Deck 13: Fiscal Policy

Question 1

Canada's Federal Budget of 2016 shows

A)a decreasing government debt.
B)a government budget deficit.
C)a government budget surplus.
D)revenues greater than outlays.
E)a balanced budget.

Answer 1

a government budget deficit.

Question 2

All of the following statements are true except

A)expenditures on goods and services have a downward trend.
B)debt interest has been steadily increasing since 1960.
C)the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest.
D)transfer payments decreased sharply during the 1990s.
E)outlays increased steadily from 1971 through 1985.

Answer 2

debt interest has been steadily increasing since 1960.

Question 3

Which of the following would not increase an existing budget deficit?

A)an increase in government expenditures on goods and services
B)an increase in interest on the government debt
C)an increase in indirect taxes
D)an increase in government transfer payments
E)a decrease in investment income

Answer 3

an increase in indirect taxes

Question 4

What are the main categories of the federal government outlays?

A)personal income taxes, expenditures on goods and services, and debt interest
B)transfer payments, expenditures on goods and services, and debt interest
C)investment income, debt interest and transfer payments
D)indirect taxes, farmers' subsidies, and debt interest
E)property taxes and sales taxes.

Question 5

Government debt is

A)the total amount of government borrowing.
B)a phenomenon that occurs only during times of war.
C)equal to revenues minus outlays.
D)the result of a rising price level.
E)always increasing.

Question 6

The category of federal government revenues that fluctuates the most is

A)personal income taxes.
B)debt interest.
C)indirect taxes.
D)transfer payments.
E)investment income.

Question 7

The largest source of revenues for the federal government is

A)transfer payments.
B)corporate income taxes.
C)expenditures on goods and services.
D)indirect taxes such as the GST.
E)personal income taxes.

Question 8

Fiscal policy is

A)any policy by the Bank of Canada.
B)the use of the federal budget to achieve macroeconomic objectives.
C)effective only when the federal government has a budget surplus.
D)any attempt by the federal government or Bank of Canada to control inflation.
E)budgeting policy by aggregate households.

Question 9

Which of the following is not a source of government revenues?

A)transfer payments
B)indirect taxes
C)corporate income taxes
D)investment income
E)personal income taxes

Question 10

Canada's government debt

A)is larger than the value of the public capital stock so some of Canada's government debt has financed public consumption expenditure.
B)is smaller than the value of the public capital stock so some of Canada's government debt has financed public consumption expenditure.
C)is smaller than the value of the public capital stock so Canada's government debt has not financed public consumption expenditure.
D)equals the value of the public capital stock.
E)has risen every year since 1975.

Question 11

If revenues exceed outlays, the government's budget balance is _______, and the government has a budget _______.

A)positive; deficit
B)negative; surplus
C)zero; deficit
D)negative; deficit
E)positive; surplus

Question 12

All of the following statements are true except

A)total revenues have no strong trends.
B)the main source of fluctuations in revenues is corporate income taxes.
C)personal income taxes decreased during the 2000s.
D)revenues include corporate income taxes, personal income taxes, indirect taxes, and investment and other income.
E)indirect taxes decreased during the 2000s.

Question 13

The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal income taxes, $15 million in corporate income taxes, $5 million in indirect taxes, $2 million in investment income, $30 million in transfer payments, $12 million in government expenditure, and $8 million in debt interest.Ricardia has a government budget

A)surplus of $3 million.
B)deficit of $13 million.
C)surplus of $13 million.
D)surplus of $57 million.
E)deficit of $3 million.

Question 14

As a percentage of provincial GDP, provincial government outlays are highest in

A)Newfoundland and Labrador.
B)Ontario.
C)Quebec.
D)Nova Scotia.
E)Alberta.

Question 15

Suppose the government starts with a debt of $0.Then in year 1, there is a deficit of $100 billion, in year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion.What is government debt at the end of year 4?

A)$180 billion
B)$140 billion
C)$20 billion
D)somewhat greater than $220 billion, depending on the interest rate
E)somewhat greater than $140 billion, depending on the interest rate

Question 16

Prior to World War II, the purpose of the federal budget was to

A)stabilize the economy.
B)achieve macroeconomic objectives such as full employment and price level stability.
C)provide incentives to encourage investment.
D)finance the business of government.
E)oversee revenue equalization among the provinces.

Question 17

If outlays exceed revenues, the government's budget balance is _______, and the government has a budget _______.

