Deck 13: Fiscal Policy

Question 1

Consumer spending will likely rise if:

A) government transfers rise.
B) the government raises tax rates.
C) government transfers fall.
D) the government raises tax rates or government transfers fall.

Answer 1

government transfers rise.

Question 2

A change in taxes or a change in government transfers affects consumption through its effect on:

A) autonomous consumption.
B) the marginal propensity to save.
C) disposable income.
D) government spending.

Answer 2

disposable income.

Question 3

Sources of provincial and municipal revenues do NOT include:

A) social insurance taxes.
B) property taxes.
C) sales taxes.
D) income taxes.

Answer 3

social insurance taxes.

Question 4

Which example does NOT illustrate government transfers?

A) provincial government prescription drug programmes for low-income individuals
B) unemployment insurance
C) an Old Age Security (OAS)pension
D) a reimbursement of personal income tax withheld from wages

Question 5

Spending for purchases of goods and services accounts for approximately _____% of federal spending.

A) 22
B) 33
C) 28
D) 46

Question 6

Which example does NOT illustrate government purchases of goods and services?

A) a crown prosecutor's salary
B) new pavement for highway 40 in Quebec
C) a surgeon's bill reimbursed under the Medicare programme
D) equipping Canadian mounties with electroshock weapons

Question 7

Social insurance programmes are:

A) government programmes intended to protect families against economic hardships.
B) private insurance policies to protect families from hardships caused by government actions.
C) private insurance policies that cover gaps in government-provided health care.
D) programmes to help unemployed people have a social life.

Question 8

Which type of payment is NOT a government transfer payment?

A) salaries paid to federal ministers of parliament
B) Old Age Security
C) Medicare
D) Guaranteed Income Supplement

Question 9

If the actual output lies below potential output,then an appropriate fiscal policy would be to _____,which will shift the _____ curve to the _____.

A) increase government purchases;AD;left
B) increase transfer payments;AS;right
C) increase tax rates;AD;right
D) increase government purchases;AD;right

Question 10

The LARGEST source of federal tax revenues is:

A) property taxes.
B) personal income taxes.
C) social contributions.
D) sales taxes.

Question 11

The federal government's LARGEST source of revenue is:

A) property taxes.
B) personal income and corporate profit taxes.
C) sales taxes.
D) social insurance taxes.

Question 12

Consumer spending will likely fall if:

A) government transfers rise.
B) the government raises tax rates.
C) the government lowers tax rates.
D) government transfers rise or tax rates are lowered.

Question 13

Which factor is NOT a tool of fiscal policy?

A) changing tax rates
B) government transfers
C) government purchases of goods and services
D) changes in the money supply

Question 14

Which factor is a government transfer?

A) wages paid to Canadian senators
B) purchases of tanks for the army
C) Guaranteed Income Supplement (GIS)payments to retired auto workers
D) payments to contractors for repairs on highways

Question 15

Medicare and social insurance programmes are examples of:

A) unilateral payments.
B) transfer payments.
C) monetary policy.
D) taxes.

Question 16

Sources of federal tax revenue do NOT include:

A) the personal income tax.
B) property taxes.
C) social insurance taxes.
D) the corporate profits tax.

Question 17

Suppose that the economy is in a recessionary gap.To move equilibrium aggregate output closer to the level of potential output,the BEST fiscal policy option is to:

A) decrease government purchases.
B) decrease taxes.
C) decrease government transfers.
D) increase real interest rates.

Question 18

Which source of tax revenue is the LARGEST one for the Canadian federal government?

A) personal income taxes
B) property taxes
C) sales taxes
D) social insurance taxes

Question 19

The basic equation of national income accounting is GDP = C + I + G + X - IM.When the government uses fiscal policy to make changes to taxes and transfers,this policy primarily affects:

A) IM.
B) I.
C) C.
D) X.

Question 20

Government payments to households for which no good or service is provided in return are called:

A) transfer payments.
B) government purchases.
C) consumption expenditures.
D) investment expenditures.

Question 21

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium)Refer to Figure: Short- and Long-Run Equilibrium.If the economy is at equilibrium at E₁,the appropriate policy to return the economy to potential output is a(n):

A) increase in transfer payments.
B) decrease in transfer payments.
C) increase in taxes.
D) decrease in government spending.

