Deck 13: Fiscal Policy, Deficits, and Debt

Question 1

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is:

A) Active Monetary Policy
B) Automatic Fiscal Policy
C) Discretionary Fiscal Policy
D) Active Federal Policy

Answer 1

Discretionary Fiscal Policy

Question 2

The intent of contractionary fiscal policy is to:

A) Increase aggregate demand
B) Decrease aggregate demand
C) Increase aggregate supply
D) Decrease aggregate supply

Answer 2

Decrease aggregate demand

Question 3

Refer to the graph above. Assume that the economy is in a recession with a price level of P₁ and output level Q₁. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output?

A) P₂ and Q₄
B) P₁ and Q₁
C) P₂ and Q₂
D) P₁ and Q₃

Answer 3

P₂ and Q₂

Question 4

When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:

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

Question 5

The economy starts out with a balanced Federal budget. If the government then implements expansionary fiscal policy, then there will be a:

A) Trade deficit
B) Trade surplus
C) Budget deficit
D) Budget surplus

Question 6

If the government wishes to increase the level of real GDP, it might reduce:

A) Taxes
B) Transfer payments
C) The size of the budget deficit
D) Its purchases of goods and services

Question 7

Which combination of fiscal policy actions would most likely offset each other?

A) Increase taxes and government spending
B) Decrease taxes and increase government spending
C) Increase taxes, but make no change in government spending
D) Decrease government spending, but make no change in taxes

Question 8

Discretionary fiscal policy is often initiated on the advice of the:

A) Congressional Budget Office
B) Council of Economic Advisers
C) Joint Economic Committee
D) Federal Reserve Board

Question 9

Refer to the figure above. The economy is at equilibrium at point C which is below potential output. What fiscal policy would increase real GDP?

A) Shift aggregate demand by increasing taxes
B) Shift aggregate demand by decreasing transfer payments
C) Shift aggregate demand by decreasing government spending
D) Shift aggregate demand by increasing transfer payments

Question 10

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

A) Supply-side fiscal policy
B) Expansionary fiscal policy
C) Contractionary fiscal policy
D) Nondiscretionary fiscal policy

Question 11

Contractionary fiscal policy would tend to make a budget deficit become:

A) Bigger
B) Smaller
C) A trade deficit
D) A trade surplus

Question 12

Refer to the above graph. What combination would most likely cause a shift from AD₁ to AD₃?

A) An increase in taxes and an increase in government spending
B) A decrease in taxes and an increase in government spending
C) An increase in taxes and a decrease in government spending
D) A decrease in taxes and a decrease in government spending

Question 13

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

A) Increased government spending or increased taxation, or a combination of the two actions
B) Increased government spending or decreased taxation, or a combination of the two actions
C) Increased government spending or increased taxation, but not a combination of the two actions
D) Decreased government spending or decreased taxation, or a combination of the two actions

Question 14

Refer to the above graph. What combination would most likely cause a shift from AD₁ to AD₂?

A) An increase in taxes and an increase in government spending
B) A decrease in taxes and an increase in government spending
C) An increase in taxes and no change in government spending
D) A decrease in taxes and a decrease in government spending

Question 15

The set of fiscal policies that would be most contractionary would be a(n):

A) Increase in government spending and taxes
B) Decrease in government spending and taxes
C) Increase in government spending and a decrease in taxes
D) Decrease in government spending and an increase in taxes

Question 16

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n):

A) Supply-side fiscal policy
B) Expansionary fiscal policy
C) Contractionary fiscal policy
D) Nondiscretionary fiscal policy

Question 17

The goal of expansionary fiscal policy is to increase:

A) The price level
B) Aggregate supply
C) Real GDP
D) Unemployment

Question 18

When the Federal government cuts taxes and increases spending to stimulate the economy during a period of recession, such actions are design to be:

A) Passive
B) Automatic
C) Countercyclical
D) Nondiscretionary

Question 19

Fiscal policy is enacted through changes in:

A) Interest rates and the price level
B) The supply of money and foreign exchange
C) Unemployment and inflation
D) Taxation and government spending

Question 20

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy:

A) Cyclical
B) Implicit
C) Discretionary
D) Nondiscretionary

Question 21

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

A) $6 billion
B) $9 billion
C) $12 billion
D) $16 billion

Question 22

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A) Increase government spending and taxes
B) Decrease government spending and taxes
C) Decrease government spending and increase taxes
D) Increase government spending and decrease taxes

