Question 1

During economic expansions:

Accepted Answer

A)   outlays increase and tax revenue falls.
B)   outlays increase and tax revenue increases.
C)   outlays decrease and tax revenue increases.
D)   outlays decrease and tax revenue falls.
E)   outlays and tax revenue stay the same.

Question 2

Give two examples of automatic stabilizers, and explain why they are an important component of fiscal policy.

Accepted Answer

Examples of automatic stabilizers includ...

Question 3

Fiscal policy is:

Accepted Answer

A)   the use of the money supply to influence the economy.
B)   actions taken by the Federal Reserve to influence the economy.
C)   only used during times of recession.
D)   only used during times of expansion.
E)   the use of government spending and taxes to influence the economy.

Question 4

If the effects of expansionary fiscal policy hit when the economy is already expanding:

Accepted Answer

A)   the effects could lead to even deeper recession.
B)   the policy will have no effect.
C)   the policy is called an automatic stabilizer.
D)   it may lead to excessive aggregate demand and inflation.
E)   it will lead to high rates of unemployment along with high rates of inflation, known as stagflation.

Question 5

When the government decreases spending or increases taxes to slow economic expansion, the government is conducting:

Accepted Answer

A)   expansionary monetary policy.
B)   expansionary fiscal policy.
C)   contractionary monetary policy.
D)   contractionary fiscal policy.
E)   neither monetary policy nor fiscal policy.

Question 6

The "crowding-out" critique is based on the idea that:

Accepted Answer

A)   consumption increases when government spending increases.
B)   government spending may be a substitute for private spending.
C)   time lags crowd out the effects of fiscal policy.
D)   supply-side fiscal policy does not increase total output.
E)   increases in government spending and decreases in taxes are offset by increases in savings.

Question 7

Refer to the following figure to answer the next questions. 
-According to the figure, if the government increases spending by only $4 billion in an effort to shift aggregate demand enough to return to long-run equilibrium, the marginal propensity to consume must be equal to:

Accepted Answer

A)   0.75.
B)   0.8.
C)   1.33.
D)   1.57.
E)   0.6.

Question 8

The portion of additional income that is spent on consumption is:

Accepted Answer

A)   average propensity to consume (AP
C)  .
B)   marginal propensity to consume (MP
C)  .
C)   marginal propensity to save (MPS) .
D)   average propensity to save (APS) .
E)   1 minus marginal propensity to consume  .

Question 9

Crowding-out occurs when:

Accepted Answer

A)   supply-side fiscal policy does not increase total output.
B)   consumption increases when government spending increases.
C)   private spending falls in response to increases in government spending.
D)   time lags crowd out the effects of fiscal policy.
E)   increases in government spending and decreases in taxes are offset by increases in savings.

Question 10

Why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long-run equilibrium on its own?

Accepted Answer

A)   Expansionary fiscal policy always works in stimulating aggregate demand.
B)   It could take a long time for prices to adjust by market forces alone.
C)   Expansionary fiscal policy has no adverse effects on the economy.
D)   When prices adjust during a recession, we see increases in inflation.
E)   Expansionary fiscal policy is easy to get approved by Congress and the president.

Question 11

Refer to the following figure to answer the next questions: 
-According to the figure, the amount of private investment after government borrowing is:

Accepted Answer

A)   $50 billion.
B)   $25 billion.
C)   $100 billion.
D)   $150 billion.
E)   $275 billion.

Question 12

The three time lags that accompany policy decisions are:

Accepted Answer

A)   recognition lag, implementation lag, and impact lag.
B)   crowding-out lag, implementation lag, and impact lag.
C)   recognition lag, implementation lag, and countercyclical lag.
D)   crowding-out lag, implementation lag, and countercyclical lag.
E)   crowding-out lag, stabilizing lag, and countercyclical lag.

Question 13

The y axis for the Laffer curve represents:

Accepted Answer

A)   the tax revenue.
B)   the tax rate.
C)   real gross domestic product (GDP) .
D)   the price level.
E)   the inflation rate.