Question 22

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium II)Refer to Figure: Short- and Long-Run Equilibrium II.If the economy is at equilibrium at E₁,the government should use the _____ fiscal policy to shift the aggregate demand curve to the _____.

A) expansionary;right
B) expansionary;left
C) contractionary;right
D) contractionary;left

Question 23

Use the following to answer questions:
(Figure: Short-Run Equilibrium)Refer to Figure: Short-Run Equilibrium.If the economy is at equilibrium at Y₁ and P₁,it is in a(n):

A) recessionary gap.
B) inflationary gap.
C) high level of unemployment.
D) liquidity trap.

Question 24

Suppose that the economy is in an inflationary gap.To move equilibrium aggregate output closer to the level of potential output,the BEST fiscal policy option is to:

A) lower tax rates.
B) decrease government purchases.
C) increase the investment tax credit.
D) lower the real interest rate.

Question 25

Use the following to answer questions:
Which factor is an expansionary fiscal policy?

A) an increase in the money supply that decreases interest rates
B) an increase in taxes that reduces the budget deficit and decreases consumption
C) a decrease in government spending
D) an increase in employment insurance benefits

Question 26

Use the following to answer questions:
(Figure: Short-Run Equilibrium)Refer to Figure: Short-Run Equilibrium.If the economy is at equilibrium at Y₁ and P₁,the government should use the _____ fiscal policy to shift the aggregate demand curve to the _____.

A) expansionary;right
B) expansionary;left
C) contractionary;right
D) contractionary;left

Question 27

Use the following to answer questions:
(Figure: Short-Run Equilibrium)Refer to Figure: Short-Run Equilibrium.Appropriate fiscal policy action is:

A) a decrease in transfer payments.
B) an increase in government purchases.
C) a decrease in tax rates.
D) an increase in transfer payments.

Question 28

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium)Refer to Figure: Short- and Long-Run Equilibrium.If the economy is at equilibrium at E₁,it is in a(n):

A) recessionary gap.
B) inflationary gap.
C) low level of unemployment.
D) liquidity trap.

Question 29

Use the following to answer questions:
Expansionary fiscal policy:

A) increases long-run aggregate supply.
B) decreases long-run aggregate supply.
C) increases aggregate demand.
D) decreases aggregate demand.

Question 30

Use the following to answer questions:
If overall spending declines and thus the economy contracts,the government could counter this by:

A) raising tax rates.
B) decreasing government transfers.
C) increasing government spending.
D) decreasing government spending.

Question 31

Use the following to answer questions:
If the economy is at equilibrium above potential output,there is a(n)_____ gap,and a(n)_____ fiscal policy is appropriate.

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

Question 32

If the current equilibrium output lies above potential output,then an appropriate fiscal policy would be to _____,which will shift the AD curve to the _____.

A) decrease government purchases;right
B) increase government purchases;left
C) decrease government purchases;left
D) raise tax rates;right

Question 33

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium II)Refer to Figure: Short- and Long-Run Equilibrium II.Which action would be the appropriate response on the part of the government upon viewing the state of the economy?

A) Increase government spending to close the recessionary gap.
B) Decrease government spending to close the recessionary gap.
C) Lower tax rates to close the inflationary gap.
D) Raise tax rates to close the inflationary gap.

Question 34

Use the following to answer questions:
If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence,the appropriate fiscal policy is:

A) a decrease in government transfers.
B) an increase in government spending.
C) a decrease in government spending.
D) an increase in the money supply to decrease interest rates.

Question 35

Use the following to answer questions:
(Figure: Short-Run Equilibrium)Refer to Figure: Short-Run Equilibrium.It reflects a short-run inflationary gap.According to the labeling on the graph,the size of the inflationary gap is equal to:

A) P₂ - P₁.
B) Y₁ - Y_P.
C) P₂ - P₀.
D) P₁ - P₀.

Question 36

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium)Refer to Figure: Short- and Long-Run Equilibrium.If the economy is at equilibrium at E₁,the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

A) expansionary;right
B) expansionary;left
C) contractionary;right
D) contractionary;left

Question 37

Use the following to answer questions:
If the economy is at equilibrium below potential output,there is a(n)_____ gap,and a(n)_____ fiscal policy is appropriate.