A)positive; deficit
B)positive; surplus
C)negative; deficit
D)zero; surplus
E)negative; surplus

Question 18

The main components of government revenues are

A)personal income taxes, corporate income taxes, indirect taxes, and investment and other income.
B)transfer payments, investment income, and indirect taxes.
C)debt interest, expenditures on goods and services, and income taxes.
D)debt interest, corporate income taxes, and income taxes.
E)corporate income taxes, indirect taxes, and transfer payments.

Question 19

Choose the statement that is incorrect.

A)The debt- to- GDP ratio increased from 1974 through 1997, and then began to decrease.
B)The federal government debt was 4.4 percent of GDP in 1971.
C)The debt- to- GDP ratio increased slightly during the 2008- 2009 recession.
D)As a percentage of real GDP, the federal government debt was greater in 2014 than in 1971.
E)The government debt increases when the government has a budget deficit.

Question 20

Which of the following is a government outlay?

A)debt interest
B)personal income taxes
C)corporate income taxes
D)investment income
E)indirect taxes

Question 21

An increase in the tax on capital income _______ the supply of loanable funds and _______ investment.

A)increases; increases
B)decreases; increases
C)increases; decreases
D)decreases; decreases
E)decreases the demand for loanable funds; decreases or increases

Question 22

Consider all the effects on fiscal policy.A cut in the tax on capital income

A)shifts the AD curve rightward.
B)shifts the LAS curve rightward.
C)shifts the SAS curve rightward.
D)all of the above
E)only B and C

Question 23

Consider all the effects of fiscal policy.An income tax cut

A)increases real GDP but decreases the price level.
B)increases real GDP and the price level may rise or fall.
C)increases real GDP but leaves the price level unchanged.
D)increases both real GDP and the price level.
E)does not change real GDP or the price level.

Question 24

Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent.The real after- tax interest rate is

A)- 0.5 percent.
B)2.0 percent.
C)4.0 percent.
D)3.5 percent.
E)0.5 percent.

Question 25

If we compare Canada to France and the United Kingdom, Canada's tax wedge is _______ the French tax wedge and _______ the U.K. tax wedge.

A)smaller than; larger than
B)equal to; larger than
C)smaller than; smaller than
D)larger than; larger than
E)larger than; smaller than

Question 26

At the end of 2011, the government of France's debt was €1,126 billion.€ is euro, the currency of France).In 2012, the government spent €1,067 billion and ended the year with a debt of €1,304 billion.How much did the government receive in tax revenue in 2012?

A)€1,482 billion
B)€1,245 billion
C)€178 billion
D)€889 billion
E)€1,125 billion

Question 27

The difference between the before- tax and after- tax rates is the

A)tax wedge.
B)taxation penalty.
C)deadweight loss.
D)tax plug.
E)deadweight gain.

Question 28

According to the Laffer curve, raising the tax rate

A)always decreases the amount of tax revenue.
B)might increase, decrease, or not change the amount of tax revenue.
C)always increases the amount of tax revenue.
D)has no effect on the amount of tax revenue.
E)does not change the amount of tax revenue.

Question 29

If the nominal interest rate is 11%, the inflation rate is 4% and the tax rate is 25%, what is the real after- tax interest rate?

A)5.25 percent
B)4.25 percent
C)8 percent
D)- 1.25 percent
E)10 percent

Question 30

If we compare the United States to France, we see that potential GDP per person in France is _______ than that in the United States because the French tax wedge is _______ than the U.S.tax wedge.

A)greater; larger
B)less; smaller
C)greater; smaller
D)less; larger
E)none of the above

Question 31

At the end of 2015, the government of China's debt was ¥25.8 trillion.¥ is yuan, the currency of China).In 2016, the government spent ¥18.7 trillion and ended the year with a debt of ¥28 trillion.How much did the government receive in tax revenue in 2016?

A)¥18.7 trillion
B)¥16.5 trillion
C)¥35.2 trillion
D)¥5,400 billion
E)¥2.2 trillion

Question 32

The Laffer Curve has been criticized by mainstream economists because

A)tax cuts are just spent, not saved as predicted by the theory.
B)empirically, tax cuts have not led to higher tax revenues.
C)there is no theoretical possibility of higher tax rates leading to lower tax revenues.
D)savers look only at real interest rates, not nominal interest rates.
E)higher tax rates do not create negative incentive effects.

