Fiscal Policy



When changes to taxes and spending occur in the economy without explicit action by the central government, such policy is:
 
A. Cyclical

B. Variable

C. Discretionary

D. Nondiscretionary

Answer: D

When the Central government cut taxes and increases spending to stimulate the economy during a period of recession, such actions are design to be:
 
A. Passive

B. Automatic

C. Countercyclical

D. Nondiscretionary

Answer: C

Fiscal policy is enacted through changes in:
 
A. Interest rates

B. The supply of money

C. Unemployment and inflation

D. Taxation and government spending

Answer: D

Which are contractionary fiscal policies?
 
A. Increased taxation and increased government spending
B. Increased taxation and decreased government spending
C. Decreased taxation and no change in government spending
D. No change in taxation and increased government spending

Answer: B

If the Parliament passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):
 
A. Political business cycle
B. Expansionary fiscal policy
C. Contractionary fiscal policy
D. Nondiscretionary fiscal policy

Answer: C

The set of fiscal policies that would be most contractionary would be a(n):
 
A. Increase in government spending and taxes
B. Decrease in government spending and taxes
C. Increase in government spending and a decrease in taxes
D. Decrease in government spending and an increase in taxes

Answer: D

If the government wishes to increase the level of real GDP, it might reduce:
 
A. Taxes
B. Transfer payments
C. The size of the budget deficit
D. Its purchases of goods and services

Answer: A

Which combination of fiscal policy actions would most likely be offsetting?
 
A. Increase taxes and government spending
B. Decrease taxes and increase government spending
C. Increase taxes, but make no change in government spending
D. Decrease taxes, but make no change in government spending

Answer: A

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:
 
A. Increased government spending or increased taxation, or a combination of the two actions
B. Increased government spending or decreased taxation, or a combination of the two actions
C. Increased government spending or increased taxation, but not a combination of the two actions
D. Decreased government spending or decreased taxation, or a combination of the two actions

Answer: B

Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?
 
A. Increase taxes and government spending
B. Decrease taxes and government spending
C. Increase taxes and decrease government spending
D. Decrease taxes and increase government spending

Answer: C

When government spending is increased, the amount of the increase in aggregate demand primarily depends on:
 
A. The average propensity to consume
B. The size of the multiplier
C. Income taxes
D. Exchange rates

Answer: B

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the:
 
A. Smaller is the economy's MPS
B. Larger is the economy's MPS
C. Smaller is the economy's MPC
D. Larger is the unemployment rate

Answer: A

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the:
 
A. Smaller is the economy's MPC
B. Flatter is the economy's aggregate supply curve
C. Smaller is the economy's MPS
D. Less the economy's built-in stability

Answer: C

Which fiscal policy would be the most contractionary?
 
A. A $40 billion increase in taxes
B. A $50 billion increase in government spending
C. A $50 billion decrease in government spending
D. A $40 billion decrease in government spending and a $10 billion decrease in taxes

Answer: C

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 .75. By how much should the government raise taxes to achieve its objective?
 
A. $6 billion
B. $9 billion
C. $12 billion
D. $16 billion

Answer: C

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is .4, then it could increase government spending by:
 
A. $10 billion
B. $20 billion
C. $31.25 billion
D. $40.50 billion

Answer: B

In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPC is .75, then it could increase taxes by:
 
A. $6 billion
B. $8 billion
C. $10 billion
D. $12 billion

Answer: B

A government economist states that: "The collection of personal income tax revenues automatically falls during a recession." This statement best describes how the progressive income tax system:
 
A. Increases crowding out in the economy
B. Decreases real interest rates in the economy
C. Offsets the timing problem for fiscal policy
D. Serves as an automatic stabilizer for the economy

Answer: D

Which is an example of an automatic stabilizer? As real GDP decreases, income tax revenues:
 
A. Increase and transfer payments decrease
B. Decrease and transfer payments increase
C. And transfer payments decrease
D. And transfer payments increase

Answer: B

If government tax revenues change automatically and in a countercylical direction over the course of the business cycle, this would be called a(n):
 
A. Discretionary fiscal policy
B. Expansionary fiscal policy
C. Political business cycle
D. Nondiscretionary fiscal policy

Answer: D

Due to automatic stabilizers, when income rises, government transfer spending:
 
A. Increases and tax revenues decrease
B. Decreases and tax revenues increase
C. And tax revenues decrease
D. And tax revenues increase

Answer: B

Refer to the above graph. A budget surplus would be associated with GDP level:
 
A. H
B. J
C. K
D. L

Answer: D

Refer to the above graph. If the full-employment level of GDP for this economy is at H, the:
 
A. Standardized budget will produce a surplus
B. Standardized budget will produce a deficit
C. Actual budget will produce a deficit
D. Actual budget will produce a surplus

Answer: B

With a regressive tax system, as the level of income increases in an economy, the average tax rate will:
 
A. Increase
B. Decrease
C. Remain constant
D. Either increase or decrease

Answer: B

Built-in stabilizers:
 
