Deck 11: Fiscal Policy

Question 1

Fiscal policy is most effective in controlling inflation when the economy operates in the _____ region of the aggregate supply curve.

A) horizontal
B) vertical
C) upward rising
D) downward sloping
E) backward bending

Answer 1

B

Question 2

Calculate the government spending multiplier if, an increase in government spending by $5 million increases real GDP by $25 million.

A) 0.2
B) 0.5
C) 2
D) 5
E) 6

Answer 2

D

Question 3

NARRBEGIN: Figure 11.2
The figure given below depicts the tax revenue for different tax rates applied by the government.
Figure 11.2

Refer to Figure 11.2. If you were a member of the Congress that aims to increase tax revenue collections, what would you recommend if the current tax rate were 80 percent?

A) Increasing the tax rate to 100 percent
B) Decreasing the tax rate to 30 percent
C) Decreasing the tax rate to 70 percent
D) Increasing the tax rate to 90 percent
E) Decreasing the tax rate to zero percent

Answer 3

C

Question 4

Suppose the Congress enacts a 5 percent decrease in annual military expenditures. Other things equal, this can be associated with:

A) a change in the slope of the aggregate demand curve.
B) a leftward shift of the aggregate demand curve.
C) a rightward shift of the aggregate demand curve.
D) a movement down along the aggregate demand curve.
E) a movement up along the aggregate demand curve.

Question 5

Government spending equals the sum of _____, _____, and _____.

A) taxes; changes in the reserves of the central bank; changes in net exports
B) taxes; change in government debt; change in government-issued money
C) taxes; public expenditures; private deductible expenditures
D) public expenditures; business investment; change in government debt
E) public debt; welfare expenditures; social security expenditures

Question 6

Ceteris paribus, if the U.S. federal government reduces fiscal spending which of the following will be observed?

A) The aggregate demand curve will shift to the right.
B) The aggregate expenditure in the economy will decrease.
C) The economy will approach potential GDP.
D) The marginal propensity to consume will increase.
E) The average price level will increase.

Question 7

Which of the following statements about taxation is incorrect?

A) A tax cut affects aggregate demand indirectly.
B) A tax cut raises income and expenditures.
C) Cutting taxes by $20 is not the same as increasing government spending by $20.
D) A change in taxes does not affect consumption.
E) An increase in taxes decreases income and expenditures.

Question 8

If government spending in a country declines by $10 billion and, at the same time, taxes increase by an equal amount, what is the total effect in the economy?

A) Equilibrium real GDP increases
B) Equilibrium real GDP decreases by $20 billion
C) Equilibrium real GDP is unchanged
D) Equilibrium real GDP decreases by more than $10 billion and less than $20 billion
E) Equilibrium real GDP decreases by more than $20 billion

Question 9

Which of the following can be categorized under fiscal policy?

A) Increase in money supply
B) Decrease in money supply
C) Increase in federal funds rate
D) Decrease in reserve requirement
E) Increase in tax rates

Question 10

Suppose the equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and prices. This can be accomplished by:

A) increasing government spending such that aggregate expenditures are increased.
B) raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
C) decreasing government spending such that aggregate demand is reduced.
D) lowering average tax rates such that aggregate supply is increased.
E) increasing transfer payments such that aggregate expenditures decline.

Question 11

The _____ is the difference between potential real GDP and the equilibrium level of real GDP.

A) employment gap
B) inflationary gap
C) GDP gap
D) fiscal gap
E) monetary gap

Question 12

Which of the following statements is true of government spending?

A) An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.
B) Government spending is a part of monetary policy, not fiscal policy.
C) A decline in government spending brings about an expansion in the economy.
D) Increase in government spending increases the recessionary gap in the economy.
E) An increase in government spending shifts the aggregate demand curve downward by a fraction of the rise in government spending.

Question 13

Which of the following is not a means of financing government spending?

A) Government subsidies
B) Personal income taxes
C) Printing new money
D) Issuing government bonds
E) Capital gains taxes

Question 14

When the government uses taxes and spending to affect national economy, it is engaging in:

A) fiscal policy.
B) monetary policy.
C) interest rate policy.
D) trade policy.
E) exchange rate policy.