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

Question 38

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium)Refer to Figure: Short- and Long-Run Equilibrium.The government should _____ aggregate demand by _____ taxes to close the _____ gap.

A) expand;increasing;inflationary
B) reduce;cutting;inflationary
C) expand;cutting;recessionary
D) reduce;increasing;recessionary

Question 39

Use the following to answer questions:
(Figure: Short-Run Equilibrium)Refer to Figure: Short-Run Equilibrium.If the economy is at equilibrium at Y₁ and P₁,the appropriate policy to return the economy to potential output would be a(n):

A) increase in transfer payments.
B) increase in government spending.
C) increase in taxes.
D) decrease in taxes.

Question 40

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium II)Refer to Figure: Short- and Long-Run Equilibrium II.If the economy is at equilibrium at E₁,it is in a(n):

A) recessionary gap.
B) inflationary gap.
C) high level of unemployment.
D) liquidity trap.

Question 41

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.Which equation measures a recessionary gap?

A) Y₃ - Y₁
B) Y₃ - Y₂
C) Y₂ - Y₁
D) Y₃ - Y₀

Question 42

Use the following to answer questions:
(Figure: Fiscal Policy I)Refer to Figure: Fiscal Policy I.Suppose that this economy is in equilibrium at E₂.If there is a decrease in government purchases,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 43

Use the following to answer questions:
(Figure: Fiscal Policy I)Refer to Figure: Fiscal Policy I.Suppose that this economy is in equilibrium at E₂.If there is an increase in taxes _____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 44

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.At E₁,the economy:

A) is in a long-run equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) has low unemployment.

Question 45

An increase in government transfers is an example of the _____ fiscal policy because it shifts the aggregate demand curve to the _____ aggregate output.

A) expansionary;left,increasing
B) contractionary;left,decreasing
C) expansionary;right,increasing
D) contractionary;right,decreasing

Question 46

To close a recessionary gap with fiscal policy,the government could:

A) increase national savings so that the interest rate falls.
B) lower the annual income exempt from paying the personal income tax.
C) lower the corporate income tax rate.
D) lower the amount of unemployment insurance benefits.

Question 47

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.A movement from AD₃ to AD₁ could be caused by:

A) increased government purchases.
B) increased government transfers.
C) higher tax rates.
D) lower tax rates.

Question 48

Use the following to answer questions:
(Figure: Fiscal Policy I)Refer to Figure: Fiscal Policy I.Suppose that this economy is in equilibrium at E₁.If there is an increase in government purchases,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 49

Use the following to answer questions:
A government might want to increase aggregate demand to:

A) close an inflationary gap.
B) close a recessionary gap.
C) reduce prices.
D) reduce employment.

Question 50

Contractionary fiscal policy includes:

A) increasing government purchases.
B) increasing government transfers.
C) raising tax rates.
D) decreasing money growth.

Question 51

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.At E₃,the economy:

A) is in a long-run equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) is stagnating.

Question 52

A reduction in government transfers _____,thereby shifting the aggregate demand curve to the _____.

A) increases Canadian costs to companies,increasing investment;left
B) decreases government purchases of goods and services,decreasing consumption;right
C) increases the marginal propensity to save,decreasing consumption;right
D) decreases disposable income and consumption;left

Question 53

A cut in taxes _____,shifting the aggregate demand curve to the _____.

A) decreases government transfers and consumption;right
B) increases disposable income and consumption;right
C) decreases the marginal propensity to save,increasing consumption;left
D) increases corporate profits and investment;left

Question 54

Use the following to answer questions:
An inflationary gap occurs when:

A) prices are too low.
B) real output is too low.
C) potential output exceeds actual output.
D) actual output exceeds potential output.

Question 55

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.A movement from AD₁ to AD₃ could be caused by:

A) increased government purchases.
B) decreased government transfers.
C) higher tax rates.
D) decreased government purchases.

Question 56

To close an inflationary gap with fiscal policy,the government could:

A) reduce budget allocations to highway maintenance.
B) increase provincial transfer payments to universities.
C) lower the corporate income tax rate.
D) raise the average amount awarded for a disability pension.

Question 57

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.At E₂,the economy:

A) is in a long-run equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) has high unemployment.