A. Intensify the business cycle
B. Reduce the size of the multiplier
C. Increase the government's deficit during a recession
D. Are a part of discretionary fiscal policy

Answer: B

The actual and standardized budgets will be equal when:
 
A. The rate of inflation is zero
B. The economy is at full employment
C. The balanced-budget multiplier is 1
D. Taxes have no effect on fiscal policy

Answer: B

If the standardized 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:
 
A. Built-in stability
B. A cyclical deficit
C. An expansionary fiscal policy
D. A contractionary fiscal policy

Answer: B

In Year 1, the actual budget deficit was $200 billion and the standardized deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the standardized deficit was $175 billion. GDP was $1000 billion in Year 1 and $1005 billion in Year 2. It can be concluded that fiscal policy from Year 1 to Year 2 was:
 
A. Proportional
B. Inflationary
C. Contractionary
D. Expansionary

Answer: D

The standardized deficit as a percentage of GDP is 2 percent in Year 1. This deficit becomes 1 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:
 
A. Fiscal policy was expansionary
B. Fiscal policy was contractionary
C. The Central government is decreasing taxes
D. The Central government is increasing spending

Answer: B

The standardized deficit is the difference between annual government expenditures and tax revenues that would have occurred if the economy was:
 
A. In a recession
B. At full employment
C. At the peak of a business cycle
D. At the trough of the business cycle

Answer: B

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget amendment that would require the Central government to balance its budget during a recession would be:
 
A. Expansionary and worsen the effects of the recession
B. Contractionary and worsen the effects of the recession
C. Contractionary and counter the effects of the recession
D. Expansionary and counter the effects of the recession

Answer: B
The table below shows the standardized budget deficit as a percentage of GDP over a five-year period.
Refer to the above information. In which year was fiscal policy expansionary?
 
A. Year 2
B. Year 3
C. Year 4
D. Year 5

Answer: B

One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the:
 
A. Start of the recession and the time it takes to recognize that the recession has started
B. End of the recession and the time it takes to recognize that the recession has ended
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 taken

Answer: A

One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:
 
A. Start of the recession and the time it takes to recognize that the recession has started
B. End of the recession and the time it takes to recognize that the recession has ended
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 taken

Answer: C

One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs between the:
 
A. Start of the recession and the time it takes to recognize that the recession has started
B. End of the recession and the time it takes to recognize that the recession has ended
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 taken

Answer: D

Proponents of the notion of a "political business cycle" suggest that:
 
A. The standardized budget is a better indicator of the state of the economy than the actual budget
B. Cyclical swings in the economy are produced by the inherent instability found in capitalist economies
C. A possible cause of economic fluctuations is due to the use of fiscal policy for political purposes
D. There is a tradeoff among goals that tends to make the economic policies of state and local governments procyclical

Answer: C

The crowding-out effect suggests that:
 
A. Increases in consumption are always at the expense of saving
B. Increases in government spending will close a recessionary expenditure gap
C. Increases in government spending may raise the interest rate and thereby reduce investment
D. High taxes reduce both consumption and saving

Answer: C

The crowding-out effect works through interest rates to:
 
A. Increase the effectiveness of expansionary fiscal policy
B. Decrease the effectiveness of expansionary fiscal policy
C. Decrease the effectiveness of contractionary fiscal policy
D. Increase the effectiveness of contractionary fiscal policy

Answer: B

The public debt is the:
 
A. Amount of paper currency in circulation
B. Ratio of all past deficits to all past surpluses
C. Total of all past deficits minus all past surpluses
D. Difference between current government expenditures and revenues

Answer: C

How is the public debt calculated?
 
A. By adding up consumption, investment, government purchases, and net exports and then cumulating the annual totals over the years of the nation
B. By subtracting consumption and investment from government spending each year and then cumulating the annual totals over the years of the nation
C. By subtracting current government spending from current government tax revenues
D. By adding up the difference between annual government tax revenues and annual government spending and cumulating the differences over the years of the nation

Answer: D
The following is budget information for a hypothetical economy. All data are in billions of dollars.
Refer to the above data. In which year is there a budget surplus?

A. Year 1
B. Year 2
C. Year 4
D. Year 5

Answer: A
The following is budget information for a hypothetical economy. All data are in billions of dollars.
Refer to the above data. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy?
 
A. $25 billion
B. $75 billion
C. $125 billion
D. $925 billion

Answer: C

To understand the quantitative significance of the public debt relative to the economy, it should be:
 
A. Divided by the social security trust fund
B. Multiplied by the size of the population
C. Measured as a percentage of GDP
D. Compared to the value of imports and exports

Answer: C

Most of the public debt is owed to citizens and domestic institutions. This is one reason that the public debt:
 
A. Crowds out private investment
B. Does not impose a burden on future generations
C. Has a procyclical economic effect on the economy
D. Can result in the bankruptcy of the Central government

Answer: B

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