Deck 33: Fiscal Policy, Deficits, and Debt

Question 1

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $200 billion.To obtain full employment under these conditions, the government should

A)encourage personal saving by increasing the interest rate on government bonds.
B)decrease government expenditures.
C)reduce tax rates and/or increase government spending.
D)discourage private investment by increasing corporate income taxes.

Answer 1

reduce tax rates and/or increase government spending.

Question 2

Contractionary fiscal policy is so named because it

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 expand real GDP.

Answer 2

is aimed at reducing aggregate demand and thus achieving price stability.

Question 3

Discretionary fiscal policy will stabilize the economy most when

A)deficits are incurred during recessions and surpluses during inflations.
B)the budget is balanced each year.
C)deficits are incurred during inflations and surpluses during recessions.
D)budget surpluses are continuously incurred.

Answer 3

deficits are incurred during recessions and surpluses during inflations.

Question 4

The effect of a government surplus on the equilibrium level of GDP is substantially the same as

A)a decrease in imports.
B)an increase in saving.
C)an increase in consumption.
D)an increase in investment.

Question 5

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

A)reducing government expenditures by $12 billion.
B)reducing government expenditures by $60 billion.
C)increasing taxes by $15 billion.
D)increasing taxes by $20 billion.

Question 6

Discretionary fiscal policy refers to

A)any change in government spending or taxes that destabilizes the economy.
B)the authority that the president has to change personal income tax rates.
C)intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
D)the changes in taxes and transfers that occur as GDP changes.

Question 7

Suppose that the economy is in the midst of a recession.Which of the following policies would most likely end the recession and stimulate output growth?

A)A congressional proposal to incur a federal surplus to be used for the retirement of public debt.
B)Reductions in agricultural subsidies and veterans' benefits.
C)Postponement of a highway construction program.
D)Reductions in federal tax rates on personal and corporate income.

Question 8

Fiscal policy refers to the

A)deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.
B)deliberate changes in government spending and taxes to achieve greater equality in the distribution of income.
C)altering of the interest rate to change aggregate demand.
D)fact that equal increases in government spending and taxation will be contractionary.

Question 9

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by

A)increasing government spending by $4 billion.
B)increasing government spending by $40 billion.
C)decreasing taxes by $4 billion.
D)increasing taxes by $4 billion.

Question 10

An economist who favored expanded government would recommend

A)tax cuts during recession and reductions in government spending during inflation.
B)tax increases during recession and tax cuts during inflation.
C)tax cuts during recession and tax increases during inflation.
D)increases in government spending during recession and tax increases during inflation.

Question 11

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by

A)reducing government expenditures by $125 billion.
B)reducing government expenditures by $20 billion.
C)increasing taxes by $50 billion.
D)increasing taxes by $250 billion.

Question 12

Countercyclical discretionary fiscal policy calls for

A)surpluses during recessions and deficits during periods of demand-pull inflation.
B)deficits during recessions and surpluses during periods of demand-pull inflation.
C)surpluses during both recessions and periods of demand-pull inflation.
D)deficits during both recessions and periods of demand-pull inflation.

Question 13

Assume the economy is at full employment and that investment spending declines dramatically.If the goal is to restore full employment, government fiscal policy should be directed toward

A)an equality of tax receipts and government expenditures.
B)an excess of tax receipts over government expenditures.
C)an excess of government expenditures over tax receipts.
D)a reduction of subsidies and transfer payments and an increase in tax rates.

Question 14

Expansionary fiscal policy is so named because it

A)involves an expansion of the nation's money supply.
B)necessarily expands the size of government.
C)is aimed at achieving greater price stability.
D)is designed to expand real GDP.

Question 15

The group of three economists appointed by the president to provide fiscal policy recommendations is the

A)Council of Economic Advisers.
B)Joint Economic Committee.
C)Bureau of Economic Analysis.
D)Federal Reserve Board of Governors.

