Deck 13: Fiscal Policy and the Federal Budget

Question 1

When government spending exceeds tax revenues during a given year, a budget deficit occurs, which the government finances by issuing securities such as Treasury bills, notes, and bonds.

Answer 1

True

Question 2

The multiplier effect that applies to changes in household taxes is larger than the one that applies to changes in government expenditures.

Answer 2

False

Question 3

Discretionary fiscal policy is the deliberate use of changes in government expenditures and taxation to affect aggregate demand and influence the economy's performance in the short run.

Answer 3

True

Question 4

If the federal government's budget is initially balanced, a fiscal policy that combats a recession would cause the budget to move into a surplus.

Question 5

To combat a recession, fiscal policy would increase government expenditures and/or decrease taxes, thus causing an increase in aggregate demand.

Question 6

To combat demand-pull inflation, fiscal policy would cut government expenditures and/or raise taxes, which causes the government's budget to move into a deficit.

Question 7

Automatic stabilizers work by preventing aggregate demand from decreasing as much in bad times and rising as much in good times, thus helping to stabilize the economy.

Question 8

According to the concept of automatic stabilizers, tax receipts automatically increase and transfer payments automatically decrease during economic prosperity, thus slowing the growth of aggregate demand and controlling upward pressure on the price level when the economy is expanding.

Question 9

Among the problems facing fiscal policy are timing lags, irreversibility, deflationary bias, and the crowding-out effect.

Question 10

The crowding-out effect and the foreign-trade effect enhance the ability of fiscal policy to combat recession.

Question 11

According to the crowding-out effect, an increase in government spending will result in inflation, which reduces the purchasing power of the dollar and decreases investment spending.

Question 12

According to the foreign-trade effect, an expansionary fiscal policy that boosts interest rates will cause net exports to decrease, partially offsetting the expansionary fiscal policy.

Question 13

According to supply-side economists, a reduction in marginal tax rates causes take-home pay to increase, which increases consumption spending and the aggregate supply curve.

Question 14

The Laffer curve shows the relationship between the income tax rate that a government imposes and the total tax revenue that the government collects.

Question 15

Most economists agree that the amount of the U.S. government's debt by itself is the best indicator of the debt's burden.

Question 16

Assume that the economy's marginal propensity to consume is 0.75 and that the price level is constant. If the government decreases household taxes by $100 billion, real output will increase by $300 billion.

Question 17

If a law is passed that forces the federal government to balance its budget annually, then it will require the government to increase expenditures and/or decrease taxes during a recession, thus making the recession worse.

Question 18

An appropriate fiscal policy for a recession is an increase in government expenditures, an increase in transfer payments, and a decrease in taxes.

Question 19

If the aggregate supply curve is horizontal, an expansionary fiscal policy will increase real output by less than if the aggregate supply curve is upward sloping.

Question 20

In the U.S., fiscal policy is implemented by the Council of Economic Advisors and the Federal Reserve System.

Question 21

As national income increases, tax revenues increase and transfer payments decrease.

Question 22

Food stamps, unemployment compensation benefits, the federal personal income tax, and federal construction expenditures are automatic stabilizers.

Question 23

Critics fear that the U.S. government's debt will have an adverse impact on the nation's saving, investment, and stock of capital goods.

Question 24

Economic theory suggests that a decrease in marginal tax rates will encourage individuals to substitute leisure for work and consumption for saving.

Question 25

Most of the U.S. government's debt is owned by foreigners who purchase the securities issued by the Treasury.

Question 26

Fiscal policy is a legal mandate of the federal government as a result of the Employment Act of 1946 and the Humphry-Hawkins Act of 1978.

Question 27

The Works Project Administration (WPA) is an example of a federal policy aimed at reducing the national debt.

Question 28

A contractionary fiscal policy would most likely be adopted whne the economiy is experiencing high inflation.

Question 29

The most important automatic stabilizer is the tax system.

Question 30

Because of the crowding-out effect, an expansionary fiscal policy will have stronger expects than anticipated.