Question 15

NARRBEGIN: Figure 11.1
The figure given below shows the macroeconomic equilibria of a country.
Figure 11.1

Refer to Figure 11.1. A decrease in government spending would be most effective in reducing the price level if the economy were in equilibrium:

A) at point A.
B) at point B.
C) when real GDP equals Y1.
D) when real GDP equals Y3.
E) when real GDP equals Y2.

Question 16

The sum of the unemployment rate and the inflation rate is known as:

A) the macroeconomic index.
B) the mortality rate.
C) the market index.
D) the misery index.
E) a coincident indicator.

Question 17

If aggregate demand intersects aggregate supply in the horizontal range of the aggregate supply curve, then, other things equal, an increase in government spending will:

A) raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
B) lower real GDP by an amount equal to the increased spending and reduce inflation.
C) raise the price level and leave real GDP unchanged.
D) raise both real GDP and the price level by a multiple of the initial spending increase.
E) have no effect on real GDP or the price level, because all private investment will be crowded out.

Question 18

The effect of an increase in government spending on real GDP will be lesser:

A) the smaller the crowding-out effect.
B) the smaller the percentage of government spending financed by tax increases.
C) the larger the government budget surplus.
D) the more rapidly money is converted into goods.
E) the steeper the aggregate supply curve.

Question 19

If the government wants to close a GDP gap, it should:

A) borrow funds from the public by issuing bonds.
B) lower taxes and raise government spending.
C) lower government spending on social security.
D) raise both direct and indirect tax rates.
E) adopt contractionary fiscal policies to control inflation.

Question 20

NARRBEGIN: Figure 11.1
The figure given below shows the macroeconomic equilibria of a country.
Figure 11.1

Refer to Figure 11.1. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will:

A) decrease the price level.
B) lower real GDP and leave the price level unchanged.
C) lower real GDP and increase the price level.
D) increase the price level and leave real GDP unchanged.
E) have no effect on real GDP or the price level.

Question 21

Discretionary fiscal policy is best defined as:

A) the deliberate change in tax laws and government spending to change equilibrium income.
B) the deliberate manipulation of the money supply to expand the economy.
C) the arbitrary fluctuation in tax laws and budget requirements.
D) the automatic change in certain fiscal instruments when real GDP changes.
E) the policy action taken by the Congress to reduce the federal budget deficit.

Question 22

Which of the following is true of fiscal policy before the Great Depression of the 1930s?

A) Fiscal policy was made at the federal level.
B) Policies associated with national defense were made at the state level.
C) Foreign policy was made at the State level.
D) The federal budget was determined mostly by economists and not by politicians.
E) National defense and foreign trade were the focus areas of the federal government while other areas of government policy were dealt by the individual states.

Question 23

NARRBEGIN: Figure 11.3
The figure given below depicts the macroeconomic equilibrium in a country.
Figure 11.3

Refer to Figure 11.3. Assume that the increase in aggregate demand from AD1 to AD2 was the result of government spending that was financed by borrowing. Assuming that the Ricardian equivalence holds and people expect taxes to rise in future, the equilibrium income will be:

A) $800.
B) less than $500.
C) more than $800.
D) less than $700.
E) $700.

Question 24

In the late 1990s, debt-financed government spending decreased in Mexico. Following this decrease, consumption spending increased. Ricardian equivalence would explain this increase in consumption as the result of:

A) people's expectation of higher future taxes required to pay off government debt.
B) people's expectation of lower future taxes that induce them to save less.
C) automatic stabilization of the economy.
D) the crowding out effect.
E) an increase in current household disposable income.

Question 25

Starting with a situation where there is a substantial budget deficit, when tax revenues grow faster than federal expenditures, the government will experience:

A) a balanced budget.
B) an increasing national debt.
C) a declining budget surplus.
D) a declining budget deficit.
E) an increasing budget deficit.

Question 26

Which of the following trends has been observed in federal revenues and expenditures over time?

A) Expenditures were lower than the revenues in the 1998-2001 period.
B) Expenditures were lower than the revenues in the 1930s.
C) Expenditures were higher than the revenues in the 1998-2001 period.
D) Expenditures were more less equal to the revenues in the 1930s.
E) Expenditures were more or less equal to the revenues in the 1998-2001 period.

Question 27

Identify the correct statement.

