Question 1

Suppose aggregate demand is too low to bring about the Natural Real GDP level.A Keynesian policy prescription would call for a(n)_____________________ to close this recessionary gap.

Accepted Answer

Keynesian economics suggests that during periods of low aggregate demand, which leads to unemployment and underutilized resources, the government should intervene to stimulate the economy. This can be achieved through an increase in government spending (A) to directly boost demand or a decrease in taxes (D) to increase disposable income for consumers and businesses, thereby indirectly boosting demand. Both measures aim to close the recessionary gap by increasing aggregate demand.

Question 2

__________ flows from government to households.

Accepted Answer

A transfer payment is when the government gives money to households without expecting anything in return, such as Social Security or welfare benefits.

Question 3

Suppose Congress increases income taxes.This is an example of

Accepted Answer

Increasing income taxes reduces disposable income and decreases consumption spending, leading to a decrease in aggregate demand. This is an example of contractionary fiscal policy.

Question 4

Which of the following is an example of crowding out?

Accepted Answer

Crowding out occurs when government spending increases and causes a decrease in private spending. Option B fits this definition as government deficit spending increases interest rates, which then causes a decrease in private investment spending.

Question 5

Suppose the economy is at a position below its institutional production possibilities frontier.In response to this situation,Keynesian economists would propose that government __________ taxes,which will cause the aggregate demand curve to shift to the __________ and Real GDP will __________.

Accepted Answer

The answer of Suppose the economy is at a position...

Question 6

Suppose Congress decreases income taxes.This is an example of

Accepted Answer

Decreasing income taxes is an example of expansionary fiscal policy because it increases disposable income and encourages consumer spending, which in turn stimulates the economy.

Question 7

A federal budget surplus

Accepted Answer

A federal budget surplus occurs when tax revenues exceed government expenditures.

Question 8

An expansionary fiscal policy will

Accepted Answer

An expansionary fiscal policy involves increasing government spending and/or decreasing taxes to stimulate economic growth. This can lead to a budget deficit if the government does not reduce spending or increase taxes in the future to offset the initial increase in spending or decrease in taxes. However, it is not necessarily always the case that an expansionary fiscal policy will lead to a budget deficit. It depends on the specific actions taken by the government and the state of the economy. Therefore, option C is the best answer as it acknowledges that sometimes, an expansionary fiscal policy may lead to a budget deficit.

Question 9

An example of automatic fiscal policy is

Accepted Answer

The answer of An example of automatic fiscal policy is
...

Question 10

A balanced budget occurs when

Accepted Answer

A balanced budget occurs when government expenditures equal tax revenues, meaning the government is not spending more than it is bringing in. A budget deficit occurs when expenditures exceed revenues, while a budget surplus occurs when revenues exceed expenditures. The elimination of the national debt is not a requirement for a balanced budget. The deficit-GDP ratio is a measure of the size of a budget deficit in relation to the size of the economy and is not relevant to the definition of a balanced budget. Transfer payments and tax revenues need not be equal for a budget to be balanced, as other sources of revenue can also be used to balance government expenditures.

Question 11

Suppose the economy is at a position below the physical production possibilities frontier but above the institutional production possibilities frontier.In response to this situation,Keynesian economists may propose that government enact __________ fiscal policy to correct this __________ gap by __________ government expenditures.

Accepted Answer

The answer of Suppose the economy is at a position...

Question 12

If there is complete crowding out as a result of an increase in government spending there will be

Accepted Answer

When there is complete crowding out due to an increase in government spending, the increase in government spending is exactly offset by a decrease in private spending, leading to no change in aggregate demand.

Question 13

Suppose the economy is at a position below the institutional production possibilities frontier.In response to this situation,Keynesian economists would propose that the government should __________ expenditures,which will cause the aggregate demand curve to shift to the __________ in an attempt to close this __________ gap.

Accepted Answer

Keynesian economists advocate for government intervention, in the form of increased expenditures, to stimulate demand and close the output gap during recessions. This will shift the aggregate demand curve to the right, which would help to close the recessionary gap. Choice D is the only option that suggests an increase in government expenditures and a shift to the right, both of which are consistent with Keynesian economics.

Question 14

Reductions in private spending as a result of increased government spending or borrowing is called

Accepted Answer

Crowding out refers to the decrease in private spending, investment, or consumption that occurs when government increases its borrowing or spending. This happens because the increased demand for loanable funds leads to higher interest rates, which can make borrowing more expensive and reduce private investment.

Question 15

When the economy is in a recessionary gap,Keynesian economists will often advocate expansionary policy measures.Why?

Accepted Answer

Keynesian economists believe that an economy can get stuck in a recessionary gap and cannot recover without government intervention. They also believe that the economy can take too long to eliminate this gap and return to full-employment output. Therefore, they advocate for expansionary policy measures to stimulate spending and increase aggregate demand, which can help the economy return to full-employment output faster. They are not generally in favor of increasing taxes, as this can decrease consumer spending and lower aggregate demand, making the recessionary gap worse.

Question 16

A federal budget deficit

Accepted Answer

A federal budget deficit occurs when government expenditures exceed tax revenues, resulting in the government needing to borrow money to make up the difference. This can result from a variety of factors, such as increased spending on programs, decreased tax revenue due to economic downturns, or a combination of both.

Question 17

Crowding out results in a decrease in

Accepted Answer

Crowding out occurs when an increase in government spending leads to a decrease in private spending due to higher interest rates, which reduce private sector investment. Therefore, the decrease is in private spending, not government spending, transfer payments or defense spending.

Question 18

Expansionary fiscal policy actions include __________ government spending and/or __________ taxes,while contractionary fiscal policy actions include __________ government spending and/or __________ taxes.

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes to stimulate the economy, while contractionary fiscal policy involves decreasing government spending and/or increasing taxes to cool down an overheated economy.

Question 19

With complete crowding out,an increase in government spending

Accepted Answer

With complete crowding out, an increase in government spending will lead to a decrease in available funds for private investment, which will result in a reduction in private spending. Therefore, the increase in government spending is completely offset by a reduction in private spending.

Question 20

Fiscal policy refers to

Accepted Answer

Fiscal policy refers to changes in government expenditures and taxation to achieve particular economic goals. It involves the use of government spending and taxation to influence the economy. The government may increase its spending and reduce taxes to stimulate demand and boost economic growth or decrease spending and raise taxes to reduce inflationary pressures.

Quiz 11: Fiscal Policy and the Federal Budget

Suppose aggregate demand is too low to bring about the Natural Real GDP level.A Keynesian policy prescription would call for a(n) _____________________ to close this recessionary gap.