Question 16

Discretionary fiscal policy is so named because it

A)is undertaken at the option of the nation's central bank.
B)occurs automatically as the nation's level of GDP changes.
C)involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
D)is invoked secretly by the Council of Economic Advisers.Accessibility: Keyboard Navigation

Question 17

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $120 billion.To obtain price-level stability under these conditions, the government should

A)increase tax rates and/or reduce government spending.
B)discourage personal saving by reducing the interest rate on government bonds.
C)increase government expenditures.
D)encourage private investment by reducing corporate income taxes.

Question 18

An appropriate fiscal policy for a severe recession is

A)a decrease in government spending.
B)a decrease in tax rates.
C)appreciation of the dollar.
D)an increase in interest rates.

Question 19

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

A)increasing government spending by $25 billion.
B)increasing government spending by $80 billion.
C)decreasing taxes by $25 billion.
D)decreasing taxes by $100 billion.

Question 20

An economist who favors smaller government would recommend

A)tax cuts during recession and reductions in government spending during inflation.
B)tax increases during recession and tax cuts during inflation.
C)tax cuts during recession and tax increases during inflation.
D)increases in government spending during recession and tax increases during inflation.

Question 21

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

A)shift the AD curve to the right.
B)increase the equilibrium GDP.
C)not affect the AD curve.
D)shift the AD curve to the left.

Question 22

An appropriate fiscal policy for severe demand-pull inflation is

A)an increase in government spending.
B)depreciation of the dollar.
C)a reduction in interest rates.
D)a tax rate increase.

Question 23

If Congress adjusted the U.S.tax system so that the MPC was reduced, the

A)economy would become more inflation prone.
B)economy would become less stable.
C)stability of the economy would be unaffected.
D)economy would become more stable.

Question 24

Which of the following represents the most expansionary fiscal policy?

A)a $10 billion tax cut
B)a $10 billion increase in government spending
C)a $10 billion tax increase
D)a $10 billion decrease in government spending

Question 25

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion.To achieve full-employment output (exactly), government should

A)increase government expenditures by $100 billion.
B)increase government expenditures by $50 billion.
C)reduce taxes by $50 billion.
D)reduce taxes by $200 billion.

Question 26

Which of the following best describes the built-in stabilizers as they function in the United States?

A)The size of the multiplier varies inversely with the level of GDP.
B)Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C)Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D)Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Question 27

The cyclically adjusted budget refers to

A)the inflationary impact that the automatic stabilizers have in a full-employment economy.
B)that portion of a full-employment GDP that is not consumed in the year it is produced.
C)the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.
D)the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

Question 28

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion.To achieve full-employment output (exactly), government should

A)increase government expenditures by $80 billion.
B)reduce government expenditures by $40 billion.
C)reduce taxes by $40 billion.
D)reduce taxes by $80 billion.

Question 29

Built-in stability means that

A)an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy.
B)with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplus.
C)Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D)government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

Question 30

Which of the following statements is correct?

A)Built-in stability only partially offsets fluctuations in economic activity.
B)Built-in stability works in halting inflation, but it cannot alleviate unemployment.
C)Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.
D)Built-in stability has eliminated the need for discretionary fiscal policy.

Question 31

The actual budget deficit of the federal government in 2009 was about $1.4 trillion.On the basis of this information, it

A)can be concluded that the economy was faced with serious inflation in 2009.
B)cannot be determined whether the government engaged in expansionary or contractionary fiscal policy in 2009.
C)can be concluded that fiscal policy was contractionary in 2009.
D)can be concluded that fiscal policy was expansionary in 2009.

Question 32

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

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 legislative action by Congress to be made effective.
D)guarantee that the federal budget will be balanced over the course of the business cycle.

Question 33

Suppose the price level is fixed, the MPC is 0.8, and the GDP gap is a negative $200 billion.To achieve full-employment output (exactly), government should

A)increase government expenditures by $200 billion.
B)reduce taxes by $200 billion.
C)increase government expenditures by $40 billion.
D)reduce taxes by $160 billion.

