Question 1

The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This:

Accepted Answer

A) enhanced member countries' ability to conduct fiscal policy. 
B) enhanced member countries' ability to conduct monetary policy. 
C) limited member countries' ability to use fiscal policy. 
D) did away with budget deficits altogether. 
A) enhanced member countries' ability to conduct fiscal policy. 
B) enhanced member countries' ability to conduct monetary policy. 
C) limited member countries' ability to use fiscal policy. 
D) did away with budget deficits altogether.

Question 2

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Accepted Answer

A) Decrease taxes by $100 billion. 
B) Increase taxes by $100 billion. 
C) Decrease taxes by $25 billion. 
D) Decrease government transfers by $25 billion. 
A) Decrease taxes by $100 billion. 
B) Increase taxes by $100 billion. 
C) Decrease taxes by $25 billion. 
D) Decrease government transfers by $25 billion.

Question 3

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _____ by _____.

Accepted Answer

A) increase; $200 billion 
B) decrease; $200 billion 
C) increase; $160 billion 
D) decrease; $160 billion 
A) increase; $200 billion 
B) decrease; $200 billion 
C) increase; $160 billion 
D) decrease; $160 billion

Question 4

Contractionary fiscal policy includes:

Accepted Answer

A) increasing government purchases. 
B) increasing government transfers. 
C) raising tax rates. 
D) decreasing money growth. 
A) increasing government purchases. 
B) increasing government transfers. 
C) raising tax rates. 
D) decreasing money growth.

Question 5

During a recessionary gap:

Accepted Answer

A) holding everything else constant, the budget deficit would increase. 
B) contractionary fiscal policy would help correct this problem. 
C) an increase in taxes or a decrease in government purchases would shift the AD curve to the right. 
D) unemployment would most likely be falling. 
A) holding everything else constant, the budget deficit would increase. 
B) contractionary fiscal policy would help correct this problem. 
C) an increase in taxes or a decrease in government purchases would shift the AD curve to the right. 
D) unemployment would most likely be falling.

Question 6

Use the following to answer questions:
Figure: Inflationary and Recessionary Gaps  
-(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by:

Accepted Answer

A) increased government purchases. 
B) decreased government transfers. 
C) higher tax rates. 
D) decreased government purchases. 
A) increased government purchases. 
B) decreased government transfers. 
C) higher tax rates. 
D) decreased government purchases.

Question 7

A government surplus is contractionary because _____ are contractionary.

Accepted Answer

A) increases in taxation 
B) increases in government purchases 
C) increases in government transfers 
D) decreases in taxation 
A) increases in taxation 
B) increases in government purchases 
C) increases in government transfers 
D) decreases in taxation

Question 8

Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.

Accepted Answer

A) True 
 B)False

Question 9

The federal budget tends to move toward _____ as the economy ____.

Accepted Answer

A) deficit; contracts 
B) deficit; expands 
C) surplus; contracts 
D) a balanced budget; contracts 
A) deficit; contracts 
B) deficit; expands 
C) surplus; contracts 
D) a balanced budget; contracts

Question 10

Increased government transfers constitute contractionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 11

Social insurance programs are:

Accepted Answer

A) government programs intended to protect families against economic hardships. 
B) private insurance policies to protect families from hardships caused by government actions. 
C) private insurance policies that cover gaps in government-provided health care. 
D) programs to help unemployed people have a social life. 
A) government programs intended to protect families against economic hardships. 
B) private insurance policies to protect families from hardships caused by government actions. 
C) private insurance policies that cover gaps in government-provided health care. 
D) programs to help unemployed people have a social life.

Question 12

A recessionary gap can be closed with:

Accepted Answer

A) contractionary monetary policy. 
B) an increase in taxes. 
C) a decrease in government purchases. 
D) expansionary fiscal policy. 
A) contractionary monetary policy. 
B) an increase in taxes. 
C) a decrease in government purchases. 
D) expansionary fiscal policy.