Question 33

The Laffer curve shows that increasing _______ increases _______ when _______ low.

A)government outlays; the budget deficit; government expenditure is
B)potential GDP; tax revenue; tax revenue is
C)the tax rate; potential GDP; the interest rate is
D)the tax rate; tax revenue; the tax rate is
E)tax revenue; potential GDP; tax revenue is

Question 34

The Laffer curve is the relationship between

A)government outlays and revenues.
B)government expenditure and potential GDP.
C)tax revenue and potential GDP.
D)the tax rate and the amount of tax revenue.
E)the tax rate and potential GDP.

Question 35

An income tax cut that provides a greater incentive to work than an alternative tax cut will result in comparatively

A)the same potential GDP and a lower price level.
B)higher potential GDP and a lower price level.
C)the same potential GDP and a higher price level.
D)higher potential GDP and a higher price level.
E)the same potential GDP and price level.

Question 36

An increase in income taxes

A)decreases potential GDP because real GDP decreases when households have less disposable income to spend.
B)increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase.
C)does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged.
D)decreases potential GDP because workers' incentives to work are weakened.
E)does not affect potential GDP because potential GDP depends on technology only.

Question 37

An increase in income tax _______ potential GDP by shifting the labour _______.

A)decreases; demand curve rightward
B)increases; supply curve and labour demand curve rightward
C)increases; supply curve rightward
D)decreases; supply curve leftward
E)increases; demand curve rightward

Question 38

A tax cut on capital income

A)does not affect potential GDP because the interest rate affects aggregate expenditure only.
B)increases potential GDP because the supply of loanable funds increases.
C)does not affect potential GDP because it has no impact on the supply of labour.
D)increases potential GDP because households have more disposable income to spend.
E)increases potential GDP because workers have greater incentives to work.

Question 39

Consider all the effects of fiscal policy.A cut in the income tax

A)shifts both the SAS and LAS curves rightward but does not shift the AD curve.
B)shifts the AD, SAS, and LAS curves rightward.
C)shifts the LAS curve rightward but does not shift either the AD or SAS curve.
D)shifts the SAS curve rightward but does not shift either the AD or LAS curve.
E)shifts the AD curve rightward but does not shift either the LAS or SAS curve.

Question 40

Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent.The real after- tax interest rate is

A)3.5 percent.
B)4.0 percent.
C)3.0 percent.
D)- 3.5 percent.
E)- 0.5 percent.

Question 41

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP).What is the real GDP when the government has a balanced budget?

A)$250
B)$1,250 billion
C)$750 billion
D)$100
E)$1,000 billion

Question 42

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion._______ in government expenditure or _______ in taxes will further increase China's budget _______, increase investment and speed economic growth.

A)A decrease; an increase; surplus
B)A decrease; an increase; deficit
C)An increase; an increase; surplus
D)A decrease; a decrease; deficit
E)An increase; a decreases; deficit

Question 43

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1real GDP).What are autonomous taxes in Ricardia?

A)It depends on the level of real GDP.
B)$250 billion
C)0.1
D)$25 billion
E)$2.5 billion

Question 44

The cyclical deficit

A)exceeds the structural surplus.
B)is a persistent economic phenomenon.
C)is an accumulation of the government debt.
D)occurs when the economy is at full employment.
E)arises because real GDP does not equal potential GDP.

Question 45

A tax on labour income

A)decreases the supply of labour and has no influence on the real wage rate.
B)has no effect on the demand for labour.
C)increases the supply of labour and lowers the real wage rate.
D)increases the demand for labour and raises the real wage rate.
E)decreases the demand for labour but does not change the real wage rate.

Question 46

If the economy is in an expansion, and the federal government is running a deficit, then a recession would automatically

A)increase taxes.
B)decrease the deficit.
C)increase government outlays.
D)increase the deficit.
E)both C and D

Question 47

If the economy is in a recession, and the government has a budget deficit, then there

A)may be a structural surplus, but not a structural deficit.
B)may be either a structural surplus or deficit.
C)may be a structural deficit, but not a structural surplus.
D)must be a structural deficit.
E)must be a structural surplus.

Question 48

The structural deficit is the deficit

A)that would occur at potential GDP.
B)that would occur at the trough of the business cycle.
C)in an expansion.
D)in a recession.
E)caused by the business cycle.