Question 34

Which of the following statements is correct?

A)The cyclically adjusted budget and the actual budget differ because the latter does not take government transfer payments into account.
B)The cyclically adjusted budget is less likely to show a deficit than is the actual budget.
C)The cyclically adjusted budget and the actual budget will show the same size deficit or surplus in any given fiscal year.
D)The cyclically adjusted budget is more likely to show a deficit than is the actual budget.

Question 35

An expansionary fiscal policy is shown as a

A)rightward shift in the economy's aggregate demand curve.
B)movement along an existing aggregate demand curve.
C)leftward shift in the economy's aggregate supply curve.
D)leftward shift in the economy's aggregate demand curve.

Question 36

Which of the following represents the most contractionary fiscal policy?

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 spending.

Question 37

If the economy has a cyclically adjusted budget surplus, this means that

A)the public sector is exerting an expansionary impact on the economy.
B)tax revenues would exceed government expenditures if full employment were achieved.
C)the actual budget is necessarily also in surplus.
D)the economy is actually operating at full employment.

Question 38

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the

A)smaller is the economy's MPC.
B)flatter is the economy's aggregate supply curve.
C)smaller is the economy's MPS.
D)less is the economy's built-in stability.

Question 39

A tax reduction of a specific amount will be more expansionary the

A)smaller is the economy's MPC.
B)larger is the economy's MPC.
C)smaller is the economy's multiplier.
D)less is the economy's built-in stability.

Question 40

The cyclically adjusted budget tells us

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.

Question 41

The federal budget deficit is found by

A)subtracting government tax revenues plus government borrowing from government spending in a particular year.
B)subtracting government tax revenues from government spending in a particular year.
C)cumulating the differences between government spending and tax revenues over all years since the nation's founding.
D)subtracting government revenues from the noninvestment-type government spending in a particular year.

Question 42

Economists refer to a budget deficit that exists when the economy is achieving full employment as a

A)cyclical deficit.
B)cyclically adjusted deficit.
C)natural deficit.
D)nonrecurring deficit.

Question 43

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP.The government is engaging in a(n)

A)expansionary fiscal policy.
B)contractionary fiscal policy.
C)neutral fiscal policy.
D)high-interest-rate policy.

Question 44

Suppose the government cuts taxes to keep the economy's cyclically adjusted budget in balance when the economy is expanding.The government is engaging in a(n)

A)contractionary fiscal policy.
B)expansionary fiscal policy.
C)low-interest-rate policy.
D)neutral fiscal policy.

Question 45

The American Recovery and Reinvestment Act of 2009 was implemented primarily to

A)reduce inflationary pressure caused by oil price increases.
B)curb the overspending by households that contributed to the Great Recession.
C)bring the federal budget back into balance.
D)stimulate aggregate demand and employment.

Question 46

When current tax revenues exceed current government expenditures and the economy is achieving full employment,

A)the cyclically adjusted budget has neither a deficit nor a surplus.
B)the cyclically adjusted budget may have either a deficit or a surplus.
C)the cyclically adjusted budget has a surplus.
D)the government is engaging in an expansionary fiscal policy.

Question 47

The immediate primary cause of the swing from federal budget surpluses in 2000 and 2001 to a budget deficit in 2002 was

A)the tax cuts of 2001.
B)spending increases relating to the wars in Afghanistan and Iraq.
C)the recession of 2001.
D)the acceleration of inflation in 2001 and 2002.

Question 48

Which of the following is a true statement?

A)Fiscal policy has been expansionary every year since 2000.
B)Fiscal policy has been contractionary every year since 2000.
C)Fiscal policy swung from expansionary to contractionary in 2002.
D)Fiscal policy swung from contractionary to expansionary in 2002.

Question 49

Since 2002, the United States has had

A)large federal budget surpluses.
B)large federal budget deficits.
C)modest trade surpluses.
D)a rising natural rate of unemployment.