Question 58

Use the following to answer questions:
(Figure: Short- and Long-Run Equilibrium II)Refer to Figure: Short- and Long-Run Equilibrium II.If the economy is at equilibrium at E₁,the appropriate policy to return the economy to potential output would be a(n):

A) increase in government spending.
B) decrease in government spending.
C) increase in transfer payments.
D) decrease in taxes.

Question 59

Use the following to answer questions:
(Figure: Inflationary and Recessionary Gaps)Refer to Figure: Inflationary and Recessionary Gaps.Which equation measures an inflationary gap?

A) Y₃ - Y₁
B) Y₃ - Y₂
C) Y₂ - Y₁
D) Y₃ - Y₀

Question 60

Use the following to answer questions:
(Figure: Fiscal Policy I)Refer to Figure: Fiscal Policy I.Suppose that this economy is in equilibrium at E₁.If there is a decrease in taxes,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 61

A recessionary gap can be closed with:

A) contractionary monetary policy.
B) an increase in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.

Question 62

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₂.If there is an increase in government transfers,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;right;increase;increase
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;left;decrease;decrease

Question 63

An expansionary fiscal policy either _____ government spending or _____ taxes.

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

Question 64

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₁.If there is a decrease in government purchases,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;left;decrease;decrease

Question 65

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₂.If there is a decrease in government transfers,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;left;decrease;decrease

Question 66

Use the following to answer questions:
Contractionary fiscal policy includes:

A) decreasing taxes.
B) decreasing the money supply.
C) decreasing government expenditures.
D) increasing government expenditures.

Question 67

Use the following to answer questions:
Expansionary fiscal policy includes:

A) decreasing taxes.
B) increasing taxes.
C) increasing the money supply.
D) decreasing government expenditures.

Question 68

An inflationary gap can be closed with:

A) expansionary monetary policy.
B) a decrease in taxes.
C) a decrease in government purchases.
D) expansionary fiscal policy.

Question 69

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₁.If there is a decrease in taxes,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₁;right;increase;increase
B) AD₁;left;decrease;decrease
C) AD₂;right;increase;increase
D) AD₂;right;decrease;increase

Question 70

A contractionary fiscal policy:

A) decreases a government budget deficit or increases a government budget surplus.
B) may include increases in government spending.
C) may include reductions in taxes.
D) may include discretionary increases in transfer payments.

Question 71

Use the following to answer questions:
Contractionary fiscal policy includes:

A) decreasing taxes.
B) increasing taxes.
C) increasing the money supply.
D) increasing government expenditures.

Question 72

An expansionary fiscal policy:

A) usually decreases a government budget deficit or increases a government budget surplus.
B) may include decreases in government spending.
C) may include increases in taxes.
D) may include decreases in taxes.

Question 73

Use the following to answer questions:
Expansionary fiscal policy includes:

A) increasing taxes.
B) increasing the money supply.
C) decreasing government expenditures.
D) increasing government expenditures.

Question 74

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₁.If there is a decrease in government transfers,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;left;decrease;decrease

Question 75

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₁.If there is an increase in government purchases,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;left;increase;decrease
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 76

A contractionary fiscal policy either _____ government spending or _____ taxes.

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

Question 77

Use the following to answer questions:
(Figure: Fiscal Policy II)Refer to Figure: Fiscal Policy II.Suppose that this economy is in equilibrium at E₁.If there is an increase in taxes,_____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₁;left;increase;decrease
B) AD₁;left;decrease;decrease
C) AD₂;right;increase;increase
D) AD₂;right;decrease;increase

Question 78

Use the following to answer questions:
Fiscal policy that decreases aggregate demand is:

A) balanced.
B) supplemental.
C) contractionary.
D) expansionary.

Question 79

Use the following to answer questions:
(Figure: Fiscal Policy I)Refer to Figure: Fiscal Policy I.Suppose that this economy is in equilibrium at E₂.If there is an increase in government transfers _____ will shift to the _____,causing a(n)_____ in the price level and a(n)_____ in real GDP.

A) AD₂;right;increase;increase
B) AD₂;left;decrease;decrease
C) AD₁;right;increase;increase
D) AD₁;right;decrease;increase

Question 80

Use the following to answer questions:
Fiscal policy that increases aggregate demand is:

A) balanced.
B) supplemental.
C) contractionary.
D) expansionary.