A) It is absolutely compulsory for the government to earn a profitable return on the money it earns by selling bonds.
B) When government borrowing rises, interest rates decline, thereby driving up private investment.
C) When interest rates rise, fewer number of corporations offer new bonds to raise investment funds.
D) An increase in interest rate reduces the cost of borrowing by the firms.
E) When interest rates fall, the firm's cost of raising funds through bonds increases.

Question 28

Suppose an economy is in equilibrium. Also suppose that consumer expectations change as the threat of war increases the likelihood of an increase in taxes. This would result in:

A) an increase in equilibrium income.
B) no change in equilibrium income.
C) a downward shift of the aggregate supply curve.
D) a decrease in equilibrium income.
E) a change in the slope of the aggregate supply curve.

Question 29

Ricardian equivalence can be said to hold if:

A) taxation has greater effect on private spending than government borrowing.
B) taxation has a lesser effect on private spending than government borrowing.
C) government borrowing does not affect private consumption while taxation has a negative impact on private consumption.
D) government spending activities financed by taxation and those financed by borrowing have the same effect on private spending.
E) government spending activities financed by taxation and those financed by borrowing have no effect on private spending.

Question 30

The emphasis on the greater incentives to produce created by lower taxes has come to be known as:

A) trickle-down economics.
B) supply-side economics.
C) the paradox of thrift.
D) the permanent income hypothesis.
E) monetarist economics.

Question 31

A drop in consumption or investment spending caused by increased government spending is referred to as:

A) the multiplier effect.
B) an expansionary gap.
C) the Ricardian equivalence.
D) the paradox of thrift.
E) the crowding out.

Question 32

NARRBEGIN: Figure 11.2
The figure given below depicts the tax revenue for different tax rates applied by the government.
Figure 11.2

Refer to Figure 11.2. If the tax rate were 100 percent:

A) tax revenue would be maximized.
B) no one would be willing to work.
C) there would be a strong incentive to work.
D) tax revenue would be greater than if the tax rate were zero percent.
E) tax revenue would be less than if the tax rate were zero percent.

Question 33

If crowding out exists, the expansionary effect of government spending will be:

A) smaller than intended.
B) negative.
C) infinite.
D) larger than intended.
E) zero.

Question 34

If fewer businesses offer new bonds to raise investment funds when government borrowing increases interest rates, this would be an example of:

A) Ricardian equivalence.
B) overestimating the tax multiplier.
C) crowding out.
D) increased consumption.
E) the balanced-budget multiplier.

Question 35

Which of the following correctly explain Ricardian equivalence?

A) Government spending that is financed by borrowing has a smaller effect on the economy than government spending financed by raising taxes.
B) Consumers do not base current spending on future expected tax liabilities.
C) Government borrowing can function like increased current taxes, reducing current household and business expenditures.
D) The government should balance its budget by equating revenue and expenditure in every fiscal year.
E) Government spending does not crowd out private investment.

Question 36

In the presence of the crowding out effect, the purchase of Treasury bonds by the government will result in:

A) an increase in the interest rates.
B) a decrease in the price of bonds.
C) a decline in the private sector spending.
D) an increase in the private sector spending.
E) a decrease in the rate of inflation.

Question 37

Critics of the supply-side tax cuts proposed by the Reagan administration argued that lower taxes would:

A) increase the budget deficit.
B) decrease money supply in the economy.
C) reduce the aggregate price level.
D) reduce the disposable income of households.
E) reduce the volume of international trade.

Question 38

Which of the following is depicted in Figure 11.2?

A) The Lorenz curve
B) The community indifference curve
C) The aggregate labor supply curve
D) The Laffer curve
E) The Engel curve

Question 39

The ratio of U.S. government spending to GDP reached its peak during:

A) World War I.
B) World War II.
C) the Great Depression.
D) the real estate crisis.
E) the bursting of the stock market bubble.

Question 40

If consumers spend _____ of a change in their disposable income, then a tax increase of $100 would lower consumption by $70.

A) 35 percent
B) 100 percent
C) 80 percent
D) 70 percent
E) 50 percent

Question 41

If Joe earns $80,000 per year and pays $20,000 in taxes, while Moe earns $100,000 and pays $22,000 in taxes, their tax system would best be described as:

A) progressive.
B) proportional.
C) regressive.
D) discretionary.
E) lump-sum.

