Deck 13: B: Fiscal Policy, Deficits, Surpluses, and Debt

Question 1

Tax revenues automatically increase during economic expansions and decrease during recessions.

Answer 1

True

Question 2

The actual and full-employment budgets will be equal when the economy is at full-employment.

Answer 2

True

Question 3

A contractionary fiscal policy shifts the aggregate demand curve leftward and may or may not reduce real GDP.

Answer 3

True

Question 4

An increase in taxes would be an expansionary fiscal policy.

Question 5

The greater the progressiveness of the tax system, the less is the built-in stability of the economy.

Question 6

Built-in stability refers to the fact that net tax revenues vary inversely with the level of GDP.

Question 7

The full-employment budget measures what the Federal budget deficit or surplus would be at full employment output with existing tax and spending decisions.

Question 8

If taxation becomes more progressive, the built-in stability in the economy will increase.

Question 9

The key to assessing whether fiscal policy is expansionary is to observe the change in the full-employment budget as a percentage of GDP.

Question 10

Automatic stabilizers will reduce tax revenues during recessions and increase tax revenues during periods of strong economic growth.

Question 11

The key to assessing the direction of discretionary fiscal policy is to observe changes in the full-employment deficit.

Question 12

An increase in taxes and a decrease in government spending would be characteristic of a contractionary fiscal policy.

Question 13

Built-in stability is synonymous with discretionary fiscal policy.

Question 14

If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

Question 15

The operational lag of fiscal policy refers to the time which elapses between the beginning of a recession or inflation and the certain awareness that it is actually happening.

Question 16

A decrease in government spending is one of the options that can be used to pursue a contractionary fiscal policy.

Question 17

An inflationary gap can be restrained by increasing government spending and reducing taxes.

Question 18

The actual budget may be in deficit while the full-employment budget is in surplus.

Question 19

An increase in the cyclical deficits will automatically increase the full-employment budget deficit.

Question 20

A decrease in government spending and taxes would be an example of fiscal policies that reinforce each other.

Question 21

If fiscal policy leads to higher interest rates, the dollar may appreciate and net exports fall.

Question 22

The public debt is the accumulation of all deficits and surpluses which have occurred through time.

Question 23

The payment of interest on the public debt probably decreases income inequality.

Question 24

The crowding-out effect refers to the possibility that deficit spending may lead people to increase their saving in anticipation of higher future taxes.

Question 25

Critics contend that the crowding-out effect will be minimal when the economy is in a recession.

Question 26

The impact of an expansionary fiscal policy may be strengthened if it crowds out some private investment spending.

Question 27

Fiscal policy is carried out primarily by:

A)the federal government.
B)provincial and local governments working together.
C)provincial governments alone.
D)local governments alone.

Question 28

Expansionary fiscal policy is so named because it:

A)involves an expansion of the nation's money supply.
B)necessarily expands the size of government.
C)is aimed at achieving greater price stability.
D)is designed to expand real GDP.

Question 29

Discretionary fiscal policy is so named because it:

A)is undertaken at the option of the nation's central bank.
B)occurs automatically as the nation's level of GDP changes.
C)involves specific changes in T and G undertaken expressly for stabilization purposes at the option of Parliament.
D)none of the above.

Question 30

Fiscal policy refers to the:

A)manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
B)manipulation of government spending and taxes to achieve greater equality in the distribution of income.
C)altering of the interest rate to change aggregate demand.
D)fact that equal increases in government spending and taxation will be contractionary.

Question 31

The crowding-out of investment may be avoided if a budget deficit is financed by issuing new money.

Question 32

The net export effect may partially counteract an expansionary fiscal policy.

Question 33

The additional taxes needed to pay the interest on the public debt reduce incentives to work, save, invest, and bear risks.

Question 34

Some economists believe the budget deficit is directly linked to the trade deficit through real interest rates and the international value of the dollar.

Question 35

The crowding-out effect may be dampened if the investment-demand curve is shifting to the right.

