Question 1

Which of the following would decrease the size of a federal budget deficit?

Accepted Answer

Growth in real GDP would increase tax revenues and decrease the size of the federal budget deficit. A recession, an increase in defense spending, a decrease in tax revenues, and an increase in transfer payments would all increase the size of the federal budget deficit.

Question 2

Tax rates that produce revenues equal to government expenditures when an economy operates at its long-run capacity will lead to a

Accepted Answer

During a recession, the economy operates below its long-run capacity, leading to lower tax revenues and higher government expenditures, resulting in a budget deficit.

Question 3

If the federal government is running a budget surplus,

Accepted Answer

If the federal government is running a budget surplus, it means that its revenues are greater than its expenditures. This allows the government to reduce its outstanding debt by using the surplus to pay down existing debt.

Question 4

Why does a tax change affect aggregate demand?

Accepted Answer

When there is a tax change, disposable income (the amount of income left after taxes) changes. This, in turn, affects consumption spending, as people adjust their spending based on their disposable income. As a result, a tax change can affect aggregate demand, which is the total amount of spending in the economy.

Question 5

When the federal government is running a budget deficit,

Accepted Answer

When the federal government is running a budget deficit, it means that the government is spending more money than it is taking in through revenue. As a result, government expenditures exceed government revenues.

Question 6

If the government owes $10.0 trillion and then borrows $700 billion more this year,this leads to

Accepted Answer

The government's total debt before borrowing more is $10.0 trillion. Borrowing an additional $700 billion adds to that debt, bringing the total debt to $10.7 trillion. The deficit is the amount by which government spending exceeds revenue in a given year. In this case, the government borrowed $700 billion, which increases the deficit to $700 billion. Therefore, the correct answer is B.

Question 7

If the economy is experiencing inflationary boom,and the government lowers taxes in an effort to balance the budget,the Keynesian model indicates the likely effect will be to

Accepted Answer

According to the Keynesian model, lowering taxes lead to an increase in aggregate demand which will further exacerbate inflationary pressures in an economy that is already experiencing an inflationary boom. Therefore, lowering taxes in such a scenario will likely continue the inflationary pressures rather than counteract them.

Question 8

Which of the following best expresses the central idea of countercyclical fiscal policy?

Accepted Answer

Countercyclical fiscal policy refers to the use of government spending and taxation policies to stabilize economic fluctuations. It involves using deficits (government spending exceeds revenue) during economic recessions to boost demand and stimulate the economy, and surpluses (government revenue exceeds spending) during economic booms to restrain inflationary pressures. Therefore, option D correctly expresses the central idea of countercyclical fiscal policy.

Question 9

Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

Accepted Answer

Countercyclical fiscal policy is designed to stabilize the economy by increasing government spending and/or decreasing taxes during times of recession or economic slowdown, which increases aggregate demand. Conversely, during economic boom times, countercyclical fiscal policy calls for reducing government spending and/or increasing taxes to decrease aggregate demand and prevent overheating of the economy.

Question 10

The government is pursuing an expansionary fiscal policy if it

Accepted Answer

An expansionary fiscal policy involves increasing government spending and/or reducing taxes in order to stimulate economic growth and increase aggregate demand. Option D is the only choice that includes both increasing government spending and reducing taxes, making it the best answer.

Question 11

Changes in government spending and/or taxes as the result of legislation,is called

Accepted Answer

Discretionary fiscal policy refers to changes in government spending and/or taxes as the result of legislation. Open market operations and discretionary monetary policy refer to actions taken by the Federal Reserve to influence the money supply and interest rates. Balanced budget operations refer to a government's attempt to balance its budget by matching its expenditures with revenues.

Question 12

If Congress votes to increase government purchases and at the same time decrease personal income taxes,they

Accepted Answer

This policy combination is known as fiscal stimulus, which is appropriate during a recession. Increasing government purchases leads to more spending and investment in the economy, while decreasing personal income taxes provides individuals with more disposable income to spend, both of which can help to stimulate economic growth and job creation. This policy is not geared towards balancing the federal budget or achieving a surplus, nor is it intended to counteract inflation or an economic boom.

