B) and D)
F) None of the above

Question 14

To understand the quantitative significance of the public debt relative to the economy,it should be:

Accepted Answer

A)   divided by the social security trust fund.
B)   multiplied by the size of the population.
C)   measured as a percentage of GDP.
D)   compared to the value of imports and exports.E) A) and D)
F) C) and D)

Question 15

If government tax revenues change automatically and in a countercyclical direction over the course of the business cycle,this would be called a(n) :

Accepted Answer

A)   discretionary fiscal policy.
B)   expansionary fiscal policy.
C)   political business cycle.
D)   nondiscretionary fiscal policy.E) B) and C)
F) All of the above

Question 16

Crowding-out is the notion that:

Accepted Answer

A)   since tax revenues vary directly with GDP,a rise in the level of GDP will increase the budget surplus and limit expansion.
B)   deficit financing will increase the demand for money,increase the interest rate,and reduce the level of investment spending in the economy.
C)   the full-employment budget is the best indicator of whether a budget deficit crowds out investment.
D)   the actual budget is the best indicator of whether a budget deficit crowds out saving.E) B) and D)
F) B) and C)

Question 17

Automatic stabilizers will reduce tax revenues during recessions and increase tax revenues during periods of strong economic growth.

Accepted Answer

A) True 
 B)False

Question 18

In Year 1,the actual budget deficit was $150 billion and the cyclically adjusted deficit was $125 billion.In Year 2,the actual budget deficit was $125 billion and the cyclically adjusted deficit was $100 billion.It can be concluded that fiscal policy from Year 1 to Year 2 was:

Accepted Answer

A)   proportional.
B)   progressive.
C)   contractionary.
D)   expansionary.E) A) and B)
F) A) and C)

Question 19

-Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.If GDP is $400:

Accepted Answer

A)   there will be a budget deficit.
B)   there will be a budget surplus.
C)   the budget will be balanced.
D)   the macroeconomy will be in equilibrium.E) A) and D)
F) All of the above

Question 20

Which of the following represents the most contractionary fiscal policy?

Accepted Answer

A)   a $30 billion tax cut
B)   a $30 billion increase in government spending
C)   a $30 billion tax increase
D)   a $30 billion decrease in government spendingE) None of the above
F) B) and D)

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

A major advantage of the built-in or automatic stabilizers is that they:

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Automatic stabilizers will reduce tax revenues during recessions and increase tax revenues during periods of strong economic growth.

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The greatest expansionary impact of a budget deficit will occur when the:

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The cyclically adjusted budget tells us:

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If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap,it may fail to achieve its objective if:

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To understand the quantitative significance of the public debt relative to the economy,it should be:

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

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If fiscal policy leads to higher interest rates,the dollar may appreciate and net exports fall.

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Crowding-out is the notion that:

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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:

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-Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2,wholly offsetting any crowding-out effect?

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Which of the following represents the most contractionary fiscal policy?

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Expansionary fiscal policy is so-named because it involves an expansion of the nation's money supply.

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If government tax revenues change automatically and in a countercyclical direction over the course of the business cycle,this would be called a(n) :

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-Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.If GDP is $400:

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An increase in taxes and a decrease in government spending would be characteristic of a contractionary fiscal policy.

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An increase in the public debt will:

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In Year 1,the actual budget deficit was $150 billion and the cyclically adjusted deficit was $125 billion.In Year 2,the actual budget deficit was $125 billion and the cyclically adjusted deficit was $100 billion.It can be concluded that fiscal policy from Year 1 to Year 2 was:

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If the MPC in the economy is .75,government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

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-Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.The tax system of this economy is such that:

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-Refer to the above diagram.Initially assume that the investment demand curve is I_d1.Which of the following effects of a budget deficit might shift the investment demand curve from I_d1 to I_d2,wholly offsetting any crowding-out effect?

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