Question 31

In 2006, 73 percent of the federal debt was owned by foreign investors.

Question 32

In 2006, federal debt equaled 38 percent of GDP.

Question 33

The Comprehensive Employment and Training Act provided public service jobs for unemployed workers and young people in the

A) 1930's
B) 1950's
C) 1970's
D) 1990's

Question 34

______ is the use of government expenditures and taxes to promote full employment, stable prices, and economic growth.

A) Monetary policy
B) Incomes policy
C) Stabilization policy
D) Fiscal policy

Question 35

All of the following are major goals of fiscal policy except

A) full employment
B) stable prices
C) economic growth
D) zero net exports

Question 36

An expansionary fiscal policy tends to increase

A) real output and employment, but not income
B) real output and income, but not employment
C) income and employment, but not real output
D) real output, employment, and income

Question 37

Discretionary fiscal policy affects all the following except

A) consumption
B) investment
C) net exports
D) money supply

Question 38

______ is the deliberate use of changes in government expenditures and taxation to affect aggregate demand and influence the economy's performance.

A) Discretionary fiscal policy
B) Nondiscretionary fiscal policy
C) Discretionary monetary policy
D) Nondiscretionary monetary policy

Question 39

To combat a recession, discretionary policy could result in a(n)

A) increase in taxes, decrease in government expenditures, and cause a rightward shift in the aggregate demand curve
B) decrease in taxes, decrease in government expenditures, and cause a rightward shift in the aggregate demand curve
C) increase in taxes, increase in government expenditures, and cause a leftward shift in the aggregate demand curve
D) decrease in taxes, increase in government expenditures, and cause a rightward shift in the aggregate demand curve

Question 40

To combat inflation, discretional fiscal policy could result in a(n)

A) increase in taxes, a decrease in government expenditures, and a rightward shift in the aggregate demand curve
B) decrease in taxes, a decrease in government expenditures, and a rightward shift in the aggregate demand curve
C) increase in taxes, a decrease in government expenditures, and a leftward shift in the aggregate demand curve
D) decrease in taxes, an increase in government expenditures, and a rightward shift in the aggregate demand curve

Question 41

To combat a recession, fiscal policy should move toward a budget that is

A) balanced
B) in a deficit
C) in a surplus
D) as low as possible

Question 42

To combat inflation, fiscal policy should move toward a

A) balanced budget
B) budget deficit
C) budget surplus
D) budget amendment

Question 43

To combat a recession, the correct fiscal policy would be a

A) cut in taxes, an increase in government spending, and a budget deficit
B) cut in taxes, a decrease in government spending, and a budget surplus
C) hike in taxes, an increase in government spending, and a budget deficit
D) hike in taxes, a decrease in government spending, and a budget surplus

Question 44

If the federal government implements public-works projects to combat downturns in the economy, this would be an example of

A) discretionary fiscal policy
B) automatic fiscal stabilizers
C) nondiscretionary fiscal policy
D) nonautomatic fiscal stabilizers

Question 45

Assume that the economy's marginal propensity to consume is 0.9 and the price level is constant. If the U.S. government purchases $10 billion of jet aircraft from American companies, aggregate demand will increase by

A) $50 billion
B) $80 billion
C) $100 billion
D) $120 billion

Question 46

Which combination of fiscal policies would have the greatest expansionary effect on the economy?

A) decrease government expenditures, provide an investment tax credit, and increase personal income taxes
B) provide an investment tax credit, increase government expenditures, and decrease personal income taxes
C) decrease unemployment compensation benefits, increase corporate income taxes, and provide an investment tax credit
D) increase personal income taxes, increase corporate income taxes, and decrease unemployment compensation benefits

Question 47

Suppose the economy is in a recession and that the marginal propensity to consume is 0.75. Assuming that the price level is constant, by how much would the government have to increase its expenditures in order to increase real output by $200 billion?

A) $25 billion
B) $50 billion
C) $75 billion
D) $100 billion

Question 48

Suppose the economy is in a recession and that the marginal propensity to consume is 0.8. Assuming that the price level is constant, by how much would government have to decrease household taxes in order to increase real output by $200 billion?

