Question 1

The new classical model implies that a

Accepted Answer

A)  budget surplus will effectively retard inflation emanating from excess demand. 
B)  budget deficit will increase the real interest rate. 
C)  substitution of debt for tax financing will leave aggregate demand and real output unchanged. 
D)  planned budget deficit will be a highly effective tool to combat a recession. 
A)  budget surplus will effectively retard inflation emanating from excess demand. 
B)  budget deficit will increase the real interest rate. 
C)  substitution of debt for tax financing will leave aggregate demand and real output unchanged. 
D)  planned budget deficit will be a highly effective tool to combat a recession. C

Question 2

New classical economists believe that an increase in deficit financing by the government will

Accepted Answer

A)  reduce government spending. 
B)  increase consumption. 
C)  reduce future taxes. 
D)  increase savings. 
A)  reduce government spending. 
B)  increase consumption. 
C)  reduce future taxes. 
D)  increase savings. D

Question 3

Compared to a reduction in tax rates, a one-time tax rebate will exert

Accepted Answer

A)  a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut. 
B)  a stronger impact on aggregate demand because both the increase in the incentive to earn and impact on long-term income will be larger for the temporary tax cut. 
C)  an identical impact on aggregate demand because the size of the budget deficit will be the same regardless of whether the tax cut is temporary or permanent. 
D)  an identical impact on  aggregate demand because the incentive effects of a tax cut will be the same regardless of whether it is temporary or permanent. 
A)  a weaker impact on aggregate demand because the increase in the incentive to earn and impact on long-term income will be smaller for the temporary tax cut. 
B)  a stronger impact on aggregate demand because both the increase in the incentive to earn and impact on long-term income will be larger for the temporary tax cut. 
C)  an identical impact on aggregate demand because the size of the budget deficit will be the same regardless of whether the tax cut is temporary or permanent. 
D)  an identical impact on  aggregate demand because the incentive effects of a tax cut will be the same regardless of whether it is temporary or permanent. A

Question 4

In response  to the recession of 2008-2009, the fiscal policy of the federal government was

Accepted Answer

A)  highly expansionary, and this Keynesian stimulus promoted a rapid recovery. 
B)  highly expansionary, but this was largely offset by the Fed's restrictive monetary policy 
C)  highly restrictive, but this was largely offset by the Fed's highly expansionary monetary policy 
D)  highly expansionary, but the unemployment rate nonetheless remained high during 2010 and 2011 
A)  highly expansionary, and this Keynesian stimulus promoted a rapid recovery. 
B)  highly expansionary, but this was largely offset by the Fed's restrictive monetary policy 
C)  highly restrictive, but this was largely offset by the Fed's highly expansionary monetary policy 
D)  highly expansionary, but the unemployment rate nonetheless remained high during 2010 and 2011

Question 5

Measured as a share of GDP, the borrowing of the federal  government from foreigners

Accepted Answer

A)  is zero; the federal government does not borrow from foreigners. 
B)  is 100 percent; the federal government borrows only from foreigners. 
C)  has been approximately 50 percent of GDP since the early 1990s. 
D)  was approximately 10 percent of GDP in 2000, but it soared to 34 percent of GDP in 2015. 
A)  is zero; the federal government does not borrow from foreigners. 
B)  is 100 percent; the federal government borrows only from foreigners. 
C)  has been approximately 50 percent of GDP since the early 1990s. 
D)  was approximately 10 percent of GDP in 2000, but it soared to 34 percent of GDP in 2015.

Question 6

How do new classical economists differ from Keynesian economists in their assumptions about how government borrowing affects household consumption and borrowing patterns?

Accepted Answer

Keynesian economists believe households

Question 7

If a reduction in government borrowing leads to lower real interest rates in the United States,

Accepted Answer

A)  U.S. investors will decrease their investments abroad. 
B)  U.S. exports will decrease relative to imports. 
C)  the inflow of loanable funds from abroad will moderate the fall in the real rate of interest. 
D)  the dollar will depreciate in the foreign exchange market. 
A)  U.S. investors will decrease their investments abroad. 
B)  U.S. exports will decrease relative to imports. 
C)  the inflow of loanable funds from abroad will moderate the fall in the real rate of interest. 
D)  the dollar will depreciate in the foreign exchange market.

Question 8

Supply-side economic policies are best viewed as

Accepted Answer

A)  a short-run countercyclical tool. 
B)  a long-run strategy to promote economic growth. 
C)  a strategy for the control of long-run inflation. 
D)  a stabilization tool to smooth the ups and downs of the business cycle. 
A)  a short-run countercyclical tool. 
B)  a long-run strategy to promote economic growth. 
C)  a strategy for the control of long-run inflation. 
D)  a stabilization tool to smooth the ups and downs of the business cycle.