Question 49

Increasing taxes on business and investment _______ short- run aggregate supply and _______ potential GDP.

A)increases; decreases
B)increases; does not change
C)does not change; does not change
D)decreases; does not change
E)decreases; decreases

Question 50

Lowering taxes on employment _______ , which _______ the equilibrium quantity of labour.

A)increases the supply of labour and the demand for labour; increases
B)decreases the supply of labour and increases the demand for labour; decreases
C)increases the demand for labour; increases
D)increases the supply of labour; increases
E)decreases the demand for labour and increases the supply of labour; decreases

Question 51

If the economy is in a recession and the federal government is running a deficit, then an expansion would

A)increase the deficit only if the interest rate rises.
B)automatically decrease the deficit.
C)automatically increase the deficit.
D)automatically balance the budget.
E)leave the deficit unchanged.

Question 52

A tax on interest income

A)decreases the supply of loanable funds and has no influence on the real interest rate.
B)increases the demand for loanable funds and raises the real interest rate.
C)increases the supply of loanable funds and lowers the real interest rate.
D)has no effect on the demand for loanable funds.
E)decreases the demand for loanable funds but does not change the real interest rate.

Question 53

Suppose that in China, investment is ¥400 billion, saving is ¥400 billion, tax revenues are ¥500 billion, exports are ¥300 billion, and imports are ¥200 billion.The government budget _______ the supply of loanable funds, which _______ the real interest rate and _______ investment.

A)surplus decreases; raises; increases
B)surplus increases; lowers; decreases
C)deficit decreases; raises; decreases
D)surplus increases; lowers; increases
E)surplus increases; raises; decreases

Question 54

Everything else remaining the same, as the economy enters a recession,

A)tax revenues rise and interest payments on the debt rise.
B)government outlays rise and tax revenues fall.
C)government outlays tend to fall and tax revenues fall.
D)interest payments on the debt rise and tax revenues fall.
E)tax revenues and transfer payments rise.

Question 55

The government is proposing to increase the tax rate on labour income and asks you to report on the supply- side effects of such an action.According to the research of Edward C.Prescott, cross- country evidence for Canada, the United States, the United Kingdom, and France shows all of the following except

A)between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP.
B)potential GDP per person in Canada is 12 percent below that of the United States but this difference is due to different productivities.
C)potential GDP per person in the United Kingdom is 28 percent below that of the United States per person)and about a third of the difference arises from the different tax wedges.
D)the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP.
E)potential GDP per person in France is 30 percent below that of the United States per person)and the entire difference can be attributed to the difference in the tax wedge in the two countries.

Question 56

Everything else remaining the same, as the economy enters an expansion,

A)tax revenues fall and transfer payments remain constant.
B)tax revenues and transfer payments fall.
C)tax revenues rise and transfer payments fall.
D)tax revenues and transfer payments rise.
E)transfer payments and interest on the debt rise.

Question 57

Norland has the budget deficit of $15 billion.According to the government economists, Norland has a structural deficit of $3 billion.What is a cyclical deficit in Norland?

A)$10 billion
B)zero
C)$12 billion
D)$15 billion
E)$18 billion

Question 58

The government increases the tax rate on labour income.At the equilibrium level of employment, the before- tax wage rate _______ and the after- tax wage rate _______.

A)rises; rises
B)rises; falls
C)rises; does not change
D)falls; rises
E)falls; falls

Question 59

Expenditure on alternative energy and the nation's infrastructure _______ short- run aggregate supply and _______ potential GDP.

A)does not change; does not change
B)increases; decreases
C)increases; increases
D)increases; does not change
E)does not change; increases

Question 60

A decrease in the tax on capital income _______ the real interest rate and _______ investment and economic growth.

A)decreases; increases
B)increases; decreases
C)decreases; decreases
D)increases; increases
E)decreases; does not change

Question 61

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.A discretionary fiscal restraint policy would be shown as

A)a movement from left to right along the revenues curve.
B)an upward shift of the revenues curve.
C)a movement from left to right along the outlays curve.
D)an upward shift of the outlays curve.
E)both A and C

Question 62

Which of the following is an example of a fiscal policy designed to counter a recessionary gap?

A)decreasing government expenditures on goods and services
B)increasing debt interest payments
C)decreasing transfer payments
D)increasing taxes
E)increasing transfer payments

Question 63

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.If real GDP equals $550 billion, the budget is

A)in balance.
B)a deficit of $40 billion.
C)a deficit of $60 billion.
D)a surplus of $60 billion.
E)a surplus of $40 billion.

