Deck 7: The Government Sector

Question 1

Recent data show that government expenditures in Canada, including transfer payments, are:

A) about 40 percent of GDP.
B) a higher percent of GDP in Canada than in the US.
C) about the same percent of GDP as similar expenditures in G7 countries.
D) all of the above.

Answer 1

all of the above.

Question 2

In 2006, the total revenues in Canada:

A) were higher than the total government expenditures plus transfers in Canada.
B) were less than the government expenditures in Canada.
C) as a fraction of GDP in Canada were much lower than the average revenue-GDP fraction in G7 countries.
D) were equal to the public debt in Canada.

Answer 2

were higher than the total government expenditures plus transfers in Canada.

Question 3

Which of the following statements is false?

A) Government spending is an injection into the circular flow.
B) Taxes are withdrawals from the circular flow.
C) Government spending and taxes are withdrawals from the circular flow, while consumption and . investments are injections into the circular flow.
D) Transfer payments are injections into the circular flow.

Answer 3

Government spending and taxes are withdrawals from the circular flow, while consumption and . investments are injections into the circular flow.

Question 4

Government activity affects aggregate demand by:

A) their purchases of goods and services only.
B) levying taxes and making transfer payments as well as purchasing goods and services.
C) changing the level of aggregate supply of goods and services.
D) establishing the rules within which a market economy must operate.

Question 5

Which of the following is false?

A) AE=C+I+G+X-Z.
B) YD=Y-NT.
C) Y=C+I+G+X-Z.
D) S+I+C=G+X-Z.

Question 6

If the MPC is 0.8 out of YD and if government levies a net tax rate of 0.3, then the MPC out of national income (Y) becomes:

A) 0.56.
B) 0.24.
C) 0.5.
D) 0.6.

Question 7

When government spending increases and taxes do not:

A) short-run equilibrium output falls, because government borrows from the public to carry out its increased spending.
B) short-run equilibrium output rises because aggregate expenditure has increased.
C) short-run equilibrium output remains the same.
D) short-run equilibrium output falls because of aggregate expenditure increases.

Question 8

An equilibrium income in an open economy with government occurs when:

A) savings equals investment plus government spending plus net export earnings.
B) unintended inventory changes are zero.
C) planned saving equals actual planned investment.
D) planned saving equals actual investment plus government spending.

Question 9

Other things remaining the same, an increase in taxes:

A) increases aggregate expenditure.
B) leaves aggregate expenditure unchanged.
C) decreases budget balance.
D) decreases savings.

Question 10

If income tax rate increases:

A) disposable income decreases, spending decreases and GDP decreases.
B) budget balance improves, spending increases and GDP increases.
C) budget balance deteriorates, spending increases and GDP increases
D) disposable income increases, spending increases and GDP increases.

Question 11

Other things constant, if the government imposes a net tax equal to NT = tY, where t is the positive income tax rate, we would expect:

A) a movement down and along the aggregate expenditure curve.
B) a decrease in the slope of the aggregate expenditure curve.
C) an increase in the slope the aggregate expenditure curve.
D) a downward parallel shift of the aggregate expenditure curve.

Question 12

Assume that the MPC out of disposable income is 0.80, the income tax rate is 0.20 and the marginal propensity to import is 0.14. Therefore, the slope of the AE curve would be:

A) 0.80.
B) 0.60.
C) 0.46.
D) none of the above.

Question 13

A $1 increase in government spending will have a larger impact upon national income than a $1 cut in lump sum taxes, because:

A) the government prints the money it spends.
B) not all of a tax cut is spent.
C) when taxes are cut, so too is government spending.
D) taxes are leakages from the system.

Question 14

-Refer to Figure 7.1. The diagram shows one consumption function with zero income tax and the other consumption function with 20% income tax rate. We can conclude all of the following except one. The exception is:

A) The consumption curve with income tax is flatter than the consumption curve without income tax.
B) The slope of the consumption curve with income tax is 0.70.
C) The autonomous expenditure multiplier will be lower with income-tax.
D) Higher the income tax rate, lower the slope of the consumption curve and lower will be slope of the AE curve.