Question 23

The so-called "negative taxes" are better known as:

A) Government spending
B) Transfer payments
C) Built-in stabilizers
D) Fiscal multipliers

Question 24

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A) Increase government spending and taxes
B) Decrease government spending and taxes
C) Decrease government spending and increase taxes
D) Increase government spending and decrease taxes

Question 25

Refer to the graph above. Assume that the economy initially has a price level of P₁ and output level Q₁. If the government implements expansionary fiscal policy, and the full multiplier effect was felt, it would bring the economy to:

A) P₂ and Q₄
B) P₁ and Q₁
C) P₂ and Q₂
D) P₁ and Q₃

Question 26

A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:

A) Economy's MPS is large
B) Economy's aggregate supply curve is flat
C) Economy's aggregate supply curve is steep
D) Unemployment rate is high

Question 27

Automatic stabilizers smooth fluctuations in the economy because they produce changes in the government's budget that:

A) Reinforce changes in GDP
B) Help offset changes in GDP
C) Produce a cyclically-adjusted budget
D) Produce a standardized budget

Question 28

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

A) Makes the actual budget a better reflection of the condition of the economy than the Standardized budget
B) Does not produce a cyclical deficit as discretionary policy does
C) Is not subject to the timing problems of discretionary policy
D) Has a greater multiplier effect than discretionary policy

Question 29

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by:

A) $10 billion
B) $20 billion
C) $31.25 billion
D) $40.50 billion

Question 30

Which of the following fiscal policy changes would be the most expansionary?

A) A $40 billion increase in government spending
B) A $20 billion tax cut and $20 billion increase in government spending
C) A $10 billion tax cut and $30 billion increase in government spending
D) A $40 billion tax cut

Question 31

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

A) $6 billion
B) $8 billion
C) $10 billion
D) $16 billion

Question 32

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:

A) The average propensity to consume
B) The size of the multiplier
C) Income taxes
D) Exchange rates

Question 33

Which of the following expansionary fiscal policy changes would be most favored by those economists who think that the government is too large and inefficient?

A) A $40 billion increase in government spending
B) A $20 billion tax cut and $20 billion increase in government spending
C) A $10 billion tax cut and $30 billion increase in government spending
D) A $40 billion tax cut

Question 34

Which of the following fiscal policy changes would be the most contractionary?

A) A $40 billion increase in taxes
B) A $10 billion increase in taxes and a $30 billion cut in government spending
C) A $20 billion increase in taxes and a $20 billion cut in government spending
D) A $30 billion increase in taxes and a $10 billion cut in government spending

Question 35

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary when the:

A) Economy's MPS is small
B) Economy's MPS is large
C) Economy's MPC is small
D) Unemployment rate is low

Question 36

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25, then it could:

A) Increase taxes by $16 billion
B) Increase taxes by $24 billion
C) Decrease government spending by $10 billion
D) Decrease government spending by $16 billion

Question 37

Due to automatic stabilizers, when the nation's total income rises, government transfer spending:

A) Increases and tax revenues decrease
B) Decreases and tax revenues increase
C) And tax revenues decrease
D) And tax revenues increase

Question 38

If the economy is to have significant built-in stability, then when real GDP increases, the tax revenues should:

A) Fall proportionately more than the change in GDP
B) Fall proportionately less than the change in GDP
C) Rise proportionately more than the change in GDP
D) Rise proportionately less than the change in GDP

Question 39

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system:

A) Increases crowding out in the economy
B) Decreases real interest rates in the economy
C) Offsets the timing problem for fiscal policy
D) Serves as an automatic stabilizer for the economy

Question 40

Which of the following is an example of built-in stability? As real GDP decreases, income tax revenues:

A) Increase and transfer payments decrease
B) Decrease and transfer payments increase
C) And transfer payments both decrease
D) And transfer payments both increase

Question 41

The cyclically-adjusted deficit as a percentage of GDP is 2 percent in Year 1. This cyclically-adjusted deficit becomes 1 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:

A) Fiscal policy was more expansionary
B) Fiscal policy was more contractionary
C) The Federal government is decreasing taxes
D) The Federal government is increasing spending

Question 42

The more progressive the tax system, the:

A) Less is the built-in stability for the economy
B) Greater is the built-in stability for the economy
C) Less is the effect of crowding-out on the economy
D) Greater is the severity of business fluctuations on the economy

Question 43

In the graph above, tax revenues vary:

