Question 1

According to the Keynesian view, if policy makers thought the economy was about to enter an inflationary boom, which of the following would be most appropriate?
A)a tax increase
B)a planned increase in the budget deficit
C)an increase government expenditures
D)a tax decrease

Accepted Answer

According to the Keynesian view, if policy makers believed that the economy was about to enter an inflationary boom, they would implement policies to reduce aggregate demand. One such policy would be a tax increase, which would lead to a reduction in disposable income and a decrease in consumer spending. This reduction in spending would lead to a decrease in aggregate demand and would help to slow down the economy, preventing inflation from taking hold.

Question 2

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
A)a change in government spending and taxation that will lead to a budget surplus
B)a planned increase in the budget deficit
C)reducing government expenditures
D)balancing the budget

Accepted Answer

Keynesian economics advocates for government intervention in times of economic downturns, so a planned increase in the budget deficit would be the most appropriate to stimulate aggregate demand and boost economic growth. A budget surplus (choice A) would reduce spending and have a contractionary effect on the economy, while reducing government expenditures (choice C) would also have a similar effect. Balancing the budget (choice D) may be desirable in the long run, but in the short run, it may worsen a recession by reducing government spending.

Question 3

When an economy expands into an economic boom, automatic stabilizers will tend to
A)enlarge the budget deficit (or reduce the surplus).
B)reduce the budget deficit (or increase the surplus).
C)ensure that the budget will remain in balance.
D)reduce the supply of money and, thereby, retard aggregate demand.

Accepted Answer

The answer of When an economy expands into an economic...

Question 4

Unemployment compensation payments
A)rise during a recession and thereby help stimulate consumption.
B)rise during a recession and thereby retard consumption.
C)rise during economic expansion and thereby help stimulate consumption.
D)rise during economic expansion and thereby retard consumption.

Accepted Answer

Unemployment compensation payments rise during a recession because more people lose their jobs and file for these payments to sustain their consumption. This, in turn, helps stimulate consumption as people have more money to spend on basic necessities.

Question 5

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?
A)Congress provides $90 billion in relief aid for hurricane victims.
B)Congress appropriates $50 billion to help the needy, and the appropriation is financed by a tax on wealth.
C)Income tax receipts are smaller because of a decline in real GDP during a recession.
D)Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession.

Accepted Answer

Discretionary countercyclical fiscal policy refers to deliberate actions taken by the government to stabilize the economy during periods of recession or inflation. Choice D, passing a bill authorizing additional spending in response to a deepening recession, best illustrates the use of discretionary countercyclical fiscal policy as it involves a deliberate action taken by Congress to stimulate the economy during a downturn. Choices A and B involve government spending, but they do not necessarily involve countercyclical policy, as they may simply represent government aid or welfare programs that are not directly aimed at stabilizing the economy. Choice C refers to automatic stabilizers, which operate without deliberate government action, and therefore do not qualify as discretionary countercyclical policy.

Question 6

According to the Keynesian view, if an economy was operating at long-run equilibrium, an increase in government expenditures (holding taxes constant) would
A)be inflationary.
B)lead to a recession.
C)lower the real rate of interest.
D)reduce the size of the national debt.

Accepted Answer

The answer of According to the Keynesian view, if an...

Question 7

Which of the following is a major deficiency of fiscal policy as a stabilization tool?
A)Congress is reluctant to make changes in either taxes or expenditures.
B)The Constitution requires the president to submit and Congress to pass a balanced budget.
C)Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly.
D)A change in fiscal policy exerts major effects on the economy quickly.

Accepted Answer

Fiscal policy decisions are subject to both political and economic considerations that are likely to impede the proper timing and effectiveness of the policy. Political factors, such as the reluctance of Congress to make changes in taxes or expenditures, can delay policy changes. Economic factors, such as the time it takes for changes in fiscal policy to take effect in the economy, can further complicate the process. As a result, it can be challenging to use fiscal policy as a precise stabilization tool.

Question 8

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?
A)a decrease in tax rates
B)an increase in tax rates
C)a reduction in government expenditures
D)a budget surplus

Accepted Answer

According to the Keynesian view, a decrease in tax rates would stimulate real output in a recession by providing individuals and businesses with more disposable income, which they can spend or invest, thereby increasing aggregate demand and boosting economic activity.

