Question 1

In recent decades, how has the U.S. national debt typically compared to its annual budget balance?

Accepted Answer

The U.S. national debt is the total amount of money that the government owes, while the annual budget balance refers to the difference between what the government earns (through taxes and other revenues) and spends in a single fiscal year. Typically, the national debt is much larger than the budget balance because the debt accumulates over many years of budget deficits, where government spending exceeds revenue.

Question 2

An increase in a country's budget deficit (or a decrease in its surplus) is associated with the use of:

Accepted Answer

An increase in a country's budget deficit or a decrease in its surplus is typically associated with expansionary fiscal policy, which involves increasing government spending, decreasing taxes, or both to stimulate economic growth.

Question 3

Econia has an evenly balanced budget. Then its government chooses to use an expansionary fiscal policy to combat a recession. What impact would this policy have on Econia's budget balance?

Accepted Answer

Expansionary fiscal policy, typically involving increased government spending and/or tax cuts, would lead to higher government expenditures than revenues, thus creating a budget deficit.

Question 4

One of the implications of ongoing use of expansionary fiscal policy is that it would:

Accepted Answer

Expansionary fiscal policy, which involves government spending exceeding tax revenues, often leads to increased public debt. This makes it challenging for the government to maintain a balanced budget, as funds may need to be allocated to service debt, limiting the ability to balance expenditures and revenues.

Question 5

When expansionary fiscal policy is used, the government's budget will:

Accepted Answer

Expansionary fiscal policy, which involves increased government spending and/or decreased taxes, typically leads to a budget deficit because it increases government outlays or reduces revenue.

Question 6

Contractionary fiscal policy affects a government's budget by tending to create:

Accepted Answer

Contractionary fiscal policy, which involves reducing government spending and/or increasing taxes, tends to decrease the budget deficit or increase the surplus by lowering government expenditures or increasing revenue, respectively.

Question 7

Ongoing government programs that cause countercyclical changes in taxes and government spending during the business cycle without additional current approvals by the legislature are called:

Accepted Answer

Automatic stabilizers are government programs that automatically adjust taxes and spending in response to economic changes, helping to mitigate the effects of economic fluctuations without the need for new legislative action.

Question 8

Which of the following is NOT an automatic stabilizer program in the United States?

Accepted Answer

Automatic stabilizers are economic policies and programs designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers. While unemployment compensation, progressive income taxes, and housing subsidies automatically adjust with economic conditions, providing more support during downturns and less during expansions, school construction is typically a discretionary spending decision made by governments and does not automatically adjust with the economic cycle.

Question 9

Ongoing government programs and policies that are designed to adjust to changing economic conditions in a way that is countercyclical and do not require additional authorization from the legislature are called:

Accepted Answer

Automatic stabilizers are government programs and policies that automatically adjust to changing economic conditions in a countercyclical manner, such as unemployment benefits and progressive taxation, without the need for new legislative action.

Question 10

An estimate of what the budget deficit would be if the economy was not in a recession and if automatic stabilizers were not in effect is known as the _____ budget deficit.

Accepted Answer

The cyclically adjusted budget deficit is an estimate of the budget deficit adjusted for the effects of the economic cycle, removing the influence of temporary fluctuations due to the economic cycle, such as those caused by recessions or booms, and the effects of automatic stabilizers.

Question 11

Deliberate changes in taxes or government spending that are undertaken to stabilize an economy are called _____ fiscal policy.

Accepted Answer

Discretionary fiscal policy refers to the deliberate manipulation of government collections (taxes) and expenditures (spending) by policymakers to influence the economy, such as to combat inflation or stimulate economic growth.

Question 12

Which of the following is NOT an example of discretionary spending in a government's budget?

Accepted Answer

Discretionary spending refers to government expenditures that are set on a yearly basis and can be adjusted by policymakers. Welfare program benefits are typically considered mandatory spending, as they are required by law and not subject to annual budget decisions.

Question 13

In response to the Great Recession, the U.S. Congress passed _____ large discretionary fiscal policy laws to stimulate the economy.

Accepted Answer

In response to the Great Recession, the U.S. Congress passed two large discretionary fiscal policy laws to stimulate the economy: the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009.

Question 14

One year, the government of Econia chooses to spend an additional $20 million on worker salaries to build new playgrounds. The playground workers spend a significant part of their salaries on consumer goods. The vendors that they buy from then have higher profits and spending power. GDP eventually rises by $28 million, which is $8 million more than the increase in government spending. Economists call this phenomenon the _____ effect.

Accepted Answer

The multiplier effect describes how an initial increase in spending (in this case, government spending on worker salaries) leads to a larger increase in the overall GDP due to the subsequent rounds of spending by those who receive the initial spending.

Question 15

A fiscal multiplier effect occurs when:

Accepted Answer

The fiscal multiplier effect refers to the phenomenon where an initial change in spending (such as government spending) leads to a larger change in GDP. This happens because the initial spending increases income for some people, who then spend more, thereby increasing income for others, and so on, amplifying the initial impact on the economy.

Question 16

The multiplier for a change in government purchases is equal to:

Accepted Answer

The multiplier for a change in government purchases is calculated as the ratio of the change in GDP to the change in government spending (G), not as a product or involving changes in taxes (T). This reflects how much the economy's output is expected to increase for each dollar increase in government spending.

Question 17

The multiplier for a change in taxes is equal to:

Accepted Answer

The multiplier for a change in taxes is calculated as the ratio of the change in GDP to the change in taxes, which is represented by the formula: Change in GDP / Change in T. This reflects how a change in taxes impacts overall economic output.

Question 18

The fiscal multiplier for government spending is 2.1, and the multiplier for taxes is -1.7. The government increases its purchases by $7 million. After the multiplier effect, GDP will:

Accepted Answer

The fiscal multiplier for government spending is 2.1, so an increase in government purchases by $7 million will increase GDP by 2.1 * $7 million = $14.7 million.

Question 19

The fiscal multiplier for government spending is 2.1, and the multiplier for taxes is -1.7. The government increases its taxes by $7 million. After the multiplier effect, GDP will:

Accepted Answer

The fiscal multiplier for taxes is -1.7, meaning for every $1 increase in taxes, GDP will decrease by $1.7. With a $7 million increase in taxes, the impact on GDP is -1.7 * $7 million = -$11.9 million, indicating GDP will fall by $11.9 million.

Question 20

Estimates of the multiplier effect indicate that the multiplier is:

Accepted Answer

The multiplier effect varies depending on the economic situation, with most estimates falling between 0.1 and 2.5, and typically less than 2. This reflects the idea that the impact of fiscal stimulus on economic output can vary widely, but it is generally positive and less than extreme values.

Quiz 28: Fiscal Policy and the Business Cycle