A) $40 billion
B) $50 billion
C) $60 billion
D) $70 billion

Question 49

If the aggregate supply curve is horizontal, an expansionary fiscal policy will result in increased output, along with

A) higher employment and stable prices
B) lower employment and stable prices
C) higher employment and rising prices
D) lower employment and falling prices

Question 50

If the aggregate supply curve is upward sloping, the cost of using a contractionary fiscal policy to combat inflation will be

A) higher interest rates and lower consumption spending
B) lower taxes for households and business
C) increased rates of inflation
D) decreased real output and employment

Question 51

The basic elements of fiscal policy were developed by

A) John Maynard Keynes during the Great Depression
B) Jean Baptiste Say during the Panic of 1907
C) Adam Smith during the Stock Market Crash of the 1890s
D) Ronald Reagan during the recession of the early 1980s

Question 52

The automatic fiscal stabilizers include all of the following except

A) corporate income taxes
B) unemployment insurance benefits
C) the prime interest rate
D) food stamps

Question 53

Unlike discretionary fiscal policy, automatic stabilizers consist of

A) deliberate changes in government spending to counteract recession and inflation
B) deliberate changes in household taxes to counteract recession and inflation
C) deliberate changes in corporation income taxes to counteract recession and inflation
D) changes in government spending and tax revenues that occur automatically as the economy fluctuates

Question 54

All of the following are problems of fiscal policy except

A) recognition lags
B) administrative lags
C) crowding-out effect
D) singular-motion effect

Question 55

Fiscal policy is enacted by the

A) Federal Reserve System
B) Council of Economic Advisors
C) Federal Open Market Committee
D) Congress and the president together

Question 56

The lag between the time that a recession is recognized and the time an expansionary fiscal policy is enacted is the

A) instructional lag
B) operation lag
C) administration lag
D) recognition lag

Question 57

The crowding-out effect occurs when increased government expenditures and the subsequent budget deficits cause

A) the money supply to increase, which curtails loans to consumers
B) interest rates to increase, which reduces investment spending
C) inflation, which erodes the purchasing power of the dollar
D) the imports of goods and services to rise, and exports to decline

Question 58

Which of the following is not true for the crowding-out effect?

A) Federal budget deficits increase interest rates, which reduces investment spending.
B) Crowding out reduces the ability of fiscal policy to combat a recession.
C) If the government spends more on education, Bill Nelson may be forced to spend less on a new home.
D) Crowding out occurs especially when the economy is in a deep recession and people are not spending all the available money.

Question 59

When there is open international investment, an expansionary fiscal policy in the U.S. will

A) increase deficits in the U.S. which attracts savings from other countries
B) decrease deficits in the U.S. which causes other countries to experience recessions
C) cause more money to be created in the U.S. which creates deficits
D) causes unemployment to rise in the U.S. which causes a recession

Question 60

The ratio of U.S. federal debt to GDP is

A) rapidly approaching 100 percent
B) the highest of all countries in the world
C) lower in 2006 than it was in 1946
D) not a commonly-used measure

Question 61

The impact of an expansionary fiscal policy on real output will be greatest when the aggregate supply curve is

A) horizontal
B) vertical
C) upward sloping
D) downward sloping

Question 62

If people are spending all the available money, when the U.S. government borrows to finance a deficit,

A) investment spending increases
B) personal consumption spending increases
C) interest rates increase
D) the exchange value of the dollar declines

Question 63

According to supply-side economists, the U.S. tax system tends to

A) decrease interest rates and loans to businesses
B) intensify the effects of demand-pull inflation
C) dampen incentives to work, save, and invest
D) reduce unemployment and push up the price level

Question 64

According to the Laffer Curve, when taxes are increased from 0 percent to a rate consistent with the maximum point on the curve, tax revenues will

A) decrease
B) increase
C) be the same as the tax rate
D) be equal to zero

Question 65

According to supply-side economists, a policy that ______ will cause productivity to increase, which shifts the aggregate supply curve to the right.