Question 42

Which of the following can be considered as an automatic stabilizer in the economy?

A) Real exchange rate
B) Real interest rate
C) Unemployment insurance
D) Money supply
E) Disposable income

Question 43

National debt can be defined as:

A) the total money supply in the economy.
B) the total stock of government bonds outstanding.
C) the difference between real GDP and potential GDP.
D) the change in fiscal deficit that results from an increase in government spending.
E) the total volume of private investment in the country.

Question 44

Which of the following is true of U.S. national debt between 1958 and 2010?

A) Total debt in the U.S. crossed $104 trillion in 2009.
B) Debt as a percentage of GDP was the highest in the year 1978.
C) Net interest payable by the U.S. government was the highest in the year 1990.
D) Interest payment as a percentage of total government spending was the highest in 2009.
E) Net interest payable by the U.S. government crossed $250 billion in 2009.

Question 45

Assume that European interest rates fall as a result of decreased deficit spending by the governments of the European Union. We would expect all of the following, except:

A) a depreciation of the euro with respect to the U.S. dollar.
B) increased European demand for American government securities.
C) a higher level of U.S. imports from Europe.
D) higher U.S. net exports to Europe.
E) higher French exports to the United States.

Question 46

If the government sells U.S. Treasury bonds to finance its budget deficit, one would expect:

A) interest rates to rise.
B) domestic investment to rise.
C) tax rates to fall.
D) inflation to rise.
E) interest rates to fall.

Question 47

Assume an economy has automatic stabilizers in place that include a progressive tax structure and a transfer payment system. Then in a period of high economic growth and high inflation, we would expect:

A) tax revenues to fall and unemployment compensation to rise.
B) average tax rates and welfare payments to decline.
C) the national debt to become larger.
D) average tax rates and government revenues to rise.
E) government spending on social security benefits to rise.

Question 48

_____ refers to the changes in government spending and taxation that are aimed at achieving a policy goal.

A) Discretionary monetary policy
B) Discretionary fiscal policy
C) Discretionary foreign trade policy
D) Discretionary exchange rate policy
E) Discretionary interest rate policy

Question 49

Under a _____ structure, the marginal income tax rate rises and the average tax rate decreases as personal income falls.

A) value added tax
B) sin tax
C) progressive tax
D) regressive tax
E) lumpsum tax

Question 50

_____ are elements of fiscal policy that automatically change in value as national income changes.

A) Statistical discrepancies
B) Exchange rates
C) Budget deficits
D) Automatic stabilizers
E) Supply-side shocks

Question 51

Which of the following constitutes a transfer payment?

A) Income taxes
B) Corporate salaries
C) Fiscal spending
D) Dividend payments
E) Welfare benefits

Question 52

If all U.S. government bonds are held by U.S. citizens, then:

A) the bondholders will not earn interest on the bonds.
B) there is no tax liability for funding the U.S. government's debt.
C) there is no net change in national wealth when the national debt changes.
D) the tax liability for funding the debt is not offset by the interest earnings of bondholders.
E) the tax rates are not increased to repay the outstanding debts.

Question 53

Which of the following is true about automatic stabilizers?

A) Automatic stabilizers are a part of discretionary fiscal policy.
B) The federal funds rate is an example of an automatic stabilizer.
C) An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
D) Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
E) When income rises, automatic stabilizers increase/boost spending.

Question 54

Suppose the marginal tax rate is 37 percent for an income level of $50,000 and 39 percent for an $80,000 income. This implies that the underlying tax structure is _____ in nature.

A) fixed
B) progressive
C) regressive
D) lump-sum
E) proportional

Question 55

Which of the following does not qualify as an automatic stabilizer in the economy?

A) Lump-sum taxes
B) Food stamps
C) Welfare payments
D) Progressive income taxes
E) Unemployment compensation

Question 56

A U.S. federal budget deficit that raises real interest rates is most likely to:

A) lead to a depreciation of the dollar on the foreign exchange market.
B) encourage foreign investment in U.S. securities.
C) lead to an increase in exports.
D) lead to an appreciation of other currencies relative to the U.S. dollar.
E) discourage imports of foreign goods.