Question 15

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04 and the government increases spending by $100 million, then we would expect GDP to increase by:

A) $227.27 million.
B) $250.00 million.
C) $400.00 million.
D) $500.00 million.

Question 16

-Refer to Figure 7.2. The diagram demonstrates that an increase in the net tax rate will reduce aggregate expenditure and equilibrium real GDP, because:

A) investment function will shift down.
B) the consumption function rotates downwards.
C) government expenditure increases.
D) none of the above.

Question 17

If the MPC is 0.8, the net income tax rate is greater than zero, the marginal propensity to import is greater than zero and the government increases spending by $100 million, then we would expect the result, in the short-run, to be:

A) increase in real GDP by $500 million.
B) increase in real GDP by $100 million.
C) no change in equilibrium real GDP.
D) increase in equilibrium real GDP by less than $500 million.

Question 18

-Refer to Figure 7.3. The diagram demonstrates that an increase in government expenditure:

A) increases investment.
B) increases the MPC.
C) increases equilibrium real GDP.
D) all of the above.

Question 19

Which of the following best completes this statement: "Once we include a proportional income tax in the model of aggregate expenditure and equilibrium real GDP, then….:"

A) individual incomes are higher than they would be without the taxes.
B) the marginal propensity to consume out of disposable income rises as a result of the tax.
C) the multiplier is lower than it would be without the taxes.
D) the government must also be spending on goods and services.

Question 20

Suppose that the government reduces its spending by $10 billion and as a result, equilibrium national income is reduced by $18 billion. The value of the multiplier is:

A) 18.
B) 10.
C) 2.
D) 1.8.

Question 21

Other things equal, the multiplier effect of a change in government spending is:

A) the same as the multiplier effect of a change in taxes.
B) the same as the multiplier effect of a change in investment or in autonomous consumption.
C) less than that associated with a change in investment.
D) greater than that associated with a change in investment.

Question 22

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04 and the autonomous taxes decrease by $100 million, then we would expect GDP to increase by:

A) $250.00 million.
B) $227.27 million.
C) $200.00 million.
D) $50.00 million.

Question 23

If the MPC is 0.8, the net income tax rate is 0.2, the marginal propensity to import is 0.04, government expenditure increase by $100 million and the autonomous taxes increase by $100 million, then we would expect GDP to increase by:

A) $250.00 million.
B) $227.27 million.
C) $200.00 million.
D) $50.00 million.

Question 24

Suppose, the autonomous government expenditure multiplier is 2.5 and the autonomous tax multiplier is -2. Therefore, the balanced budget multiplier is:

A) 4.5.
B) 2.25.
C) +0.5.
D) -0.5.

Question 25

Suppose that the government increases its spending by 10 per cent and also increases it autonomous taxes by 10 per cent. We would expect this to:

A) have no effect on the level of national income.
B) have a contractionary effect on national income.
C) decrease the marginal propensity to save out of each extra pound of income.
D) have an expansionary effect on national income.

Question 26

The government budget balance (BB) is:

A) government spending minus taxes.
B) taxes minus transfer payments minus government spending.
C) taxes minus government spending.
D) taxes minus transfer payments.

Question 27

GDP, the tax rate, autonomous taxes, transfer payments and government spending and the level of output together determine:

A) money supply.
B) potential output.
C) financial flow.
D) government budget balance.

Question 28

-Refer to Figure 7.4. NT is tax revenues and G is government expenditures. All figures are in billions. In this economy:

A) tax revenues and government spending both vary directly with GDP.
B) tax revenues vary directly with GDP, but government spending is independent of GDP.
C) tax revenues and government spending both vary inversely with GDP.
D) government spending varies directly with GDP, but tax revenues are independent of GDP.

Question 29

-Refer to Figure 7.4. The diagram shows that:

A) at low levels of income the government budget will be in deficit.
B) at low levels of income the government budget will be in surplus.
C) at low levels of income government spending decline.
D) at low levels of income government spending increase.

Question 30

Consider leakages and injections in an open economy with government sector. Which of the following equations is incorrect?

A) I+G+X=S+Z+NT.
B) S+(NT-G)-I=X-Z.
C) S+(NT-G)+(Z-X)=I.
D) S+(NT-G)+(X-Z)=I.

