Deck 15: Fiscal Policy

Question 1

Fiscal policy refers to the set of policies of the government in relation to:

A) money supply and taxes.
B) government expenditure and taxes.
C) money supply and government expenditure.
D) money supply and interest rates.

Answer 1

B

Question 2

The government's influence over the economy via taxes and expenditure is known as _____ policy.

A) monetary
B) fiscal
C) antitrust
D) public

Answer 2

B

Question 3

The expenditures of the U.S. federal government that are required by law are known as _____ spending.

A) mandatory
B) required
C) involuntary
D) discretionary

Answer 3

A

Question 4

The amount of U.S. federal government spending that is chosen by the Congress and the president is known as _____ spending.

A) voluntary
B) mandatory
C) discretionary
D) pork-barrel

Question 5

A tax system in which low-income people pay a higher proportion of their income in taxes than high-income people is known as _____ tax system.

A) a progressive
B) a fair
C) an unfair
D) a regressive

Question 6

Because low-income people spend a _____ proportion of their income in buying goods and services than high-income people, a sales tax is a _____ tax.

A) lower; regressive
B) higher; progressive
C) higher; regressive
D) lower; progressive

Question 7

A tax system in which high-income people pay a higher proportion of their income in taxes than low-income people is known as ______ tax system.

A) a regressive
B) an efficient
C) a progressive
D) an inefficient

Question 8

In one economy, low-income people pay 10 percent of their income in taxes, and high-income people pay 18 percent of their income in taxes. This economy has a _____ tax system.

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

Question 9

In one economy, both low-income and high-income people pay 10 percent of their income in taxes. In this case, the economy has a _____ tax system.

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

Question 10

A tax system in which everyone pays the same proportion of his or her income in taxes is called a _____ tax system.

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

Question 11

An economy's total government debt at the end of 2017 is $10 trillion. In 2018, the government spends $2 trillion, and its tax revenue is $1 trillion. What will be the government debt at the end of 2018?

A) $1 trillion
B) $11 trillion
C) $9 trillion
D) $10 trillion

Question 12

An economy's total government debt at the end of 2017 is $10 trillion. In 2018, the government spends $2 trillion, and its debt at the end of 2018 is $9 trillion. How much revenue did the government collect in taxes in 2018?

A) $1 trillion
B) $2 trillion
C) $3 trillion
D) $4 trillion

Question 13

An economy's total government debt at the end of 2017 is $10 trillion. In 2018, the government collects $2 trillion in tax revenue. If the government debt at the end of 2018 is $11 trillion, then how much did the government spend in 2018?

A) $1 trillion
B) $2 trillion
C) $3 trillion
D) $4 trillion

Question 14

Which of these statements is true?

A) If the government spending is less than the total tax revenue, then the government has no debt.
B) If the government spending is less than the total tax revenue, then the government debt increases.
C) If the government spending is less than the total tax revenue, then the government has a budget surplus.
D) If the government spending is less than the total tax revenue, then the government has a budget deficit.

Question 15

If the government spending is _____ than the tax revenue, then the government has a budget surplus. In this case, the overall debt of the government will:

A) less; increase.
B) less; decrease.
C) more; increase.
D) more; decrease.

Question 16

If government spending is less than the tax revenue, then the government has a budget _____. In this case, the overall debt of the government will:

A) deficit; increase.
B) deficit; decrease.
C) surplus; increase.
D) surplus; decrease.

Question 17

If government spending is greater than the tax revenue, then the government has a budget _____. In this case, the overall debt of the government will:

A) deficit; increase.
B) deficit; decrease.
C) surplus; increase.
D) surplus; decrease.

Question 18

If government spending is _____ than the tax revenue, then the government is running a budget deficit. In this case, the overall debt of the government will:

A) less; increase.
B) less; decrease.
C) more; increase.
D) more; decrease.

Question 19

Suppose that the total debt of the U.S. federal government at the end of 2017 was $19 trillion. In 2018, the government spends $3.2 trillion and collects $2.2 trillion in taxes. What will be the total debt at the end of 2018?

A) $1 trillion
B) $18 trillion
C) $19 trillion
D) $20 trillion

Question 20

Suppose that the total debt of the U.S federal government at the end of 2016 was $18 trillion and during 2017 the government runs a budget deficit of $1.5 trillion. The tax revenue of the government was _____ than spending, and the debt at the end of 2017 was:

A) less; $16.5 trillion.
B) less; $19.5 trillion.
C) more; $16.5 trillion.
D) more; $19.5 trillion.

