Question 1

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

Accepted Answer

A)   leftward shift in the aggregate demand curve.
B)   rightward shift in the aggregate demand curve.
C)   leftward shift in the aggregate supply curve.
D)   change in the price level.E) None of the above
F) A) and B)

Question 2

A net export effect may partially reinforce an expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 3

The net export effect may partially counteract an expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 4

If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap, it may fail to achieve its objective if:

Accepted Answer

A)   the households think of it as a permanent policy.
B)   the households think of it as a temporary policy.
C)   the households think of it as a 10 year program.
D)   the households think of it as a loss of revenue for the government.E) B) and C)
F) A) and D)

Question 5

The crowding-out effect refers to the possibility that deficit spending may lead people to increase their saving in anticipation of higher future taxes.

Accepted Answer

A) True 
 B)False

Question 6

-Refer to the above data. The 10 percent proportional tax on income would:

Accepted Answer

A)   reduce the MPC from .6 to .54.
B)   not affect the size of the MPC.
C)   reduce the MPC from .6 to .5.
D)   increase the MPC from .6 to .64.E) B) and C)
F) A) and B)

Question 7

If fiscal policy leads to higher interest rates, the dollar may appreciate and net exports fall.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)   Year 2
B)   Year 3
C)   Year 4
D)   Year 5E) None of the above
F) All of the above

Question 9

"Built-in stability" means that:

Accepted Answer

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 domestic income will reduce a budget deficit or produce a budget surplus while a decline will result in a deficit or a lower budget surplus.
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.E) None of the above
F) B) and C)

Question 10

An effective expansionary fiscal policy will:

Accepted Answer

A)   not change the size of full-employment deficit.
B)   reduce a full-employment deficit.
C)   increase the full-employment deficit.
D)   always result in a balanced budget once full-employment is achieved.E) C) and D)
F) A) and B)

Question 11

The most likely way the public debt burdens future generations is by:

Accepted Answer

A)   reducing the current level of investment.
B)   causing future unemployment.
C)   causing a slowly falling price level.
D)   reducing real interest rates.E) A) and C)
F) A) and B)

Question 12

The key to assessing whether fiscal policy is expansionary is to observe the change in the full-employment budget as a percentage of GDP.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is correct?

Accepted Answer

A)   The cyclically adjusted budget and the actual budget differ because the latter does not take government transfer payments into account.
B)   The cyclically adjusted budget is less likely to show a deficit than is the actual budget.
C)   The cyclically adjusted budget and the actual budget will show the same size deficit or surplus in any given fiscal year.
D)   The cyclically adjusted budget is more likely to show a deficit than is the actual budget.E) B) and D)
F) A) and B)

Question 14

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

Accepted Answer

A)   built-in stability.
B)   a cyclical deficit.
C)   an expansionary fiscal policy.
D)   a contractionary fiscal policy.E) A) and B)
F) All of the above

Question 15

If a deficit is financed by issuing new money, the:

Accepted Answer

A)   government is using its accumulated surplus to issue the new money.
B)   government will be competing with private borrowers for funds.
C)   increased demand for funds will drive up the interest rate.
D)   crowding-out of investment can probably be avoided.E) A) and D)
F) A) and C)

Question 16

If the government adopts a fiscal policy that is:

Accepted Answer

A)   expansionary, then net exports are likely to expand and reinforce the effects of the fiscal policy.
B)   contractionary, then net exports are likely to decline and partially offset the effects of the fiscal policy.
C)   contractionary, then net exports are likely to rise and reinforce the effects of the fiscal policy.
D)   expansionary, then net exports are likely to decline and partially offset the effects of the fiscal policy.E) A) and D)
F) A) and C)

Question 17

-Refer to the above graph. The crowding-out effect would be illustrated by a:

Accepted Answer

A)   shift from curve A to curve B leading to a decrease in investment.
B)   shift from curve B to curve A leading to a decrease in interest rates.
C)   movement from point 1 to point 2 on curve A leading to a decrease in investment.
D)   movement from point 2 to point 1 on curve A leading to a decrease in investment.E) A) and B)
F) None of the above

Question 18

An increase in taxes would be an expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 19

Other things being equal, which of the policies will have the most expansionary effect on the economy?

Accepted Answer

A)   a balanced budget
B)   a budget surplus held as an idle money balance
C)   a budget deficit financed by creating new money
D)   a budget surplus used for debt retirementE) B) and C)
F) None of the above

Question 20

Due to automatic stabilizers, when income rises, government transfer spending:

Accepted Answer

A)   increases and tax revenues decrease.
B)   decreases and tax revenues increase.
C)   and tax revenues decrease.
D)   and tax revenues increase.E) A) and D)
F) None of the above

Exam 11: Fiscal Policy, Deficits, Surpluses, and Debt

If fiscal policy leads to higher interest rates, the dollar may appreciate and net exports fall.

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-Refer to the above data. The 10 percent proportional tax on income would:

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

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-Refer to the above graph. The crowding-out effect would be illustrated by a:

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In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

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The key to assessing whether fiscal policy is expansionary is to observe the change in the full-employment budget as a percentage of GDP.

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The most likely way the public debt burdens future generations is by:

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A net export effect may partially reinforce an expansionary fiscal policy.

Correct AnswerverifiedShow Answer

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

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If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap, it may fail to achieve its objective if:

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The crowding-out effect refers to the possibility that deficit spending may lead people to increase their saving in anticipation of higher future taxes.

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Which of the following statements is correct?

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Due to automatic stabilizers, when income rises, government transfer spending:

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An effective expansionary fiscal policy will:

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The net export effect may partially counteract an expansionary fiscal policy.

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If the government adopts a fiscal policy that is:

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An increase in taxes would be an expansionary fiscal policy.

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If a deficit is financed by issuing new money, the:

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Other things being equal, which of the policies will have the most expansionary effect on the economy?

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"Built-in stability" means that:

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