Question 31

Consider leakages and injections in an open economy with government sector. Select the incorrect equation from the following:

A) (Savings + net taxes - government spending - investment) = (export - import).
B) (Savings + net taxes - government spending) + (import - export) = investment.
C) (Savings + export + government spending) = (import + net taxes + investment).
D) (Savings + import + net taxes) = (investment + government spending + export).

Question 32

Which of the following statements is false?

A) If the economy's savings plus net taxes minus government spending minus investment is positive, it must mean that the economy's net export is positive.
B) Economy's investment can never be less than economy's savings.
C) Negative net export means that the economy is a net borrower in the international financial capital market.
D) Other things remaining the same, higher is the fiscal deficit, lower is the net export.

Question 33

Government actions to change its budget in order to change AE and keep GDP close to its potential level is called:

A) running a deficit.
B) stabilization policy.
C) a budget surplus.
D) monetary policy.

Question 34

Government may be able to increase equilibrium real GDP and reduce the unemployment rate by:

A) increasing government purchases and keeping taxes the same.
B) cutting taxes.
C) increasing both purchases and taxes by the same amount.
D) all of the above.

Question 35

Recession-fighting policies can be handled most easily by the:

A) household sector.
B) business sector.
C) financial sector.
D) government sector.

Question 36

Expansionary fiscal policy:

A) decreases aggregate expenditure and equilibrium GDP.
B) occurs when the government cuts taxes and/or increases spending.
C) occurs when the government increases taxes and cuts spending.
D) occurs when the government cuts taxes by less than it cuts spending.

Question 37

Tightening fiscal policy during a recession is likely to _______ equilibrium real GDP.

A) talk up
B) have no effect upon
C) increase
D) reduce

Question 38

Suppose that the government cuts taxes and reduces its revenues by $20 million. We would expect the aggregate expenditure curve to:

A) shift upward by more than the $20 million.
B) shift downward by less than the $20 million.
C) shift downward by more than the $20 million.
D) shift upward by less than the $20 million.

Question 39

Budget policy is government policy on:

A) spending and taxes.
B) monetary growth.
C) encouraging growth.
D) controlling inflation.

Question 40

To the economist, the term fiscal policy refers to:

A) the inequality of private saving and investment in the short run.
B) the use of the spending and taxing powers of government to affect aggregate expenditure and equilibrium output.
C) the role of the private sector in determining the size of gross national product.
D) the attempt by government to finance all of its public spending with tax revenues.

Question 41

Contractionary or restrictive fiscal policy is so named because it:

A) involves a contraction of the nation's money supply.
B) necessarily reduces the size of government.
C) is aimed at reducing aggregate expenditure and thus the inflationary gap.
D) is expressly designed to expand real GDP.

Question 42

The direction of discretionary fiscal policy can not be examined by the simple look at the changes in the actual budget deficits or surpluses. This is because:

A) those changes may reflect the changes in the general price level.
B) those changes may reflect changes in the tax revenues as a result of change in GDP.
C) those changes may reflect the changes in the tax revenues as a result of change in imports.
D) it is impossible to calculate the changes in the actual budget deficits or surpluses.

Question 43

The structural budget balance shows what the budget balance would be:

A) if the economy were at recession.
B) if the economy were at potential output.
C) if the economy were at boom.
D) if the economy at inflationary gap.

Question 44

The "structural budget balance" refers to:

A) the inflationary impact which the automatic stabilizers have in a full-employment economy.
B) that portion of potential GDP which is not consumed in the year it is produced.
C) the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.
D) the number of workers who are underemployed when the level of unemployment is 7 to 8 percent.

Question 45

The structural budget balance tells us:

A) that in a full-employment economy the federal budget should be in balance.
B) that tax revenues should vary inversely with GDP.
C) what the size of the budget deficit or surplus would be if the economy were at potential output.
D) the actual budget deficit or surplus realized in any given year.

Question 46

A structural budget deficit is also called a:

A) cyclically adjusted deficit.
B) cyclical deficit.
C) recession-caused deficit.
D) built-in stabilizer.

Question 47

An effective expansionary fiscal policy will:

A) reduce a cyclical deficit, but necessarily increase the total (actual) deficit.
B) reduce a structural deficit.
C) increase the structural deficit but reduce the cyclical deficit.
D) always result in a balanced budget once full-employment is achieved.