Question 36

Discretionary fiscal policy refers to:

A)any change in government spending or taxes which destabilizes the economy.
B)the authority which Parliament has to change personal income tax rates.
C)changes in taxes and government expenditures made by Parliament to stabilize the economy.
D)the changes in taxes and transfers which occur as GDP changes.

Question 37

It is more meaningful to measure the growth of the public debt relative to the GDP than to measure it in absolute terms.

Question 38

The crowding-out effect of an expansionary fiscal policy is likely to be fully or partially offset during a recession.

Question 39

A net export effect may partially reinforce an expansionary fiscal policy.

Question 40

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Question 41

Assume the economy is in the midst of a severe recession.Which of the following policies would be consistent with discretionary fiscal policy?

A)a Parliamentary proposal to incur a federal surplus to be used for the retirement of public debt
B)a reduction in agricultural subsidies and veterans' benefits
C)a postponement of a highway construction program
D)a reduction in federal tax rates on personal and corporate income

Question 42

An economy is experiencing a high rate of inflation.The government wants to reduce GDP 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

Question 43

Countercyclical discretionary fiscal policy calls for:

A)surpluses during recessions and deficits during periods of demand-pull inflation.
B)deficits during recessions and surpluses during periods of demand-pull inflation.
C)surpluses during both recessions and periods of demand-pull inflation.
D)deficits during both recessions and periods of demand-pull inflation.

Question 44

In an economy, the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .75, then it could:

A)reduce taxes by $12 billion.
B)reduce taxes by $16 billion.
C)reduce government spending by $12 billion.
D)increase government spending by $18 billion.

Question 45

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.

Question 46

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.

Question 47

Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP.It could:

A)reduce taxes by $160 billion.
B)increase government spending by $80 billion.
C)reduce taxes by $40 billion.
D)increase government spending by $40 billion.

Question 48

An appropriate fiscal policy for a severe recession is:

A)a decrease in government spending.
B)a decrease in tax rates.
C)appreciation of the dollar.
D)an increase in interest rates.

Question 49

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.

Question 50

In a certain year the aggregate demand at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $200 billion.To obtain full employment under these conditions the government should:

A)encourage personal saving by increasing the interest rate on government bonds.
B)decrease government expenditures.
C)reduce tax rates and increase government spending.
D)discourage private investment by increasing corporate income taxes.

Question 51

A tax reduction of a specific amount will be more expansionary, the:

A)smaller is the economy's MPC.
B)larger is the economy's MPC.
C)smaller is the economy's multiplier.
D)less the economy's built-in stability.

Question 52

Within the aggregate demand and aggregate supply framework, fiscal policy that emphasizes activist government policies to stabilize the economy would view cutting personal income taxes as primarily a shift:

A)right in the aggregate demand curve.
B)left in the aggregate demand curve.
C)right in the aggregate supply curve.
D)left in the aggregate supply curve.

Question 53

An expansionary fiscal policy is shown as a:

A)rightward shift in the economy's aggregate demand curve.
B)movement along an existing aggregate demand curve.
C)leftward shift in the economy's aggregate supply curve.
D)leftward shift in the economy's aggregate demand curve.

Question 54

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion.If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

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

Question 55

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

A)increasing government spending by $25 billion.
B)increasing government spending by $80 billion.
C)decreasing taxes by $25 billion.
D)decreasing taxes by $100 billion.

Question 56

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .9, then it could:

A)decrease taxes by $6 billion.
B)decrease taxes by $12 billion.
C)increase government spending by $6 billion.
D)increase government spending by $12 billion.

Question 57

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion at each price level by:

A)increasing government spending by $4 billion.
B)increasing government spending by $40 billion.
C)decreasing taxes by $4 billion.
D)increasing taxes by $4 billion.

Question 58

Which of the following represents the most expansionary fiscal policy?