Question 21

Which one of the following statements is NOT true?

A) According to classical theory, wages and prices are flexible, so an economy can recover quickly from a downturn without government intervention.
B) According to Say's law, if there are no savings, taxes, or imports, there will always be enough demand in the economy to prevent a downturn.
C) According to Keynesian theory, wages and prices are sticky, so an economy may not be able to recover quickly from a downturn without government intervention.
D) According to monetarist theory, controlling the growth of money is the key to preventing stagflation.

Question 22

Which of the following is NOT a feature of Keynesian theory?

A) Wages and prices are sticky.
B) The interest rate is the key driver of investment demand.
C) Individuals sometimes have an irrational desire to hold cash.
D) Adjustments in the interest rate may not equalize saving and investment.

Question 23

According to monetarist theory, inflation is a result of:

A) too much demand for goods and services in the economy.
B) a lack of supply of goods and services in the economy.
C) too much supply of money in the economy.
D) a lack of supply of money in the economy.

Question 24

Stagflation refers to inflation and stagnant:

A) real GDP.
B) nominal GDP.
C) interest rate.
D) price level.

Question 25

A combination of stagnant real GDP and inflation is known as:

A) recession.
B) stagnation.
C) disinflation.
D) stagflation.

Question 26

Which of the following statements is true?

A) According to Keynesian theory, prices and wages are flexible.
B) According to Say's law, supply creates its own demand.
C) According to monetarist theory, stagflation results from a lack of aggregate demand.
D) According to classical theory, prices and wages are sticky.

Question 27

There is a widespread agreement among economists that:

A) both monetary and fiscal policy can be used to keep unemployment below its natural rate in the long run.
B) only fiscal policy can be used to keep the unemployment rate below its natural rate in the long run.
C) only monetary policy can be used to keep unemployment rate below its natural rate in the long run.
D) neither fiscal nor monetary policy can be used to keep unemployment below its natural rate in the long run.

Question 28

Most economists agree that an expansionary fiscal policy increases _____, thereby shifting the curve:

A) aggregate demand; left.
B) aggregate demand; right.
C) aggregate supply; left.
D) aggregate supply; right.

Question 29

Which of the following statements is true?

A) Monetary and fiscal policy can be used to affect unemployment rate in the short run but not in the long run.
B) Monetary policy can be used to affect unemployment rate in the short run, and fiscal policy can be used to affect unemployment in the long run.
C) Fiscal policy can be used to affect unemployment rate in the short run, and whole monetary policy can be used to affect the unemployment in the long run.
D) Both monetary and fiscal policy can be used to affect the unemployment rate in the short run and the long run.

Question 30

If the full employment level of output for an economy is 1,000 units and it is currently producing 900 units, then there is _____ gap, and _____ fiscal policy can be used to close the gap.

A) an inflationary; expansionary
B) an inflationary; contractionary
C) a recessionary; expansionary
D) a recessionary; contractionary

Question 31

If the full employment level of output for an economy is 1,000 units and it is currently producing 900 units, then there is _____ gap, and the government can _____ spending to close the gap.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 32

If the full employment level of output for an economy is 1,000 units and it is currently producing 900 units, then there is _____ gap, and the government can _____ taxes to close the gap.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 33

If the full employment level of output for an economy is 1,000 units and it is currently producing 900 units, then there is _____ gap, and the government can _____ transfer payments to bring the output back to its full employment level.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 34

If there is a recessionary gap in the economy, then it is producing _____ than its full employment level of output, and the government can follow _____ fiscal policy to close the gap.

A) less; an expansionary
B) more; an expansionary
C) less; a contractionary
D) more; a contractionary

Question 35

If there is a recessionary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ taxes to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 36

If there is a recessionary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ spending to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 37

If there is a recessionary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ transfer payments to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 38

Because government spending has _____ effect on aggregate demand, changing government spending has a _____ impact on output compared to a change in taxes.

A) an indirect; larger
B) a direct; larger
C) an indirect; smaller
D) a direct; smaller

Question 39

If the full employment level of output for an economy is 1,000 units and it is currently producing 1,100 units, then there is _____ gap, and _____ fiscal policy can be used to close this gap.