Question 50

The cyclically adjusted budget deficit for the United States

A)rose to âˆ'7.1 percent of potential GDP in 2009 but has since declined.
B)was zero in 2009, but the cyclical deficit created by the recession was âˆ'7.1 percent of potential GDP.
C)changed to a surplus in 2009.
D)rose to âˆ'10.1 percent of potential GDP in 2009 but has since declined.

Question 51

The American Recovery and Reinvestment Act of 2009

A)created a $700 billion rescue package for financial institutions.
B)cut taxes by $152 billion, distributed primarily as rebate checks to taxpayers.
C)implemented a $787 billion package of tax cuts and government expenditure increases.
D)substantially lowered interest rates in an attempt to stimulate investment spending.

Question 52

If government increases the size of its cyclically adjusted surplus, we can

A)assume that government is causing interest rates to rise.
B)not determine government's impact on the economy without also knowing the status of the actual budget.
C)assume that government is having a contractionary effect on the economy.
D)assume that government is having an expansionary effect on the economy.

Question 53

When the economy is at full employment,

A)one cannot generalize in comparing the actual and the cyclically adjusted budgets.
B)the cyclically adjusted budget will show a surplus and the actual budget will show a deficit.
C)the actual budget will show a surplus and the cyclically adjusted budget will show a deficit.
D)the actual and the cyclically adjusted budgets will be equal.

Question 54

When current government expenditures equal current tax revenues and the economy is achieving full employment,

A)the cyclically adjusted budget has neither a deficit nor a surplus.
B)the cyclically adjusted budget may have either a deficit or a surplus.
C)fiscal policy is contractionary.
D)nominal GDP and real GDP are equal.

Question 55

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the

A)Federal Reserve.
B)budget deficit.
C)budget surplus.
D)public debt.

Question 56

Which of the following did not contribute directly to the Great Recession?

A)crisis in the mortgage lending market
B)bursting of the dot-com stock market bubble
C)freezing credit markets
D)pessimism originating from financial market turmoil

Question 57

The amount by which government expenditures exceed revenues during a particular year is the

A)public debt.
B)budget deficit.
C)full employment.
D)GDP gap.

Question 58

Increases in the federal budget deficit from 2007 to 2009 were caused

A)exclusively by the loss of tax revenue due to recession.
B)exclusively by expansionary fiscal policy, as shown through growth in the cyclically adjusted deficit.
C)primarily by a combination of recession and expansionary fiscal policy.
D)primarily by increased outlays to a rapidly growing number of Social Security recipients.

Question 59

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP.The government is engaging in a(n)

A)expansionary fiscal policy.
B)contractionary fiscal policy.
C)neutral fiscal policy.
D)low-interest-rate policy.

Question 60

When current government expenditures exceed current tax revenues and the economy is achieving full employment,

A)the cyclically adjusted budget has neither a deficit nor a surplus.
B)the cyclically adjusted budget has a deficit.
C)fiscal policy is contractionary.
D)the cyclically adjusted budget has a surplus.

Question 61

The crowding-out effect of expansionary fiscal policy suggests that

A)tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B)increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C)it is very difficult to have excessive aggregate spending in the U.S.economy.
D)consumer and investment spending always vary inversely.

Question 62

In 2015, the U.S.federal debt held by the public was

A)held largely by foreign governments.
B)about four times as large as the GDP.
C)about twice as large as the GDP.
D)about 75 percent of the size of the GDP.

Question 63

Which of the following historically has not been a significant contributor to the U.S.public debt?

A)war financing
B)tax cuts and expenditure increases in the 1980s
C)recessions
D)demand-pull inflation

Question 64

The financing of a government deficit increases interest rates and, as a result, reduces investment spending.This statement describes

A)the supply-side effects of fiscal policy.
B)built-in stability.
C)the crowding-out effect.
D)the net export effect.