Question 48

Economists refer to the government budget balance which exists when the economy is operating at potential output as a:

A) cyclical balance.
B) surplus in the full-employment budget.
C) natural deficit.
D) structural budget balance.

Question 49

If the structural budget balance is deficit of about $100 billion and the actual budget balance is a deficit of about $150 billion, it can be concluded that there is:

A) an expansionary fiscal policy.
B) a contractionary fiscal policy.
C) an increased deficit caused by a recession.
D) fiscal mismanagement.

Question 50

-Refer to Figure 7.6. All figures are in billions of dollars. If the potential GDP is $600 billion while the actual GDP is $400 billion, the actual budget balance is:

A) a deficit of $200 billion.
B) a surplus of $60 billion.
C) a surplus of $40 billion.
D) a deficit of $20 billion.

Question 51

-Refer to Figure 7.6. All figures are in billions of dollars. If the full-employment GDP is $600 billion while the actual GDP is $400 billion, the structural budget balance is:

A) + $40 billion.
B) zero.
C) - $ 60 billion.
D) + $20 billion.

Question 52

-Refer to Figure 7.6. All figures are in billions of dollars. If the potential GDP is $600 billion while the actual GDP is $400 billion, the reduction in the budget balance caused by recessionary gap is:

A) $40 billion.
B) $20 billion.
C) zero.
D) $60 billion.

Question 53

Annual structural budget balances as a percent of GDP

-Refer to Table 7.1. Fiscal policy was contractionary in _____________.

A) Year 2
B) Year 3
C) Year 4
D) Year 5

Question 54

The actual budget balance of the federal government in 2005 was about $ +5.7 billion. On the basis of this information it:

A) can be concluded that the economy was faced with serious inflation in 2005.
B) cannot be determined whether fiscal policy had an expansionary or a contractionary impact in 2005.
C) can be concluded that fiscal policy was contractionary in 2005.
D) can be concluded that fiscal policy was expansionary in 2005.

Question 55

Which of the following statements is false?

A) Structural budget balance decreases as the recessionary gap increases.
B) Structural budget balance is unaffected by recessionary or inflationary gaps.
C) Actual budget balance decreases as the recessionary gap increases.
D) Actual budget balance increases as the inflationary gap increases.

Question 56

Consider the budget balance (BB) equation of BB = tY -G Assume that t is 0.2, potential output is 1000 and G is 180.
Find the false statement from the following statements:

A) The structural budget balance is 20.
B) With negative GDP gap of 20%, the budget balance is -20.
C) With negative GDP, the structural budget balance will be less than 20.
D) There will be zero budget balance when Y is 900.

Question 57

All of the following would be included in a list of the government's automatic stabilizers except:

A) unemployment compensation.
B) education opportunity grants for low income households.
C) personal income taxes.
D) taxes on business income.

Question 58

_____________________change spending levels or tax rates to stabilize aggregate expenditure and aggregate demand.

A) Discretionary fiscal policies
B) Automatic stabilizers
C) Supply-side policies
D) Monetary targets

Question 59

The progressive income tax and unemployment compensation are examples of:

A) full-employment budgeting.
B) automatic stabilizers.
C) monetary policy.
D) a balanced budget multiplier.

Question 60

"Built-in stabilizers"imply that:

A)an annually balanced budget will automatically offset the pro-cyclical tendencies created by state and local finance and thereby stabilizes the economy.
B)with given tax rates and expenditures policies, a rise in Y will increase the budget balance, while a decline in Y will reduce the budget balance without any action on the part of government.
C)Parliament will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D)government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

Question 61

If the government pursues discretionary fiscal policy:

A) it should pursue balanced budget cuts in taxes and cuts in government spending, when the economy is experiencing recession.
B) it should increase taxes and/or cut government spending, when the economy is experiencing recessionary gaps.
C) it should increase taxes and/or cut government spending, when the economy is experiencing inflationary gaps.
D) it should do nothing and let the automatic stabilizers do their jobs.

Question 62

_________ the net tax rate, __________ is the fall in equilibrium output, when economy has suffered from a fall in investment.