A) Directly with the level of GDP
B) Inversely with the level of GDP
C) Directly with the level of government spending
D) Inversely with the level of government spending

Question 44

In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2:

A) Real GDP decreased
B) Real GDP increased
C) Full employment was attained
D) Fiscal policy became less expansionary

Question 45

If the cyclically-adjusted budget shows a deficit zero and the actual budget shows a deficit of about $150 billion, it can be concluded that there is:

A) Built-in stability
B) A cyclical deficit
C) An expansionary fiscal policy
D) A contractionary fiscal policy

Question 46

Refer to the graph above. Automatic stability in this economy could be enhanced by:

A) Changing the tax system so that the tax line has a steeper slope
B) Changing the tax system so that the tax line is shifted upward but parallel to its present position
C) Changing the government expenditures line so that it has a positive slope
D) Changing the tax system so that the tax line has a flatter slope

Question 47

Refer to the data in the table above. The direction of fiscal policy became more contractionary from:

A) 2005 to 2006
B) 2001 to 2002
C) 2002 to 2003
D) 2003 to 2004

Question 48

If you are told that the government had an actual budget deficit of $50 billion, then you would:

A) Know that fiscal policy was expansionary
B) Know that fiscal policy was contractionary
C) Know that fiscal policy was producing a cyclical deficit
D) Not be able to determine the direction of fiscal policy from the information given

Question 49

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be:

A) Expansionary and worsen the effects of the recession
B) Contractionary and worsen the effects of the recession
C) Contractionary and counter the effects of the recession
D) Expansionary and counter the effects of the recession

Question 50

Actions by the Federal government that decrease the progressivity of the tax system:

A) Decrease the amount of government spending
B) Increase the effect of automatic stabilizers
C) Decrease the effect of automatic stabilizers
D) Increase the multiplier effect

Question 51

Which of the following serves as an automatic stabilizer in the economy?

A) Interest rates
B) Exchange rates
C) The inflation rate
D) The progressive income tax

Question 52

The cyclically-adjusted budget estimates the Federal budget deficit or surplus if:

A) The rate of inflation were zero
B) The economy were at full employment
C) The MPC were zero
D) The government had a balanced budget

Question 53

In Year 1, the actual budget deficit was $200 billion and the cyclically-adjusted deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the cyclically-adjusted deficit was $175 billion. It can be concluded that fiscal policy from Year 1 to Year 2 became more:

A) Proportional
B) Progressive
C) Contractionary
D) Expansionary

Question 54

Refer to the data in the table above. In which year was the cyclical deficit the largest?

A) 2000
B) 1999
C) 2003
D) 2004

Question 55

Refer to the data in the table above. The direction of fiscal policy became more expansionary from:

A) 1999 to 2000
B) 2004 to 2005
C) 2002 to 2003
D) 2003 to 2004

Question 56

Refer to the graph above. A budget surplus would be associated with GDP level:

A) H
B) J
C) K
D) L

Question 57

The table below shows the cyclically-adjusted budget deficit as a percentage of GDP over a five-year period. Refer to the information above. In which year was fiscal policy turning more expansionary?

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

Question 58

The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be:

A) Balanced
B) In deficit
C) In surplus
D) Expanding

Question 59

The built-in stabilizers in the economy tend to:

A) Fully offset irregular swings in real GDP
B) Magnify somewhat the irregular swings in real GDP
C) Dampen the irregular swings in real GDP
D) Overcompensate for the irregular swings in real GDP

Question 60

The cyclically-adjusted surplus as a percentage of GDP is 1 percent in Year 1. This surplus becomes a deficit of 2 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:

A) Fiscal policy turned more expansionary
B) Fiscal policy turned more contractionary
C) GDP increased
D) GDP decreased

Question 61

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken

Question 62

The cyclically-adjusted surplus in the U.S. went from +1.2% of GDP in 2000 to +0.6% of GDP in 2002. This suggests that the government during that period:

A) Cut taxes and increased spending
B) Increased taxes and cut spending
C) Wanted to rein in inflation
D) Did not change its discretionary fiscal policy

Question 63

Without a change in discretionary fiscal policy, we would expect that if the economy goes into recession, then the:

A) Cyclically-adjusted deficit and the actual deficit would both increase
B) Cyclically-adjusted deficit and the actual deficit would both decrease
C) Cyclically-adjusted deficit would stay the same while the actual deficit would increase
D) Cyclically-adjusted deficit would increase while the actual deficit would stay the same