Question 9

Expansionary fiscal policy during a recession is most effective when it

Accepted Answer

A)  creates jobs, even if they are on unproductive projects. 
B)  directs the economy to full employment and resources into productive projects. 
C)  substantially changes the composition of aggregate demand. 
D)  provides members of Congress with large political contributions. 
A)  creates jobs, even if they are on unproductive projects. 
B)  directs the economy to full employment and resources into productive projects. 
C)  substantially changes the composition of aggregate demand. 
D)  provides members of Congress with large political contributions.

Question 10

Use the figure below to answer the following question(s). Figure 12-3
  Refer to Figure 12-3. If an economy is currently operating at Y1, which of the following would a Keynesian economist be most likely to favor?

Accepted Answer

A)  a shift in the federal budget toward a surplus 
B)  a shift in the federal budget toward a deficit 
C)  a balanced budget 
D)  an increase in taxes 
A)  a shift in the federal budget toward a surplus 
B)  a shift in the federal budget toward a deficit 
C)  a balanced budget 
D)  an increase in taxes

Question 11

Which of the following contributed to the weak recovery from the 2008-2009 recession?

Accepted Answer

A)  The restrictive monetary policy followed by the Fed. 
B)  Government spending was increased by only a small amount. 
C)  The temporary nature of the tax rebates and spending increases created uncertainty and exerted only a weak impact on aggregate demand. 
D)  The budget deficits were too small to exert much impact on aggregate demand, output, and employment. 
A)  The restrictive monetary policy followed by the Fed. 
B)  Government spending was increased by only a small amount. 
C)  The temporary nature of the tax rebates and spending increases created uncertainty and exerted only a weak impact on aggregate demand. 
D)  The budget deficits were too small to exert much impact on aggregate demand, output, and employment.

Question 12

Are jobs the key to economic progress and the achievement of high income levels?

Accepted Answer

A)  Yes, as long as people are working, real income levels will be high. 
B)  Yes, when full employment is present, income levels will be at their maximum. 
C)  No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost. 
D)  Uncertain, additional employment will increase real income only when the general level of prices is unchanged. 
A)  Yes, as long as people are working, real income levels will be high. 
B)  Yes, when full employment is present, income levels will be at their maximum. 
C)  No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost. 
D)  Uncertain, additional employment will increase real income only when the general level of prices is unchanged.

Question 13

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

Accepted Answer

A)  Because they expand government revenues, higher marginal tax rates will lead to a reduction in the budget deficit and to lower interest rates. 
B)  Because they encourage investors to undertake low-productivity projects with substantial tax-avoidance benefits, higher marginal tax rates promote economic inefficiency. 
C)  Because they do not consume resources directly, income redistribution payments will exert little impact on real aggregate supply. 
D)  The primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus. 
A)  Because they expand government revenues, higher marginal tax rates will lead to a reduction in the budget deficit and to lower interest rates. 
B)  Because they encourage investors to undertake low-productivity projects with substantial tax-avoidance benefits, higher marginal tax rates promote economic inefficiency. 
C)  Because they do not consume resources directly, income redistribution payments will exert little impact on real aggregate supply. 
D)  The primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.

Question 14

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time.  In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

Accepted Answer

A)  fallen sharply from the level of  years prior to 1981. 
B)  increased sharply during the Clinton administration, but declined substantially during the administration of George W. Bush. 
C)  been virtually unchanged from the level of years prior to 1981. 
D)  increased substantially from the level of years prior to 1981. 
A)  fallen sharply from the level of  years prior to 1981. 
B)  increased sharply during the Clinton administration, but declined substantially during the administration of George W. Bush. 
C)  been virtually unchanged from the level of years prior to 1981. 
D)  increased substantially from the level of years prior to 1981.

Question 15

The policy response to the recession of 2008-2009 provided an experiment on the potency of Keynesian fiscal policy. In what respect was this true?

Accepted Answer

A)  The money supply increased rapidly and the short-term interest rates were pushed to near zero just as the Keynesian model of fiscal policy recommends. 
B)  Government spending increased sharply and the budget deficits were large just as the Keynesian model of fiscal policy recommends. 
C)  The money supply increased rapidly and the budget was shifted toward a surplus just as the Keynesian model recommends. 
D)  The federal budget was balanced just as the Keynesian model indicates would be prudent policy during a recession. 
A)  The money supply increased rapidly and the short-term interest rates were pushed to near zero just as the Keynesian model of fiscal policy recommends. 
B)  Government spending increased sharply and the budget deficits were large just as the Keynesian model of fiscal policy recommends. 
C)  The money supply increased rapidly and the budget was shifted toward a surplus just as the Keynesian model recommends. 
D)  The federal budget was balanced just as the Keynesian model indicates would be prudent policy during a recession.