Question 14

The spending multiplier is:

Accepted Answer

A)   a formula to determine the total impact on savings from an initial change of a given amount.
B)   a formula to determine the total impact on consumption from an initial change of a given amount.
C)   only used when government spending increases.
D)   a formula to determine the total impact on spending from an initial change of a given amount.
E)   only used when government spending decreases.

Question 15

Countercyclical fiscal policy:

Accepted Answer

A)   is fiscal policy that seeks to counteract business-cycle fluctuations.
B)   only includes expansionary fiscal policy.
C)   only includes contractionary fiscal policy.
D)   attempts to counteract pro-cyclical fiscal policy.
E)   is no longer used by the government.

Question 16

If the marginal propensity to consume is equal to 0.75, the spending multiplier is equal to:

Accepted Answer

A)   4.0.
B)   1.75.
C)   0.25.
D)   0.57.
E)   1.33.

Question 17

Generally, _____________ public figures tend to stress Region II of the Laffer curve, where tax rate reductions lead to _____________ tax revenue. _____________ emphasize Region I, where rate increases lead to _____________ tax revenue. Both regions are important for economic policy.

Accepted Answer

A)   conservative; increased; Liberals; less
B)   conservative; decreased; Liberals; more
C)   liberal; increased; Conservatives; less
D)   no; increased; Liberals and conservatives; less
E)   liberal and conservative; decreased; Neither liberals nor conservatives; more

Question 18

Typical fiscal policy focuses squarely on:

Accepted Answer

A)   aggregate demand.
B)   short-run aggregate supply.
C)   long-run aggregate supply.
D)   government spending.
E)   taxes.

Question 19

Three issues that arise in the application of activist fiscal policy are:

Accepted Answer

A)   time lags, outsourcing, and government debt.
B)   government debt, crowding-out, and savings shifts.
C)   time lags, crowding-out, and government debt.
D)   outsourcing, crowding-out, and government debt.
E)   time lags, crowding-out, and savings shifts.

Question 20

Research and development (R&D)  tax credits:

Accepted Answer

A)   will shift the aggregate demand curve to the right.
B)   are examples of automatic stabilizers.
C)   allow firms to spend resources to develop new technology, which in turn can lead to future production.
D)   will shift the long-run aggregate supply curve to the left.
E)   are not examples of supply-side fiscal policy initiatives.

Exam 16: Fiscal Policy

If the effects of expansionary fiscal policy hit when the economy is already expanding:

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When the government decreases spending or increases taxes to slow economic expansion, the government is conducting:

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Generally, _____________ public figures tend to stress Region II of the Laffer curve, where tax rate reductions lead to _____________ tax revenue. _____________ emphasize Region I, where rate increases lead to _____________ tax revenue. Both regions are important for economic policy.

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Countercyclical fiscal policy:

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Three issues that arise in the application of activist fiscal policy are:

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The three time lags that accompany policy decisions are:

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Why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long-run equilibrium on its own?

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The portion of additional income that is spent on consumption is:

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Give two examples of automatic stabilizers, and explain why they are an important component of fiscal policy.

Correct AnswerverifiedExamples of automatic stabilizers includ...View AnswerShow Answer

Crowding-out occurs when:

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The "crowding-out" critique is based on the idea that:

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Typical fiscal policy focuses squarely on:

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If the marginal propensity to consume is equal to 0.75, the spending multiplier is equal to:

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During economic expansions:

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Research and development (R&D) tax credits:

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Refer to the following figure to answer the next questions. -According to the figure, if the government increases spending by only $4 billion in an effort to shift aggregate demand enough to return to long-run equilibrium, the marginal propensity to consume must be equal to:

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The y axis for the Laffer curve represents:

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Refer to the following figure to answer the next questions: -According to the figure, the amount of private investment after government borrowing is:

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The spending multiplier is:

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Fiscal policy is:

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Generally, _______ public figures tend to stress Region II of the Laffer curve, where tax rate reductions lead to _ tax revenue. _ emphasize Region I, where rate increases lead to _______ tax revenue. Both regions are important for economic policy.

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Examples of automatic stabilizers includ...
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