Question 64

If people expected that a fiscal policy in the form of a tax cut was temporary, then this policy's effect on the economy will tend to be:

A) Stronger
B) Weaker
C) The exact opposite of what was intended
D) As the multiplier effect would predict

Question 65

The crowding-out effect suggests that:

A) Increases in consumption are always at the expense of saving
B) Increases in government spending will close a recessionary expenditure gap
C) Increases in government spending may reduce private investment
D) High taxes reduce both consumption and saving

Question 66

The American Recovery and Reinvestment Act of 2009 is a clear example of:

A) Nondiscretionary fiscal policy that made the cyclically-adjusted budget become more positive
B) Nondiscretionary fiscal policy that made the cyclically-adjusted budget become more negative
C) Discretionary fiscal policy that made the cyclically-adjusted budget become more positive
D) Discretionary fiscal policy that made the cyclically-adjusted budget become more negative

Question 67

The Great Recession of 2007-09 and the consequent policy response made the:

A) Actual budget deficit become very close to the cyclically-adjusted deficit during that period
B) Actual budget deficit shrink during that period
C) Cyclically-adjusted deficit grow during that period
D) Cyclically-adjusted budget balance turn positive during that period

Question 68

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement:

A) Contractionary fiscal policy
B) No change in fiscal policy
C) Expansionary fiscal policy
D) Countercyclical fiscal policy

Question 69

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the:

A) Crowding-out lag
B) Recognition lag
C) Operational lag
D) Administrative lag

Question 70

State and local governments are limited in their ability to respond to recessions because of:

A) Local politics and politicians
B) Their desire to always run budget surpluses
C) The lack of proper economic research and assistance
D) Constitutional and other requirements to balance their budgets

Question 71

When the U.S. economy reached full employment in 2007, the cyclically-adjusted deficit that year was -1.3% of GDP. From this information, we know that the:

A) Actual budget deficit must have been very close to 0% of GDP
B) Government implemented a contractionary fiscal policy that year
C) Actual budget deficit must have been very close to -1.3% of GDP
D) Government implemented a more expansionary fiscal policy from 2006 to 2007

Question 72

Proponents of the notion of a "political business cycle" suggest that:

A) The standardized budget is a better indicator of the state of the economy than the actual budget, for political reasons
B) Cyclical swings in the economy are produced by the inherent political instability found in capitalist economies
C) A possible cause of economic fluctuations is the use of fiscal policy by policy-makers for political purposes and goals
D) There is constant political trading among policy-makers that tends to make the economic policies of state and local governments procyclical

Question 73

The last year when there was a surplus in the actual U.S. Federal budget was in:

A) 2001
B) 2002
C) 2003
D) 2004

Question 74

The bursting of the Dot.com bubble in 2000, along with the terrorist attacks in 2001, made the U.S. government:

A) Decrease its cyclically-adjusted budget deficit from 2000 to 2002
B) Increase its cyclically-adjusted budget surplus from 2000 to 2002
C) Increase its cyclically-adjusted budget deficit from 2000 to 2002
D) Increase its actual budget surplus from 2000 to 2002

Question 75

The crowding-out effect arises when:

A) Government lends in the money market, thus decreasing interest rates
B) Government borrows in the money market, thus decreasing interest rates
C) Government lends in the money market, thus increasing interest rates
D) Government borrows in the money market, thus causing an increase in interest rates

Question 76

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

A) Budget lag
B) Recognition lag
C) Operational lag
D) Administrative lag

Question 77

The American Recovery and Reinvestment Act of 2009 included mostly:

A) Increases in taxes and in government spending
B) Decreases in taxes and in government spending
C) Increases in government spending and decreases in taxes
D) Decreases in government spending and increases in taxes

Question 78

The crowding-out effect works through interest rates and it tends to:

A) Increase the effectiveness of a tax increase
B) Decrease the effectiveness of a tax increase
C) Decrease the effectiveness of an increase in government spending
D) Increase the effectiveness of an increase in government spending

Question 79

One timing problem in using fiscal policy to counter a recession is the "operational lag" that occurs between the:

A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken

Question 80

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the:

A) Start of the recession and the time it takes to recognize that the recession has started
B) Start of a predicted recession and the actual start of the recession
C) Time fiscal action is taken and the time that the action has its effect on the economy
D) Time the need for the fiscal action is recognized and the time that the action is taken