Question 16

Crowding out refers to the situation in which

Accepted Answer

A)  borrowing by the federal government raises interest rates and causes firms to invest less. 
B)  foreigners sell their bonds and purchase U.S. goods and services. 
C)  borrowing by the federal government causes state and local governments to lower their taxes. 
D)  increased federal taxes to balance the budget causes interest rates to increase and consumer credit to decrease. 
A)  borrowing by the federal government raises interest rates and causes firms to invest less. 
B)  foreigners sell their bonds and purchase U.S. goods and services. 
C)  borrowing by the federal government causes state and local governments to lower their taxes. 
D)  increased federal taxes to balance the budget causes interest rates to increase and consumer credit to decrease.

Question 17

Higher standards of living are the result of

Accepted Answer

A)  an increase in the general level of prices. 
B)  trade restrictions that favor domestic industries over foreign competition. 
C)  an increase in the availability of goods and services that people value. 
D)  government subsidies that expand employment. 
A)  an increase in the general level of prices. 
B)  trade restrictions that favor domestic industries over foreign competition. 
C)  an increase in the availability of goods and services that people value. 
D)  government subsidies that expand employment.

Question 18

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Accepted Answer

According the new classical theory, a ta

Question 19

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Accepted Answer

A)  Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand. 
B)  When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand. 
C)  The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future. 
D)  A 10 percent reduction in tax rates will reduce tax revenues by 10 percent. 
A)  Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand. 
B)  When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand. 
C)  The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future. 
D)  A 10 percent reduction in tax rates will reduce tax revenues by 10 percent.

Question 20

Measured as a share of GDP, the total federal debt

Accepted Answer

A)  increased during the 1990s, but it has declined substantially during the most recent decade. 
B)  increased substantially during the recession of 2008-2009, but it is still well below the levels of the 1960s and 1970s. 
C)  has steadily trended downward during both the 1990s and the most recent decade. 
D)  is now approximately 100 percent of GDP, which is higher than at any time since the years immediately following World War II. 
A)  increased during the 1990s, but it has declined substantially during the most recent decade. 
B)  increased substantially during the recession of 2008-2009, but it is still well below the levels of the 1960s and 1970s. 
C)  has steadily trended downward during both the 1990s and the most recent decade. 
D)  is now approximately 100 percent of GDP, which is higher than at any time since the years immediately following World War II.

The new classical model implies that a

New classical economists believe that an increase in deficit financing by the government will

Compared to a reduction in tax rates, a one-time tax rebate will exert

In response to the recession of 2008-2009, the fiscal policy of the federal government was

Measured as a share of GDP, the borrowing of the federal government from foreigners

How do new classical economists differ from Keynesian economists in their assumptions about how government borrowing affects household consumption and borrowing patterns?

If a reduction in government borrowing leads to lower real interest rates in the United States,

Supply-side economic policies are best viewed as

Expansionary fiscal policy during a recession is most effective when it

Use the figure below to answer the following question(s). Figure 12-3 Refer to Figure 12-3. If an economy is currently operating at Y₁, which of the following would a Keynesian economist be most likely to favor?

Which of the following contributed to the weak recovery from the 2008-2009 recession?

Are jobs the key to economic progress and the achievement of high income levels?

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

The policy response to the recession of 2008-2009 provided an experiment on the potency of Keynesian fiscal policy. In what respect was this true?

Crowding out refers to the situation in which

Higher standards of living are the result of

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Measured as a share of GDP, the total federal debt

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters

Exam 12: Fiscal Policy: Incentives, and Secondary Effects

The new classical model implies that a

New classical economists believe that an increase in deficit financing by the government will

Compared to a reduction in tax rates, a one-time tax rebate will exert

In response to the recession of 2008-2009, the fiscal policy of the federal government was

Measured as a share of GDP, the borrowing of the federal government from foreigners

How do new classical economists differ from Keynesian economists in their assumptions about how government borrowing affects household consumption and borrowing patterns?

If a reduction in government borrowing leads to lower real interest rates in the United States,

Supply-side economic policies are best viewed as

Expansionary fiscal policy during a recession is most effective when it

Use the figure below to answer the following question(s). Figure 12-3 Refer to Figure 12-3. If an economy is currently operating at Y1, which of the following would a Keynesian economist be most likely to favor?

Which of the following contributed to the weak recovery from the 2008-2009 recession?

Are jobs the key to economic progress and the achievement of high income levels?

Which of the following propositions would a proponent of supply-side economics be most likely to stress?

During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has

The policy response to the recession of 2008-2009 provided an experiment on the potency of Keynesian fiscal policy. In what respect was this true?

Crowding out refers to the situation in which

Higher standards of living are the result of

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Measured as a share of GDP, the total federal debt

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad--As Model

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Special Topics

Filters

Use the figure below to answer the following question(s). Figure 12-3 Refer to Figure 12-3. If an economy is currently operating at Y₁, which of the following would a Keynesian economist be most likely to favor?