Question 9

The optimal time for the implementation of restrictive fiscal policy would be
A)before inflation accelerated.
B)after inflation accelerated.
C)during a recession.
D)after the price level had risen significantly.

Accepted Answer

Implementing restrictive fiscal policy before inflation accelerates can help prevent inflation from reaching a higher level. This is because restrictive fiscal policy, such as raising taxes or reducing government spending, can reduce aggregate demand and slow down economic growth, which can help put downward pressure on prices. Waiting until after inflation has already accelerated may require more severe measures that can have a larger impact on the economy and potentially cause a recession.

Question 10

Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?
A)The rate of inflation would decline.
B)The rate of inflation would rise.
C)A recession would develop.
D)Interest rates would fall.

Accepted Answer

In the Keynesian model, during a period of full employment, any increase in government spending would lead to an increase in aggregate demand. This, in turn, would lead to an increase in prices and the rate of inflation. Therefore, the most likely outcome of increasing government spending during a period of full employment would be a rise in the rate of inflation.

Question 11

Which of the following is an example of an automatic stabilizer?
A)Congress legislates lower tax rates to increase consumption and investment.
B)Tax rates are increased during a recession to maintain a balanced budget.
C)A regressive income tax system reduces tax revenues (as a share of income) as income expands.
D)Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted.

Accepted Answer

An automatic stabilizer is a feature of the economy that helps to stabilize economic fluctuations without any additional intervention from the government. The fluctuation in revenues from the corporate income tax is an example of an automatic stabilizer as it helps to stabilize the economy by increasing during a business boom and decreasing during a recession without any additional legislative action.

Question 12

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that
A)only discretionary fiscal policy can stimulate the economy.
B)only automatic stabilizers can stimulate the economy.
C)discretionary fiscal policy, once adopted, is built into the structure of the economy.
D)automatic stabilizers, once adopted, are built into the structure of the economy.

Accepted Answer

Discretionary fiscal policy involves deliberate government action in the form of changes to government spending and/or taxation to stabilize the economy. It is not built into the structure of the economy and requires a conscious decision by policymakers to undertake it. On the other hand, automatic stabilizers are features of the economy that automatically help stabilize output and employment without explicit government action. Examples of automatic stabilizers include progressive income taxes, unemployment benefits, and corporate profits taxes. Once adopted, they are built into the structure of the economy and operate automatically in response to changes in economic conditions. Therefore, the best answer is D.

Question 13

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?
A)a tax cut
B)a budget deficit
C)a budget surplus
D)an increase in the money supply

Accepted Answer

According to the Keynesian model, during a period of rapid inflation, the most appropriate policy is to enact a budget surplus. This is because a budget surplus will reduce the amount of money in circulation, thus reducing aggregate demand and lowering prices. A tax cut or increase in the money supply would further stimulate demand and exacerbate inflation. A budget deficit would also increase demand and potentially worsen inflation.

Question 14

If an economy is experiencing both full employment and price stability, within the Keynesian model, a major tax reduction probably would cause
A)an increase in unemployment in the near future.
B)an increase in the general level of prices unless government expenditures are also reduced.
C)an increase in the interest rate since individuals will reduce their savings in response to the tax cut.
D)a decrease in consumption unless the expected budget deficit is financed by selling bonds to foreigners.

Accepted Answer

According to the Keynesian model, a major tax reduction in an economy experiencing both full employment and price stability is likely to cause an increase in the general level of prices unless government expenditures are also reduced. This is because the increase in disposable income resulting from the tax cut will lead to an increase in consumption which, in turn, increases aggregate demand, leading to an increase in prices. To prevent this, the government would need to reduce its expenditures to offset the increase in consumption resulting from the tax cut, in order to maintain price stability.

Question 15

When an economy dips into recession, automatic stabilizers will tend to
A)enlarge the budget deficit (or reduce the surplus).
B)reduce the budget deficit (or increase the surplus).
C)ensure that the budget remains in balance.
D)expand the supply of money and, thereby, stimulate aggregate demand.

Accepted Answer

Automatic stabilizers, such as unemployment benefits and progressive income taxes, are designed to kick in during recessions and provide a cushion of support for households and businesses. This increased spending and decreased tax revenue will enlarge the budget deficit (or reduce the surplus).

Question 16

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should
A)increase the budget deficit.
B)increase government spending and hold taxes constant.
C)decrease government spending and/or raise taxes.
D)hold government spending constant and decrease taxes.