A) increases interest rates
B) increases expected inflation
C) reduces marginal tax rates
D) reduces the money supply

Question 66

The ______ shows the relationship between the income tax rate that a government imposes and the total tax revenue that the government collects.

A) fiscal curve
B) automatic stabilizer curve
C) transfer curve
D) Laffer curve

Question 67

During the 2007-09 recession, the official unemployment rate rose

A) over 9%
B) 11%
C) over 13%
D) over 15%

Question 68

Assume that the aggregate supply curve is upward sloping. An expansionary fiscal policy that causes only the aggregate demand curve to increase will

A) increase only output
B) increase only prices
C) decrease output and increase prices
D) increase output and increase prices

Question 69

If the U.S. government spends $20 billion on unemployment compensation benefits, purchases $75 billion of goods and services, and collects taxes of $100 billion, then there is a budget

A) surplus of $15 billion
B) surplus of $5 billion
C) deficit of $5 billion
D) deficit of $10 billion

Question 70

Concerning an annually balanced budget law, if the U.S. government balanced its budget each year, then it would

A) eliminate a recession by increasing expenditures and decreasing taxes during a recession
B) eliminate a recession by decreasing expenditures and increasing taxes during a recession
C) intensify a recession by decreasing expenditures and increasing taxes during a recession
D) intensify a recession by increasing expenditures and decreasing taxes during a recession

Question 71

When there are automatic stabilizers,

A) the government decreases tax rates as the economy slides into a recession
B) the government increases tax rates as the economy slides into a recession
C) tax receipts increase as the economy slides into a recession
D) tax receipts decrease as the economy slides into a recession

Question 72

A $50 billion increase in taxes on households has a(n)

A) identical impact on aggregate demand as a $50 billion decrease in government expenditures
B) identical impact on aggregate demand as a $50 billion increase in government expenditures
C) stronger impact on aggregate demand than a $50 billion decrease in government expenditures
D) weaker impact on aggregate demand than a $50 billion decrease in government expenditures

Question 73

The U.S. government has financed its deficits primarily by borrowing from

A) the U.S. public
B) foreign investors
C) the Federal Reserve
D) the Federal Deposit Insurance Corporation

Question 74

Critics of a large national debt are concerned that it will do all of the following except:

A) result in the crowding out of investment in the private sector
B) slow down the economy's long-run rate of growth
C) redistribute income from the wealthy to the poor
D) reduce the living standards of future generations

Question 75

Figure 13.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 13.1. Increased government spending, as a discretionary fiscal policy, would shift

A) AD₀ to AD₁
B) AD₁ to AD₀
C) AS₀ to AS₁
D) AS₁ to AS₀

Question 76

Figure 13.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 13.1 The goal of a supply-side tax cut is to shift

A) AD₀ to AD₁
B) AD₁ to AD₀
C) AS₀ to AS₁
D) AS₁ to AS₀

Question 77

Figure 13.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 13.1. A supply-side tax cut will be inflationary if when taxes decrease,

A) AD₀ shifts to AD₁
B) AD₁ shifts to AD₀
C) AS₀ shifts to AS₁
D) AS₁ shifts to AS₀

Question 78

Figure 13.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 13.1. A correct discretionary fiscal policy to enact when the economy is experiencing inflation is to

A) increase government spending, causing AD₀ to shift to AD₁
B) increase taxes, causing AD₀ to shift to AD₁
C) decrease government spending, causing AD₁ to shift to AD₀
D) decrease taxes, causing AD₁ to shift to AD₀

Question 79

If the government spends more on national defense and as a result, Marcy spends less on the construction of a new house, this is an example of

A) crowding out
B) a budget surplus
C) an automatic stabilizer
D) inflationary bias

Question 80

Advocates of supply-side economics believe that which of the following concepts is of crucial importance?

A) public-works projects
B) discretionary fiscal policy
C) marginal tax rates
D) automatic stabilizers