Question 1

When the federal government is running a budget deficit:

Accepted Answer

A budget deficit occurs when government expenditures exceed government tax revenues, meaning that the government is spending more money than it is taking in. This typically leads to an increase in the size of the national debt, as the government must borrow money to cover the shortfall.

Question 2

Fiscal policy is concerned with:

Accepted Answer

Fiscal policy involves changes in government spending and/or tax revenues in order to influence the economy.

Question 3

A government spending and taxation policy to achieve macroeconomic goals is known as:

Accepted Answer

Fiscal policy involves government spending and taxation to achieve macroeconomic goals such as stabilizing the economy or promoting economic growth. Choice A, countercyclical policy, is a type of fiscal policy that specifically focuses on stabilizing the economy during economic recessions or booms. Choice C, monetary policy, involves the control of the money supply and interest rates by a central bank to achieve similar macroeconomic goals. Choice D, a balanced budget, is not necessarily a policy to achieve macroeconomic goals, but rather a budget in which government expenditures equal government revenues.

Question 4

Suppose the economy is on the classical range of the aggregate supply curve and has a problem with inflation.According to Keynesian theory,which of the following is an appropriate discretionary fiscal policy to use in this situation?

Accepted Answer

According to Keynesian theory, during a period of inflation, the government should use contractionary fiscal policy such as increasing taxes or reducing government spending to decrease aggregate demand and bring down the level of inflation. Therefore, higher taxes would be an appropriate discretionary fiscal policy in this situation.

Question 5

The Keynesian analysis of fiscal policy argues that:

Accepted Answer

The Keynesian analysis of fiscal policy argues that fiscal policy should be used to maintain aggregate demand at a level consistent with full employment. This means that during a recession, fiscal policy should be expansionary to stimulate demand and during an inflationary boom, fiscal policy should be restrictive to control demand. The idea of balancing the federal budget annually is not a key part of Keynesian analysis, although it may be a goal for some policymakers. The focus is on using fiscal policy to manage demand in the economy.

Question 6

If an economy were experiencing a high rate of unemployment as the result of insufficient aggregate demand,a Keynesian economist would favor:

Accepted Answer

A Keynesian economist would recommend a reduction in taxes without any offsetting reduction in government expenditures to stimulate aggregate demand, which can help reduce unemployment caused by insufficient demand. This approach is based on the belief that increasing disposable income will lead to higher consumer spending, thus boosting demand and economic activity.

Question 7

Expansionary fiscal policy consists of:

Accepted Answer

Expansionary fiscal policy aims to increase aggregate demand in the economy by increasing government spending. This increased spending boosts employment, production, and economic growth. Therefore, increasing government spending is the best choice. Option B is incorrect because it refers to taxation rather than spending. Option C is incorrect because it refers to contractionary fiscal policy. Option D may have a positive impact on the economy but does not directly address the issue of aggregate demand.

Question 8

When an economy is operating below its potential capacity,Keynesian economists argue that:

Accepted Answer

When an economy is operating below its potential capacity, Keynesian economists suggest that the government should intervene by cutting taxes and/or increasing spending to stimulate aggregate demand. This is done in order to boost economic activity, increase employment opportunities, and ultimately help the economy to operate at its full potential. Raising taxes in this scenario would have negative effects on aggregate demand and would only worsen the situation, while lowering taxes in the presence of a budget deficit could worsen the deficit problem.

Question 9

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

Accepted Answer

Discretionary fiscal policy refers to the deliberate changes in government spending and/or taxes as a result of legislation. Open market operations refer to the buying and selling of government securities by the Federal Reserve, while discretionary monetary policy refers to the deliberate changes in the money supply and interest rates by the Federal Reserve. Balanced budget operations refer to the goal of balancing government spending with government revenue, rather than changing spending or taxes.

Question 10

Which of the following statements is true?

Accepted Answer

Discretionary fiscal policy refers to the deliberate actions taken by the government to stabilize the economy through changes in government spending and taxes. The other options are incorrect. A is describing monetary policy, not fiscal policy. C describes the spending multiplier, not the tax multiplier. D describes a budget surplus, not a deficit.

Question 11

If the marginal propensity to consume (MPC)is 0.75,and if policy makers wish to increase real GDP by $300 million,then by how much would they have to change taxes?

Accepted Answer

The answer of If the marginal propensity to consume (MPC)is...

Question 12

An expansionary fiscal policy may include:

Accepted Answer

An expansionary fiscal policy aims to stimulate economic growth and can be achieved through increasing government spending, discretionary increases in transfer payments or reducing taxes. Therefore, all of the options listed (A, B, and C) would be included in an expansionary fiscal policy.

