Question 1

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

Accepted Answer

Changes in the size of the federal government's budget deficit or surplus provide the most direct information about the government's fiscal policy. The budget deficit or surplus represents the difference between government spending and revenues, and reflects the government's overall fiscal stance. A budget deficit indicates expansionary fiscal policy (increased spending and/or decreased taxes), while a budget surplus indicates contractionary policy (decreased spending and/or increased taxes).

Question 2

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 offset changes in the business cycle. It involves increasing government spending and/or decreasing taxes during periods of economic downturns to stimulate demand and decreasing government spending and/or increasing taxes during times of economic booms to cool down demand. This helps to stabilize the economy and reduce the severity of recessions and booms.

Question 3

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 its spending, even if it meant running a budget deficit. This would stimulate the economy and create jobs, ultimately leading to economic recovery. However, during periods of economic booms or inflation, the government should aim to balance its budget or even run a surplus to keep the economy from overheating. Keynes did not specifically advocate for surpluses during periods of war.

Question 4

Federal budget deficits generally grow during recessions because

Accepted Answer

During recessions, unemployment rises, causing a decrease in tax revenues from income taxes and payroll taxes. At the same time, government spending on transfer payments (such as unemployment benefits and food stamps) increases as more individuals become eligible for assistance. This results in a decrease in tax revenues and an increase in transfer payments, leading to an increase in the federal budget deficit.

Question 5

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

Accepted Answer

The answer of Tax rates that produce revenues equal to...

Question 6

The primary tool of fiscal policy is

Accepted Answer

The federal budget is the primary tool of fiscal policy, as it outlines the government's spending and taxation policies which can affect aggregate demand and ultimately the health of the economy. The money supply is under the control of the central bank, and while it can be used as a tool of monetary policy, it is not a tool of fiscal policy. The stock market and regulation of the bond market are not tools of fiscal policy.

Question 7

Why does a tax change affect aggregate demand?

Accepted Answer

A tax change affects disposable income, which in turn affects consumption spending. As consumption is a component of aggregate demand, changes in consumption due to tax changes will affect aggregate demand.

Question 8

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 during an inflationary boom will increase aggregate demand and continue inflationary pressures. This is because consumers will have more disposable income to spend, which will increase demand for goods and services, leading to higher prices. Lowering taxes will also reduce government revenue, further increasing the budget deficit and adding to inflationary pressures. Therefore, the likely effect of lowering taxes in this situation would be to continue inflationary pressures.

Question 9

The government is pursuing an expansionary fiscal policy if it

Accepted Answer

An expansionary fiscal policy is a policy that involves increasing government spending and/or reducing taxes in order to stimulate economic growth and increase aggregate demand. Therefore, option D, which includes both increasing government spending and reducing taxes, is the correct answer.

Question 10

The Keynesian analysis of fiscal policy implies that

Accepted Answer

The Keynesian analysis of fiscal policy implies that the federal budget should be used to maintain aggregate demand at a level consistent with full employment. This means that fiscal policy should be used to stimulate the economy during times of recession and to control inflation during times of economic boom. The federal budget does not necessarily have to be balanced annually, but rather should be used to achieve economic stability and full employment.

Question 11

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

Accepted Answer

Countercyclical fiscal policy aims to stabilize the economy by using deficits during economic recessions and surpluses during inflationary booms. This means that the government spends more money to stimulate the economy during a recession, but then saves money during economic growth to prevent inflation from spiraling out of control. Therefore, the best option is D as it accurately describes countercyclical fiscal policy. Option A is incorrect as planned surpluses are not usually experienced during economic recessions. Option B is also incorrect as the balanced-budget approach is not a tenet of countercyclical fiscal policy. Option C is incorrect as actual deficits may not always equal actual surpluses during deflation depending on the fiscal policy being implemented.

Question 12

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

During a recession, government tax revenues decrease due to decreased economic activity, while government spending on transfer payments (such as unemployment benefits) and automatic stabilizers (such as SNAP) increase. This creates a budget deficit unless the government takes action to reduce spending or increase taxes. Therefore, a budget deficit is the most likely outcome in this scenario.

Question 13

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

Accepted Answer

The government's debt is the total amount owed, which is currently $10.0 trillion. Borrowing an additional $700 billion this year increases the debt to $10.7 trillion. The deficit is the amount by which government spending exceeds its revenue in a given year. Since the government borrowed $700 billion more than it took in this year, the deficit is also $700 billion. Therefore, the correct answer is choice B.

Question 14

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 need for government spending on programs like unemployment benefits, thus decreasing the size of the budget deficit.

Question 15

If the federal government is running a budget surplus,

Accepted Answer

If the federal government is running a budget surplus, it means the revenues collected from taxes and other sources are greater than its expenditures. This allows the government to reduce its outstanding debt by using the surplus funds to pay off some of the outstanding debt.

Question 16

When the federal government is running a budget deficit,

Accepted Answer

When the federal government is running a budget deficit, it means that its expenditures are exceeding its revenues. This results in the government borrowing money to finance its operations, leading to an increase in the national debt.

Question 17

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

Accepted Answer

Discretionary fiscal policy refers to intentional changes in government spending and/or taxation in order to influence economic performance. Open market operations and discretionary monetary policy refer to actions taken by the Federal Reserve, rather than the government. Balanced budget operations refer to a policy of balancing government spending with taxation, rather than intentionally changing either in order to influence the economy.

Question 18

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

Accepted Answer

By increasing government purchases and decreasing personal income taxes, Congress is implementing expansionary fiscal policy. This policy is designed to stimulate economic growth and increase aggregate demand, which is helpful in counteracting a recession. It is not designed to achieve a federal budget surplus (D) or balance the federal budget (A), as it involves spending more money and reducing government revenue. Additionally, it is not designed to counteract inflation and an economic boom (C), as it may actually fuel inflation during periods of strong economic growth.

Question 19

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

Accepted Answer

The Keynesian model suggests that in times of less than full-employment, the government should undertake expansionary fiscal policy to stimulate aggregate demand. This can be done through increasing government spending, decreasing taxes, or a combination of both. By injecting more money into the economy, consumers and businesses have more resources to spend and invest, leading to an increase in overall economic activity and reducing unemployment. Doing nothing or balancing the budget would not address the issue of low aggregate demand and would likely result in prolonged economic stagnation. Undertaking expansionary fiscal policy to stimulate aggregate supply is not recommended by the Keynesian model as it emphasizes demand-side factors as the primary driver of economic growth.

Question 20

A balanced budget is present when

Accepted Answer

A balanced budget is present when government revenues equal government expenditures. This means that the government is not running a deficit or a surplus, and is spending only what it is able to collect in revenue. It does not necessarily relate to the state of the economy, level of aggregate spending, or comparison between public and private sector spending.

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