A) More unstable, larger
B) Smaller, larger
C) Larger, smaller
D) Larger, larger

Question 63

A higher net tax rate _______ the multiplier, and _______ the output-effect of autonomous aggregate expenditures shocks.

A) reduces, stimulates
B) reduces, dampens
C) increases, dampens
D) increases, stimulates

Question 64

A government budget deficit is financed mainly by borrowing from the public by:

A) printing money.
B) raising taxes.
C) borrowing overseas.
D) selling bonds.

Question 65

Public debt accumulates when:

A) budget balance becomes more and more positive.
B) the budget balance becomes more and more negative.
C) deficits decrease.
D) there are balanced budget increases in taxes and in government spending.

Question 66

Which of the following statements is false?

A) Other things remaining the same, higher is the deficit, higher the debt-GDP ratio.
B) Other things remaining the same, lower is the GDP, higher the debt-GDP ratio.
C) Other things remaining the same, higher the deficit and higher the GDP, higher is the debt-GDP ratio.
D) Other things remaining the same, higher the interest rate, higher is the debt-servicing costs.

Question 67

Assume that the government runs budget surplus. The result is:

A) an increase in the total of outstanding government bonds.
B) the paradox of thrift.
C) a decrease in the public debt.
D) the money-fund effect.

Question 68

Successive federal government budget deficits in the recent past have:

A) increased aggregate expenditures and equilibrium income.
B) reduced government expenditures.
C) increased the public debt.
D) reduced the supply of government bonds available for financial portfolios.

Question 69

A country's public debt ratio is:

A) the outstanding public debt as a percentage of government expenditure.
B) the outstanding public debt as a percentage of investment expenditure.
C) the government's budget balance as a percentage of GDP.
D) outstanding public debt as a percentage of GDP.

Question 70

At the end of 2007, the federal government net debt ratio in Canada was:

A) about 10% of GDP.
B) about 20% of GDP.
C) about 35% of GDP.
D) about 60% of GDP.

Question 71

Consider an import function with Y in the vertical axis. If the marginal propensity to import (MPZ) is zero:

A) the import function is horizontal.
B) the import function has a negative slope.
C) the import function has a positive slope.
D) the import function is vertical.

Question 72

If the marginal propensity to import is 0.08, each additional dollar of national income adds ____ to planned ________.

A) 8 cents, exports
B) 8 cents, imports
C) 80 cents, exports
D) 80 cents, imports

Question 73

The expression S + NT + Z = I + G + X:

A) is derived from the aggregate expenditure equation in a closed economy.
B) is derived from the aggregate expenditure equation in an economy without international financial flows.
C) is derived from the aggregate expenditure equation in a closed economy with a government sector
D) is derived from the aggregate expenditure equation in an economy with government sector and international trade.

Question 74

If domestic GDP increases, imports will ________and net exports will _______.

A) fall, rise
B) fall, fall
C) rise, rise
D) rise, fall

Question 75

_____ export expenditure will increase equilibrium GDP, while a ______ MPZ will reduce equilibrium GDP.

A) higher, lower
B) higher, higher
C) lower, lower
D) lower, higher

Question 76

Increases in exports and increases in investment will:

A) shift the AE curve up.
B) shift the AE curve down.
C) make the AE curve steeper.
D) make the AE curve flatter.

Question 77

Higher is the MPZ:

A) higher is the export multiplier.
B) higher is the investment multiplier.
C) higher is the government expenditure multiplier.
D) lower is the balanced budget multiplier.

Question 78

In the open economy, marginal propensity to import is ________ related to GDP and net income tax rate is __________ related to GDP.

A) inversely, directly
B) inversely, inversely
C) directly, inversely
D) directly, directly

Question 79

Other things being equal, if a change in the tastes of Canadian consumers causes them to purchase less foreign goods at each level of income:

A) unemployment will increase domestically.
B) Canadian real GDP will fall.
C) deflation will occur domestically.
D) Canadian real GDP will rise.

Question 80

Recession in USA will:

A) have no perceptible impact on the Canadian economy.
B) cause inflation in the Canadian economy.
C) depress real output and employment in the Canadian economy.
D) stimulate real output and employment in the Canadian economy.