Question 1

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?

Accepted Answer

A)   The economy is operating at full employment
B)   The economy is operating at less than full employment
C)   The expenditures fail to contribute to the development of human capital
D)   The deficit financing reduces the profit expectations of business firmsE) C) and D)
F) B) and C)

Question 2

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:

Accepted Answer

A)   Contractionary fiscal policy
B)   No change in fiscal policy
C)   Expansionary fiscal policy
D)   Countercyclical fiscal policyE) B) and C)
F) All of the above

Question 3

The intent of contractionary fiscal policy is to:

Accepted Answer

A)   Increase aggregate demand
B)   Decrease aggregate demand
C)   Increase aggregate supply
D)   Decrease aggregate supplyE) All of the above
F) A) and B)

Question 4

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

Accepted Answer

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 takenE) A) and B)
F) C) and D)

Question 5

Assume that if there was no crowding-out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding-out, then GDP would have:

Accepted Answer

A)   Increased by more than $100 billion
B)   Increased by less than $100 billion
C)   Increased by $100 billion
D)   Not increasedE) B) and C)
F) A) and B)

Question 6

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

Accepted Answer

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 budgetE) A) and D)
F) A) and C)

Question 7

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

Accepted Answer

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 givenE) A) and C)
F) B) and C)

Question 8

The more progressive the tax system, the:

Accepted Answer

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 economyE) A) and D)
F) C) and D)

Question 9

The crowding-out effect arises when:

Accepted Answer

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 ratesE) B) and C)
F) None of the above

Question 10

Expansionary fiscal policy will tend to reduce the budget deficit.

Accepted Answer

A) True 
 B)False

Question 11

A budget surplus means that:

Accepted Answer

A)   Government expenditures are greater than revenues in a given year
B)   Government revenues are greater than expenditures in a given year
C)   A nation's exports are greater than its imports
D)   A nation's imports are greater than its exportsE) B) and D)
F) C) and D)

Question 12

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely:

Accepted Answer

A)   Crowd out future public investment
B)   Reduce the economy's future productive capacity
C)   Complement private investment
D)   Crowd out private investmentE) A) and D)
F) C) and D)

Question 13

The Social Security program is a retirement system where payments to retirees come from their previous contributions.

Accepted Answer

A) True 
 B)False

Question 14

1 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" class="answers-bank-image d-inline" rel="preload" > Refer to the above graph. What combination would most likely cause a shift from AD1 to AD3?

Accepted Answer

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 spendingE) C) and D)
F) A) and C)

Question 15

The crowding-out effect will be minimal when the economy is in a severe recession.

Accepted Answer

A) True 
 B)False

Question 16

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?

Accepted Answer

A)   $6 billion
B)   $9 billion
C)   $12 billion
D)   $16 billionE) A) and B)
F) A) and C)

Question 17

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

Accepted Answer

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 negativeE) A) and B)
F) B) and D)

Question 18

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

Accepted Answer

A)   The average propensity to consume
B)   The size of the multiplier
C)   Income taxes
D)   Exchange ratesE) All of the above
F) B) and C)

Question 19

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

Accepted Answer

A)   Reinforce changes in GDP
B)   Help offset changes in GDP
C)   Produce a cyclically-adjusted budget
D)   Produce a standardized budgetE) All of the above
F) A) and B)

Question 20

Which of the following nations had the highest public sector debt as a percentage of GDP in 2012?

Accepted Answer

A)   The U.S.
B)   Japan
C)   The U.K.
D)   GreeceE) B) and C)
F) A) and B)

Exam 13: Fiscal Policy, Deficits, and Debt

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

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The crowding-out effect will be minimal when the economy is in a severe recession.

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Assume that if there was no crowding-out, an increase in government spending would increase GDP by $100 billion. On the other hand, if there had been full crowding-out, then GDP would have:

Correct AnswerverifiedShow Answer

The intent of contractionary fiscal policy is to:

Correct AnswerverifiedShow Answer

Expansionary fiscal policy will tend to reduce the budget deficit.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The more progressive the tax system, the:

Correct AnswerverifiedShow Answer

The Social Security program is a retirement system where payments to retirees come from their previous contributions.

Correct AnswerverifiedShow Answer

Which of the following nations had the highest public sector debt as a percentage of GDP in 2012?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Increased government spending for investments such as highways or harbors financed by increasing the public debt would most likely:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The crowding-out effect arises when:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

A budget surplus means that:

Correct AnswerverifiedShow Answer

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?

Correct AnswerverifiedShow Answer

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

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