A) an inflationary; an expansionary
B) an inflationary; a contractionary
C) a recessionary; an expansionary
D) a recessionary; a contractionary

Question 40

If the full employment level of output for an economy is 1,000 units and it is currently producing 1,100 units, then there is _____ gap, and the government can _____ spending to close this gap.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 41

If the full employment level of output for an economy is 1,000 units and it is currently producing 1,100 units, then there is _____ gap, and the government can _____ taxes to close this gap.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 42

If the full employment level of output for an economy is 1,000 units and it is currently producing 1,100 units, then there is _____ gap, and the government can _____ transfer payments to close the gap.

A) an inflationary; decrease
B) an inflationary; increase
C) a recessionary; decrease
D) a recessionary; increase

Question 43

If there is an inflationary gap in the economy, then it is producing _____ than its full employment level of output, and the government can follow _____ fiscal policy to close the gap.

A) less; an expansionary
B) more; an expansionary
C) less; a contractionary
D) more; a contractionary

Question 44

If there is an inflationary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ taxes to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 45

If there is an inflationary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ spending to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 46

If there is an inflationary gap in the economy, then it is producing _____ than its full employment level of output, and the government can _____ transfer payments to close the gap.

A) more; decrease
B) more; increase
C) less; decrease
D) less; increase

Question 47

The built-in tax and transfer-payment policies that dampen fluctuations in economic activity are known as:

A) forward guidance.
B) monetary policies.
C) quantitative easing.
D) automatic stabilizers.

Question 48

During an expansion, the income tax paid by people _____, and transfer payments in the form of unemployment insurance:

A) increases; increases.
B) increases; decreases.
C) decreases; increases.
D) decreases; decreases.

Question 49

During a recession, the income tax paid by people _____, and transfer payments in the form of unemployment insurance:

A) increases; increases.
B) increases; decreases.
C) decreases; increases.
D) decreases; decreases.

Question 50

Which of the following statements is NOT true?

A) All else equal, during a recession the presence of automatic stabilizers makes the fiscal policy expansionary.
B) All else equal, during an expansion the presence of automatic stabilizers makes the fiscal policy contractionary.
C) All else equal, during a recession, the presence of automatic stabilizers decreases the budget deficit of the government.
D) All else equal, during an expansion, the presence of automatic stabilizers decreases the debt of the government.

Question 51

The delay between the onset of a problem and the realization that it exists is known as _____ lag.

A) a realization
B) a recognition
C) an outside
D) an implementation

Question 52

The delay between a change in policy in response to a recession and the resulting effect on the economy is known as the _____ lag.

A) effect
B) inside
C) outside
D) implementation

Question 53

The delay between the recognition that the economy is in a recession and the implementation of a policy response is known as the _____ lag.

A) outside
B) recognition
C) execution
D) implementation

Question 54

Which one of these is not a lag associated with the timing of fiscal policy action?

A) outside lag
B) implementation lag
C) recognition lag
D) execution lag

Question 55

_____ lag refers to the delay between the recognition that an economy is in a recession and the implementation of a policy response, and _____ lag is the delay between the policy change and the resulting effect.

A) Recognition; implementation
B) Implementation; outside
C) Outside; implementation
D) Recognition; outside

Question 56

_____ lag refers to the delay that occurs between when a recession begins and when the government recognizes it, and _____ lag refers to the delay between the policy change in response and the resulting effect.

A) Recognition; outside
B) Recognition; implementation
C) Outside; implementation
D) Implementation; outside

Question 57

An increase in the government spending that is financed though borrowing _____ the interest rate, which can lead to ______ in private investment.

A) increases; an increase
B) decreases; an increase
C) increases; a decrease
D) decreases; a decrease

Question 58

The decrease in private investment caused by increased government spending using borrowed funds is known as:

A) crowding-out.
B) interest rate effect.
C) substitution effect.
D) supply-side policy.

Question 59

If the government implements an expansionary fiscal policy using borrowing funds and there is complete crowding out, then private investment will _____, and the aggregate demand will:

A) remain unchanged; increase.
B) increase; remain unchanged.
C) remain unchanged; decrease.
D) decrease; remain unchanged.

Question 60

If the government implements an expansionary fiscal policy using borrowed funds and there is partial crowding out, then private investment will _____, and the aggregate demand will:

A) remain unchanged; increase.
B) decrease; increase.
C) increase; decrease.
D) decrease; remain unchanged.

Question 61

Supply-side fiscal policies focus on increasing output and decreasing inflation rate by _____ supply.

A) decreasing aggregate
B) increasing aggregate
C) decreasing money
D) increasing money

Question 62

Which of the following would constitute an expansionary supply-side fiscal policy?

A) increasing the money supply
B) increasing government spending
C) decreasing transfer payments
D) decreasing the tax on corporate profits

Question 63

Which of the following statements is true?