Question 13

A balanced budget is present when:

Accepted Answer

A balanced budget is present when government revenues equal government expenditures. It does not necessarily imply full employment, equal public and private sector spending, or perfect alignment between actual and planned aggregate spending.

Question 14

Contractionary fiscal policy is deliberate government action to influence aggregate demand and the level of real GDP through:

Accepted Answer

Contractionary fiscal policy involves decreasing government spending or increasing taxes in order to decrease aggregate demand and ultimately reduce inflation. This can be achieved through various measures such as reducing government subsidies or increasing income tax rates.

Question 15

Which of the following is an example of expansionary fiscal policy?

Accepted Answer

Expansionary fiscal policy is meant to stimulate economic growth and increase aggregate demand. This is typically achieved by increasing government spending or decreasing taxes. By increasing government spending, there is more money being injected into the economy which can stimulate consumer spending and business investment.

Question 16

Suppose that the economy is operating in full-employment equilibrium along the vertical section of the aggregate supply curve.If the aggregate demand curve is reduced by $100 billion in order for the price level to decline by 5 percent,and if the marginal propensity to consume (MPC)is 0.75,then what change in taxes would generate the desired price reduction?

Accepted Answer

Since the economy is operating at full-employment equilibrium along the vertical section of the aggregate supply curve, output is fixed and any changes in demand will only affect the price level. Therefore, a decrease in aggregate demand by $100 billion will result in a 5% decrease in the price level.

The MPC of 0.75 indicates that for every $1 decrease in taxes, consumption spending will increase by $0.75. To achieve the desired $100 billion decrease in aggregate demand, we need to use the following formula:

Change in Taxes = (Desired Change in Aggregate Demand) / MPC

= $100 billion / 0.75

= $133.3 billion

However, we are looking for the change in taxes needed to achieve a 5% decrease in the price level, which is smaller than the desired $100 billion decrease in aggregate demand. This means that we need a smaller change in taxes than the calculated $133.3 billion.

To find the exact change in taxes needed, we can use the following formula:

Change in Price Level = (Change in Aggregate Demand / Aggregate Demand) x (1 / Marginal Propensity to Consume)

-5% = (-$100 billion / Aggregate Demand) x (1 / 0.75)

Aggregate Demand = $2 trillion

The initial level of aggregate demand is $2 trillion, and we need to decrease it by $100 billion to achieve the desired 5% decrease in the price level. Therefore, the new level of aggregate demand is $1.9 trillion.

To find the change in taxes needed, we can use the formula:

Change in Taxes = (Change in Aggregate Demand) / MPC

= ($1.9 trillion - $2 trillion) / 0.75

= -$133.3 billion / 0.75

= -$177.3 billion

However, this answer is in terms of a decrease in taxes, and we are looking for the absolute value of the change in taxes. Therefore, the answer is:

Answer: C

The change in taxes needed to achieve the desired 5% decrease in the price level is -$33.3 billion.

Question 17

If the marginal propensity to consume (MPC)is 0.75,and if the goal is to increase real GDP by $400 million,then by how much would government spending have to change to generate this increase in real GDP?

Accepted Answer

The answer of If the marginal propensity to consume (MPC)is...

Question 18

Keynesian analysis stresses that a tax cut that increases the government's budget deficit or reduces its budget surplus:

Accepted Answer

According to Keynesian analysis, a tax cut that increases the government's budget deficit or reduces its budget surplus will stimulate aggregate demand, leading to increased spending and ultimately promoting employment. This is because increased disposable income from the tax cut will lead to increased consumption, which will stimulate overall demand in the economy.

Question 19

The government is pursuing an expansionary policy if it:

Accepted Answer

An expansionary policy involves increasing government spending and/or reducing tax revenues in order to stimulate economic growth and increase employment. Option D is the only choice that includes an increase in spending or a reduction in tax revenues.

Question 20

Fiscal policy is government action to influence aggregate demand and in turn to influence the level of real GDP and the price level,through:

Accepted Answer

Fiscal policy refers to changes in government spending and/or tax revenues to influence aggregate demand. This can be done through increasing government spending, which will increase aggregate demand and ultimately lead to an increase in real GDP and the price level. Conversely, decreasing government spending or increasing taxes will decrease aggregate demand, causing real GDP and the price level to fall. Expanding and contracting the money supply falls under monetary policy, while regulation of net exports and encouraging businesses to invest fall under other economic policies.

Quiz 15: Fiscal Policy