Question 64

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.If real GDP equals $550 billion, the structural deficit is

A)zero.
B)$60 billion.
C)a surplus of $40 billion.
D)a surplus of $60 billion.
E)unknown given the available information.

Question 65

Automatic fiscal policy

A)is triggered by the state of the economy.
B)involves only a change in government outlays and no change in revenues.
C)involves only a change in personal income tax rates.
D)requires action by Parliament.
E)occurs during recessions but not during expansions.

Question 66

A structural deficit

A)is present only if real GDP is greater than potential.
B)exists even if real GDP equals potential.
C)equals the cyclical deficit plus the actual deficit.
D)occurs when the economy is in a recession.
E)is greater than a cyclical deficit.

Question 67

During a recession, revenues

A)increase and government outlays decrease.
B)decrease and government outlays increase.
C)and government outlays increase.
D)remain constant and government outlays increase.
E)and government outlays decrease.

Question 68

Which one of the following happens automatically if the economy goes into a recession?

A)Revenues decrease and government outlays do not change.
B)Government outlays increase and revenues do not change.
C)The government budget deficit decreases.
D)Both government outlays and revenues increase, and the deficit stays the same.
E)The government budget deficit increases or the government budget surplus decreases.

Question 69

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.If potential GDP is $750 billion, and actual real GDP is $650 billion, the cyclical deficit is

A)equal to the structural deficit.
B)$180 billion.
C)$60 billion.
D)$40 billion.
E)zero.

Question 70

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.Discretionary expansionary fiscal policy would be shown as

A)an upward shift of the outlays curve.
B)a movement from left to right along the revenues curve.
C)a movement from left to right along the outlays curve.
D)an upward shift of the revenues curve.
E)both A and C

Question 71

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.Discretionary fiscal policy would be shown as a movement

A)from left to right along the revenues curve.
B)from right to left along the revenues curve.
C)from left to right along the outlays curve.
D)from right to left along the outlays curve.
E)none of the above

Question 72

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.If potential GDP is $750 billion,

A)the structural deficit is $40 billion.
B)neither a structural surplus nor a structural deficit exists.
C)the structural surplus is $40 billion.
D)the structural deficit is $60 billion.
E)the structural surplus is $60 billion.

Question 73

Consider the economy of NoTax, where the government expenditure multiplier is 2.5.If the government desires to shift the AD curve rightward by $5 billion, the correct increase in government expenditure is

A)$3 billion.
B)$2 billion.
C)$2.5 billion.
D)$7.5 billion.
E)$8.33 billion.

Question 74

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.An automatic increase in tax revenues would be shown as a

A)shift upwards in the revenues curve.
B)movement from left to right along the revenues curve.
C)shift upwards in the the outlays curve.
D)movement from left to right along the outlays curve.
E)both A and C

Question 75

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.The budget is balanced when real GDP equals

A)$750 billion.
B)$700 billion.
C)$550 billion.
D)$650 billion.
E)$600 billion.

Question 76

Which of the following is an example of a fiscal restraint policy?

A)increasing government expenditure
B)increasing taxes
C)cutting transfer payments
D)both A and B
E)both B and C

Question 77

Discretionary fiscal policy

A)requires action by Parliament.
B)is triggered by the state of the economy.
C)occurs during recessions but not during expansions.
D)involves only a change in government outlays and no change in revenues.
E)involves only a change in personal income tax rates.

Question 78

A cyclical deficit occurs when

A)there is a deficit due to the fact real GDP is less than potential GDP.
B)government outlays are greater than revenues.
C)there is a deficit due to the fact real GDP is greater than potential GDP.
D)there is a deficit even when real GDP equals potential GDP.
E)government outlays are less than revenues.

Question 79

During an expansion, revenues

A)decrease and government outlays increase.
B)remain constant and government outlays increase.
C)increase and government outlays decrease.
D)and government outlays decrease.
E)and government outlays increase.

Question 80

Use the figure below to answer the following questions.
Figure 13.3.1
Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland.Automatic fiscal policy would be shown as a movement

A)from left to right along the revenues curve.
B)from left to right along the outlays curve.
C)from right to left along the outlays curve.
D)from right to left along the revenues curve.
E)all of the above