Question 13

The primary tool of fiscal policy is

Accepted Answer

The primary tool of fiscal policy is the federal budget, which includes government spending and taxation. Through changes in government spending and taxes, policymakers can use fiscal policy to stimulate or slow down economic growth, stabilize prices, and address issues such as unemployment or inflation. While some aspects of fiscal policy may indirectly impact the stock and bond markets, these are not the primary tools of fiscal policy. The money supply is primarily controlled through monetary policy, which is the responsibility of the Federal Reserve.

Question 14

Suppose long-run equilibrium is present and the government budget is in balance.Which of the following would be most likely to occur if the economy falls into a recession?

Accepted Answer

In a recession, economic activity decreases, which leads to a decline in tax revenues. At the same time, government spending on programs like unemployment benefits and welfare tends to increase. This combination is likely to result in a budget deficit, as the government will be spending more than it is taking in. Therefore, option C is the most likely scenario in this situation. Option A is unlikely to occur as a surplus would require an increase in revenues or decrease in spending, which is unlikely in a recession. Option B is also unlikely as a recession would negatively impact the government's balance sheet. Option D is incorrect as revenues from taxes typically decrease during recessions.

Question 15

The prevailing budget philosophy prior to Keynes called for a balanced budget.Keynes argued that the government should not balance its budget but instead have budget deficits during

Accepted Answer

Keynes argued that during economic recessions, the government should increase spending and run budget deficits in order to stimulate the economy and create jobs. This approach is known as deficit spending and is intended to increase aggregate demand, which can help to end a recession. Therefore, the correct choice is D.

Question 16

Which of the following provides the best information about the direction of the government's fiscal policy?

Accepted Answer

The size of the federal government's budget deficit or surplus provides the clearest information about the direction of the government's fiscal policy, as it directly reflects the government's spending and revenue policies. When there is a budget deficit, it means that the government is spending more money than it is receiving in revenue, indicating an expansionary fiscal policy. Conversely, a budget surplus means that the government is collecting more revenue than it is spending, indicating a contractionary fiscal policy.

Question 17

A balanced budget is present when

Accepted Answer

A balanced budget is present when government revenues equal government expenditures, meaning that the government is not running a deficit or a surplus. It does not necessarily have to do with the level of aggregate spending, employment level, or the balance between public and private sector spending.

Question 18

If the economy is experiencing less than full-employment,the Keynesian model recommends that the government

Accepted Answer

The Keynesian model suggests that during periods of less than full-employment, the government should undertake expansionary fiscal policy to stimulate aggregate demand. This can include cutting taxes or increasing government spending to encourage consumer spending and business investments, which can ultimately lead to an increase in overall economic activity and employment levels. Doing nothing or balancing the budget may not be effective in addressing the issue of unemployment and can potentially worsen the economic situation. Undertaking expansionary fiscal policy to stimulate aggregate supply may also not be effective in increasing employment levels as it focuses more on increasing the production capacity of an economy rather than addressing the demand side of the economy.

Question 19

Federal budget deficits generally grow during recessions because

Accepted Answer

During recessions, tax revenues typically decrease due to lower economic activity and higher unemployment, while transfer payments from government programs such as unemployment insurance and food stamps increase as more people become eligible for benefits. This combination leads to a decrease in government revenue and an increase in government spending, resulting in larger budget deficits.

Question 20

The Keynesian analysis of fiscal policy implies that

Accepted Answer

The Keynesian analysis of fiscal policy suggests that the federal budget should be used to maintain aggregate demand at a level consistent with full employment. This means that during economic downturns, fiscal policy should be expansionary to boost demand and stimulate economic growth, while during times of inflationary pressure, fiscal policy should be restrictive to cool off the economy. While balancing the federal budget annually may be a desirable goal in principle, it should not be pursued at the expense of generating unnecessary unemployment or exacerbating economic instability.

Quiz 11: Fiscal Policy: the Keynesian View and Historical Perspective