A)a $10 billion tax cut
B)a $10 billion increase in government spending
C)a $10 billion tax increase
D)a $10 billion decrease in government spending

Question 59

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

A)leftward shift in the aggregate demand curve.
B)rightward shift in the aggregate demand curve.
C)leftward shift in the aggregate supply curve.
D)change in the price level.

Question 60

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.

Question 61

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

A)shift the AD curve to the right.
B)increase the equilibrium GDP.
C)not affect the AD curve.
D)shift the AD curve to the left.

Question 62

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

Question 63

Discretionary fiscal policy will stabilize the economy most when:

A)deficits are incurred during recessions and surpluses during inflations.
B)the budget is balanced each year.
C)deficits are incurred during inflations and surpluses during recessions.
D)budget surpluses are continuously incurre

Question 64

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion.If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with the goal of achieving price level stability?

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

Question 65

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

Question 66

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion at each price level by:

A)reducing government expenditures by $12 billion.
B)reducing government expenditures by $60 billion.
C)increasing taxes by $15 billion.
D)increasing taxes by $20 billion.

Question 67

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.

Question 68

Which set of fiscal policies would tend to offset each other?

A)a decrease in government spending and taxes
B)a decrease in government spending and no change in taxes
C)an increase in government spending and a decrease in taxes
D)a decrease in government spending and an increase in taxes

Question 69

Assume that aggregate demand in the economy is excessive, causing an inflationary gap.Which of the following would be most in accord with appropriate government fiscal policy?

A)an increase in federal income tax rates
B)an increase in the size of income tax exemptions for each dependent
C)passage of legislation providing for the construction of 8,000 new post office buildings
D)an increase in soil conservation subsidies to farmers

Question 70

An appropriate fiscal policy for severe demand-pull inflation is:

A)an increase in government spending.
B)depreciation of the dollar.
C)a reduction in interest rates.
D)a tax rate increase.

Question 71

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation.It could:

A)increase taxes by $10 billion.
B)reduce government spending by $40 billion.
C)reduce government spending by $5 billion.
D)increase taxes by $20 billion.

Question 72

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.

Question 73

Which combination of fiscal policy actions would most likely be offsetting?

A)increase in taxes and government spending
B)decrease in taxes and increase in government spending
C)increase in taxes, but make no change in government spending
D)decrease in taxes, but make no change in government spending

Question 74

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a:

A)leftward shift in the aggregate demand curve.
B)rightward shift in the aggregate demand curve.
C)rightward shift in the aggregate supply curve.
D)movement along an existing aggregate supply curve.

Question 75

A contractionary fiscal policy is shown as a:

A)rightward shift in the economy's aggregate demand curve.
B)rightward shift in the economy's aggregate supply curve.
C)movement along an existing aggregate demand curve.
D)leftward shift in the economy's aggregate demand curve.

Question 76

Contractionary fiscal policy is so named because it:

A)involves a contraction of the nation's money supply.
B)necessarily reduces the size of government.
C)is aimed at reducing aggregate demand and thus achieving price stability.
D)is expressly designed to contract real GDP.

Question 77

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion at each price level by:

A)reducing government expenditures by $125 billion.
B)reducing government expenditures by $20 billion.
C)increasing taxes by $50 billion.
D)increasing taxes by $250 billion.

Question 78

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPS is .25, then it could:

A)increase taxes by $16 billion.
B)increase taxes by $24 billion.
C)decrease government spending by $10 billion.
D)decrease government spending by $16 billion.

Question 79

Which of the following represents the most contractionary fiscal policy?

A)a $30 billion tax cut
B)a $30 billion increase in government spending
C)a $30 billion tax increase
D)a $30 billion decrease in government spending

Question 80

An economist who advocates discretionary fiscal policy would recommend:

A)tax cuts during recession and reductions in government spending during inflation.
B)tax increases during recession and tax cuts during inflation.
C)tax cuts during recession and tax increases during inflation.
D)increases in government spending during recession and tax increases during inflation.