Question 57

Suppose the real interest rate in the economy is 3% and the nominal interest rate is 6%, what is the current inflation rate?

A) 18%
B) 9%
C) 2%
D) 3%
E) 2.5%

Question 58

A major benefit of automatic stabilizers is that they:

A) guarantee a balanced budget over the course of the business cycle.
B) have a tendency to reduce the national debt.
C) help increase recessionary gaps in the economy.
D) moderate the effect of fluctuations in the business cycle.
E) require legislative review by Congress before they can be implemented.

Question 59

Ceteris paribus, the greater the foreign holdings of the U.S. treasury securities:

A) the lower the value of the U.S. dollar in the foreign exchange market.
B) the higher the interest rate in the U.S.
C) the greater the level of U.S. imports.
D) the lower the wealth of the U.S. citizens.
E) the lower the tax rate in the U.S. economy.

Question 60

Under a progressive tax system:

A) the average tax rate increases with increases in real GDP.
B) the average tax rate remains constant with changes in real GDP.
C) the average tax rate falls with increases in real GDP.
D) government tax receipts increase when the economy is in a recession.
E) government tax receipts decrease when the economy is expanding.

Question 61

When the price level increases, the effect of a change in government spending on real GDP will be understated.

Question 62

A balanced budget would not affect income because an increase in government spending is exactly matched by an increase in taxes.

Question 63

If the private sector anticipates higher future taxes as a result of a current budget deficit, current autonomous saving will decline.

Question 64

For which of the following reasons are VATs considered to be very important revenue generators for the government?

A) They are regressive in nature
B) They target only individuals in the high income class
C) They cannot be avoided by individuals
D) They boost a country's exports
E) They lower a country's imports

Question 65

An increase in deficit spending tends to raise interest rates, thereby resulting in a multiplier effect that is higher than would be associated with an equivalent increase in consumption spending.

Question 66

The higher the level of inflation, the stronger the impact of reductions in the personal income tax on real GDP .

Question 67

Which of the following would not be considered an indirect tax?

A) A value-added tax
B) A tax on wheat export
C) A tax on imported automobiles
D) A tax on the income of a computer manufacturer
E) A sales tax on cigarettes

Question 68

Other things equal, the steeper the slope of the aggregate supply curve, the more effective will be the expansionary fiscal policy.

Question 69

According to Ricardian equivalence, taxation and government borrowing have the same effect on spending in the private sector.

Question 70

Higher taxes affect real GDP indirectly through both the consumption channel and the output supply channel.

Question 71

A(n) _____ is an indirect tax imposed on each sale at each stage of production.

A) personal tax
B) value-added tax
C) excise duty
D) sales tax
E) ad-valorem tax

Question 72

Which of the following is an example of a transfer payment by the government?

A) The government provides unemployment benefits to its citizens
B) The local government invests in building a community center.
C) The government raises funds in order to build bridges and roads.
D) The government provides healthcare to its citizens at a subsidized price.
E) The government provides concessional rates to senior citizens who use public transport.

Question 73

The flatter the aggregate supply curve, the less the amount of government spending necessary to close a $1 billion GDP gap.

Question 74

Compared to the government in the typical industrial country, the government in the typical developing country:

A) plays the same role in investment spending.
B) plays a larger role in investment spending.
C) plays a smaller role in investment spending.
D) plays no role in investment spending.
E) plays a more negative role in investment spending.

Question 75

A decrease in federal income tax rates is an example of fiscal policy that affects GDP through consumption adjustments.

Question 76

Which of the following is a form of a direct tax?

A) Personal income taxes
B) Sales taxes
C) Excise taxes
D) Import tariffs
E) Value-added taxes

Question 77

Which of the following taxes are more easier to collect in industrial countries than in developing countries?

A) Sales tax
B) Capital gains tax
C) Personal income tax
D) Business tax
E) Export tax

Question 78

Identify the industrial country that spends 43 percent of its budget on social security, health, and education programs.

A) China
B) India
C) Brazil
D) Russia
E) The United States

Question 79

If the price level falls as real GDP decreases, the multiplier effects of any given change in aggregate expenditures are smaller than they would be if the price level remained constant.

Question 80

Government expenditures on goods and services have an indirect impact on the aggregate demand, while taxes have a direct impact.