Question 65

The average tax rate required to service the public debt is roughly measured by

A)the absolute size of the debt.
B)the debt as a fraction of the GDP.
C)interest on the debt as a percentage of the GDP.
D)the ratio of government spending to the GDP.

Question 66

The political business cycle refers to the possibility that

A)incumbent politicians will be reelected regardless of the state of the economy.
B)politicians will manipulate the economy to enhance their chances of being reelected.
C)there is more inflation during Democratic administrations than during Republican administrations.
D)recessions coincide with election years.

Question 67

According to Congressional Budget Office (CBO) projections,

A)budget deficits are expected to give way to surpluses by the year 2017.
B)Social Security will become insolvent by 2017.
C)expiration of tax cuts in 2015 will cause the budget deficit to rise to record highs by 2017.
D)budget deficits are expected to remain large for the next several years.

Question 68

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession.(2) Economists reach agreement that the economy is moving into a recession.(3) A tax cut is proposed in Congress.(4) The tax cut is passed by Congress and signed by the president.(5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.The administrative lag of fiscal policy is reflected in events

A)1 and 2.
B)2 and 3.
C)3 and 4.
D)4 and 5.

Question 69

Approximately what percentage of the U.S.public debt is held by foreign individuals and institutions (2015)?

A)26 percent
B)71 percent
C)41 percent
D)34 percent

Question 70

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession.(2) Economists reach agreement that the economy is moving into a recession.(3) A tax cut is proposed in Congress.(4) The tax cut is passed by Congress and signed by the president.(5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.The recognition lag of fiscal policy is reflected in events

A)1 and 2.
B)2 and 3.
C)3 and 4.
D)4 and 5.

Question 71

Recessions have contributed to the public debt by

A)reducing national income and therefore tax revenues.
B)increasing real interest rates.
C)increasing the international value of the dollar.
D)increasing national saving.

Question 72

Which of the following statements is correct?

A)Federal deficits were larger in the early 2000s than in the late 2000s.
B)Deep tax cuts always expand tax revenues and reduce the public debt.
C)The public debt has usually declined during wartime.
D)There is a tendency for the public debt to grow during recessions.

Question 73

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession.(2) Economists reach agreement that the economy is moving into a recession.(3) A tax cut is proposed in Congress.(4) The tax cut is passed by Congress and signed by the president.(5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.The operational lag of fiscal policy is reflected in event(s)

A)1 and 2.
B)2 and 3.
C)3 and 4.
D)5.

Question 74

The crowding-out effect is

A)strongest when the economy is at full employment.
B)strongest when the economy is in a deep recession.
C)weakest when there is demand-pull inflation.
D)equally strong, regardless of the state of the macroeconomy.

Question 75

In 2015, the U.S.public debt was about

A)$18.2 trillion.
B)$16.4 trillion.
C)$5.3 trillion.
D)$11.9 trillion.

Question 76

Since actual budget deficits surpassed 10 percent of GDP in 2009,

A)fiscal policy has become contractionary.
B)the deficits as a percentage of GDP have fallen, but fiscal policy has remained expansionary.
C)deficits as a percentage of GDP have continued to rise.
D)deficits as a percentage of GDP have remained constant but risen in dollar amounts.

Question 77

Which of the following fiscal policy actions is most likely to increase aggregate supply?

A)an increase in personal income tax rates
B)a reduction in interest rates that encourages consumers to purchase more durable goods
C)an increase in transfer payments to unemployed workers
D)an increase in government spending on infrastructure that increases private sector productivity

Question 78

The crowding-out effect of expansionary fiscal policy suggests that

A)government spending increases at the expense of private investment.
B)imports replace domestic production.
C)private investment increases at the expense of government spending.
D)saving increases at the expense of investment.

Question 79

Which of the following best describes the idea of a political business cycle?

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.

Question 80

What percentage of the U.S.public debt is held by U.S.government agencies and the Federal Reserve (2015)?

A)26 percent
B)50 percent
C)41 percent
D)34 percent