A) An increase in government spending is an example of supply-side fiscal policy.
B) An increase in the money supply is an example of expansionary supply-side fiscal policy.
C) A decrease in transfer payments is an example of expansionary supply-side fiscal policy.
D) A decrease in the tax on profit is an example of expansionary supply-side fiscal policy.

Question 64

All else equal, lowering income taxes _____ the disposable income of workers, which in turn incentivizes workers to work _____ hours.

A) increases; fewer
B) increases; more
C) decreases; fewer
D) decreases; more

Question 65

The inverted U-shaped relationship between tax rates and tax revenue is known as the _____ curve.

A) Keynesian
B) monetarist
C) Laffer
D) Friedman

Question 66

Because individuals are incentivized to work _____ when tax rates decrease, the Laffer curve suggests that _____ tax rates when they are very high can increase the tax revenue.

A) less; increasing
B) less; decreasing
C) more; increasing
D) more; decreasing

Question 67

Because individuals are incentivized to work more when tax rates _____, the Laffer curve suggests that _____ tax rates when they are very high can increase the tax revenue.

A) decreases lowering
B) decrease; raising
C) increase; lowering
D) increase; raising

Question 68

Which of the following taxes contributes the largest share to the federal government's tax revenue in the United States?

A) excise tax
B) corporate income tax
C) individual income tax
D) payroll tax

Question 69

The two largest contributors to the U.S federal government's tax revenue are the:

A) individual income tax and corporate income tax.
B) corporate income tax and payroll tax.
C) payroll tax and corporate income tax.
D) individual income tax and payroll tax.

Question 70

Which one of the following is NOT a part of the U.S federal government's mandatory spending?

A) military
B) social security
C) Medicare
D) Medicaid

Question 71

Which one of the following is NOT a part of the U.S federal government's discretionary spending?

A) military
B) social security
C) veterans' benefits
D) transportation

Question 72

If the government implements expansionary fiscal policy and there is _____ crowding out, then private investment will _____, and the aggregate demand will remain unchanged.

A) partial; rise
B) partial; fall
C) complete; rise
D) complete; fall

Question 73

If the government implements expansionary fiscal policy and there is _____ crowding out, then private investment will _____, and the aggregate demand will increase.

A) partial; rise
B) partial; fall
C) complete; rise
D) complete; fall

Question 74

Suppose that it takes two months for the government to implement expansionary fiscal policy after recognizing that the economy is in a recession. In this case, the two months is referred to as the _____ lag.

A) recognition
B) implementation
C) outside
D) execution

Question 75

Suppose that a recession begins on January 15, 2017, and that by the time the government receives the data on the economy and realizes that the economy is in a recession, it is March 15, 2017. In this case, the two months in between these two dates is known as the _____ lag.

A) recognition
B) implementation
C) outside
D) execution

Question 76

Suppose that it takes 40 days for the government to realize that it is in a recession. Further, it takes the government 42 days to implement an expansionary fiscal policy and an additional 30 days for the expansionary policy to show any effect. Given this, the recognition lag is _____ days, and the outside lag is _____ days.

A) 42; 70
B) 40; 30
C) 30; 72
D) 30; 40

Question 77

Suppose that it takes 40 days for the government to realize that it is in a recession. Further, it takes the government 42 days to implement an expansionary fiscal policy and an additional 30 days for the expansionary policy to show any effect. Given this, the implementation lag is _____ days, and the outside lag is _____ days.

A) 42; 70
B) 40; 30
C) 30; 72
D) 42; 30

Question 78

Suppose that it takes 40 days for the government to realize that it is in a recession. Further, it takes the government 42 days to implement an expansionary fiscal policy and an additional 30 days for the expansionary policy to show any effect. Given this, the recognition lag is _____ days, and the implementation lag is _____ days.

A) 42; 70
B) 40; 30
C) 40; 42
D) 82; 30

Question 79

All else equal, the presence of automatic stabilizers implies that budget deficits will _____ during recessions and _____ during expansions.

A) increase; remain unchanged
B) increase; decrease
C) decrease; increase
D) remain unchanged; increase

Question 80

If the short-run aggregate supply curve intersects the aggregate demand curve to the left of the long-run aggregate supply curve, then the economy has _____ gap, and the government can close the gap using _____ fiscal policy.

A) an inflationary; an expansionary
B) a recessionary; an expansionary
C) an inflationary; a contractionary
D) a recessionary; a contractionary