Accepted Answer

According to the Keynesian view, if an inflationary boom is about to begin, policy makers should decrease government spending and/or raise taxes in order to cool off the economy and prevent inflation. This is because the increase in demand caused by the boom will lead to an increase in prices due to shortages of goods and services, which will exacerbate inflation. By decreasing government spending and/or raising taxes, there will be a decrease in demand and inflationary pressures will be reduced.

Question 17

Keynesian analysis suggests that a planned budget surplus
A)will affect aggregate demand only if the money supply decreases by the size of the surplus.
B)will stimulate both consumption and income.
C)will stimulate output and employment.
D)is proper during periods of inflation but may increase unemployment if timed improperly.

Accepted Answer

Keynesian analysis suggests that a planned budget surplus may increase unemployment if timed improperly because it would reduce aggregate demand and could lead to a decrease in output and employment. However, it is considered proper during periods of inflation as it can help to reduce inflationary pressures. Option A is incorrect because even if the money supply decreases by the size of the surplus, it will not necessarily affect aggregate demand. Options B and C are incorrect because a planned budget surplus is likely to reduce consumption and output, not stimulate them.

Question 18

Automatic stabilizers will shift the government budget toward
A)a surplus during both expansions and contractions.
B)a deficit during both expansions and contractions.
C)a surplus during an expansion and a deficit during a contraction.
D)a surplus during a contraction and a deficit during an expansion.

Accepted Answer

Automatic stabilizers are designed to dampen the effects of business cycles on the economy. During an expansionary phase, automatic stabilizers will tend to increase tax revenues and decrease government spending, leading to a surplus in the government budget. Conversely, during a contractionary phase, automatic stabilizers will tend to decrease tax revenues and increase government spending, resulting in a deficit in the government budget. Therefore, the best choice is C, which states that automatic stabilizers will shift the government budget toward a surplus during an expansion and a deficit during a contraction.

Question 19

The main reason that the deficit grows in a recession is that
A)the government reacts quickly and adjusts taxes to compensate.
B)monetary policy that targets interest rates causes the costs of borrowing to fall.
C)the deficit causes the recession, and reducing the deficit cures the recession.
D)many forms of taxes act as automatic stabilizers.

Accepted Answer

Many forms of taxes, such as income taxes and corporate taxes act as automatic stabilizers during a recession. When economic activity slows, people and businesses earn less and therefore pay less in taxes, which automatically increases the deficit. Additionally, government spending often increases during a recession as a result of programs such as unemployment insurance and food assistance, further contributing to the deficit.

Question 20

In the midst of the Great Depression in 1932, Congress and the Hoover administration increased tax rates substantially. According to the Keynesian view, this tax increase was
A)inappropriate because it would depress economic activity and lead to further increases in unemployment.
B)appropriate because it would lead to a significant increase in the money supply and, thereby, increase employment.
C)inappropriate because it would decrease the money supply and, thereby, prolong the Depression.
D)appropriate because it would stimulate economic activity and help end the Depression.

Accepted Answer

According to the Keynesian view, tax increases during a recession are inappropriate because they decrease consumer spending power and investment, leading to further unemployment and depression. This is because during a recession, the government should increase spending and lower taxes to stimulate economic activity and increase employment, as per the Keynesian theory. Therefore, the tax increase in 1932 was deemed inappropriate by Keynesian economists.

Quiz 11: Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

According to the Keynesian view, if policy makers thought the economy was about to enter an inflationary boom, which of the following would be most appropriate?

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

When an economy expands into an economic boom, automatic stabilizers will tend to

Unemployment compensation payments

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

According to the Keynesian view, if an economy was operating at long-run equilibrium, an increase in government expenditures (holding taxes constant) would

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

The optimal time for the implementation of restrictive fiscal policy would be

Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment?

Which of the following is an example of an automatic stabilizer?

The distinction between discretionary fiscal policy and the use of automatic stabilizers is that

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?

If an economy is experiencing both full employment and price stability, within the Keynesian model, a major tax reduction probably would cause

When an economy dips into recession, automatic stabilizers will tend to

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

Keynesian analysis suggests that a planned budget surplus

Automatic stabilizers will shift the government budget toward

The main reason that the deficit grows in a recession is that

In the midst of the Great Depression in 1932, Congress and the Hoover administration increased tax rates substantially. According to the Keynesian view, this tax increase was