Question 13

The multiplier effect of changes in government purchases of goods and services is equal to:

Accepted Answer

A) 1 / (1 - MPS). 
B) 1 / (1 - MP
C) . 
C) MPS / (1 - MP
C) . 
D) MPC / (1 - MPS). 
A) 1 / (1 - MPS). 
B) 1 / (1 - MP
C) . 
C) MPS / (1 - MP
C) . 
D) MPC / (1 - MPS).

Question 14

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

Accepted Answer

A) more than 
B) less than 
C) about the same as 
D) inversely with 
A) more than 
B) less than 
C) about the same as 
D) inversely with

Question 15

The business cycle and the budget balance are unrelated.

Accepted Answer

A) True 
 B)False

Question 16

One of the shortcomings of fiscal policy is that:

Accepted Answer

A) it has significant time lags, which make it more effective. 
B) it takes effect immediately, so it is the best policy to use in an economic crisis. 
C) it affects aggregate demand indirectly through the interest rate. 
D) it has time lags, so sometimes it may end up destabilizing the economy. 
A) it has significant time lags, which make it more effective. 
B) it takes effect immediately, so it is the best policy to use in an economic crisis. 
C) it affects aggregate demand indirectly through the interest rate. 
D) it has time lags, so sometimes it may end up destabilizing the economy.

Question 17

The fact that tax receipts fall during a recession:

Accepted Answer

A) makes the multiplier stronger. 
B) has no impact on the multiplier. 
C) reduces the adverse effect of the initial fall in aggregate demand. 
D) acts as an automatic contractionary fiscal policy. 
A) makes the multiplier stronger. 
B) has no impact on the multiplier. 
C) reduces the adverse effect of the initial fall in aggregate demand. 
D) acts as an automatic contractionary fiscal policy.

Question 18

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

Accepted Answer

A) decrease government purchases; right 
B) increase government purchases; left 
C) decrease government purchases; left 
D) raise tax rates; right 
A) decrease government purchases; right 
B) increase government purchases; left 
C) decrease government purchases; left 
D) raise tax rates; right

Question 19

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

Accepted Answer

A) True 
 B)False

Question 20

Use the following to answer questions :
Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs.
-(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

Accepted Answer

A) increase taxes 
B) decrease taxes 
C) increase spending 
D) decrease spending 
A) increase taxes 
B) decrease taxes 
C) increase spending 
D) decrease spending

The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This:

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _ by _.

Contractionary fiscal policy includes:

During a recessionary gap:

Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD₁ to AD₃ could be caused by:

A government surplus is contractionary because _____ are contractionary.

Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.

The federal budget tends to move toward _ as the economy .

Increased government transfers constitute contractionary fiscal policy.

Social insurance programs are:

A recessionary gap can be closed with:

The multiplier effect of changes in government purchases of goods and services is equal to:

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

The business cycle and the budget balance are unrelated.

One of the shortcomings of fiscal policy is that:

The fact that tax receipts fall during a recession:

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _, which will shift the AD curve to the _.

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

toward a Fuller Understanding of Present Value

Filters

Exam 13: Fiscal Policy Appendix Taxes and the Multiplier

The stability pact signed by many of the countries that adopted the euro limited each member nation's deficit to 3% of GDP. This:

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _____ by _____.

Contractionary fiscal policy includes:

During a recessionary gap:

Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by:

A government surplus is contractionary because _____ are contractionary.

Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.

The federal budget tends to move toward _____ as the economy ____.

Increased government transfers constitute contractionary fiscal policy.

Social insurance programs are:

A recessionary gap can be closed with:

The multiplier effect of changes in government purchases of goods and services is equal to:

The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.

The business cycle and the budget balance are unrelated.

One of the shortcomings of fiscal policy is that:

The fact that tax receipts fall during a recession:

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

toward a Fuller Understanding of Present Value

Filters

Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by $40 billion. Real GDP will _ by _.

Use the following to answer questions: Figure: Inflationary and Recessionary Gaps -(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD₁ to AD₃ could be caused by:

The federal budget tends to move toward _ as the economy .

If the current equilibrium output lies above potential output, then an appropriate fiscal policy would be to _, which will shift the AD curve to the _.