Deck 18: Fiscal Policy

Question 1

During the recession of 2001,

A)there were a number of proposals for tax increases or spending cuts to stir the economy,but they failed due to worries about their effects on the already large deficit.
B)a series of tax cuts were passed,though they only occurred in late 2001.
C)all the proposed tax and spending cuts were approved in order to motivate the economy and reduce the large deficit.
D)the cyclical deficit increased but the structural deficit remained unchanged.
E)None of the above

Answer 1

B

Question 2

If the tax function is given by T = - 20 + 0.1Y the average tax rate would

A)be 0.1.
B)fall as income falls.
C)vary negatively with income.
D)be - 20 + 0.1.
E)none of the above

Answer 2

B

Question 3

According to the Keynesians,

A)an easy-fiscal tight-monetary policy reduces the trade deficit,such as what occurred during the 1980s.
B)an easy-fiscal tight-monetary policy mix affects the composition of output by encouraging imports of foreign goods and discouraging U.S.exports,as was experienced during the 1980s.
C)there was not a link between the rising government budgetary deficit and the rising trade deficit during the mid-1980s.
D)budget deficits and trade deficits should not be a source of concern

Answer 3

B

Question 4

How do automatic fiscal stabilizers function? What do they imply about the behavior of structural deficits over the business cycle? What do they imply about the behavior of cyclical deficits over the business cycle?

Question 5

According to the Keynesian model,the optimal fiscal policy is to

A)increase cyclical but not structural deficits during a recession.
B)reduce cyclical and structural deficits during a recession.
C)increase structural deficits during an recession.
D)maintain a balanced budget in case of national emergency.

Question 6

In the simple Keynesian model,if the tax function is given by T = 0.15Y and the consumption function is C = 50 + 0.7Y_D then a 10-unit increase in government spending would increase equilibrium income by

A)10 units.
B)11.2 units.
C)22.4 units.
D)30 units.
E)none of the above

Question 7

The role of the progressive tax system as an autonomous fiscal stabilizer requires that the budget

A)should require actual deficits be equal to zero on average.
B)should go into a surplus at appropriate points in the business cycle.
C)cannot have a structural deficit component.
D)Both a and b
E)None of the above

Question 8

Cite the difference between a "political business cycle" and a "party cycle?" What do each imply about the length and regularity of business cycles?

Question 9

Which of the following are the most frequently utilized tools of fiscal policy in the United States?

A)Indirect business taxes
B)Corporate income taxes
C)Inheritance taxes
D)Personal income taxes

Question 10

Assume that the actual deficit is $150 billion with the economy well below potential output and that the level of economic activity rose to its potential level while tax revenues increased by $50 billion and transfer payments fell by $20 billion.Then,what is the structural deficit?

A)$180 billion
B)$120 billion
C)$220 billion
D)$80 billion
E)$100 billion

Question 11

When automatic fiscal stabilizers are in place,a shock that causes a fall in the level of economic activity automatically

A)results in a decline in the federal budget deficit that lessens the fall in income.
B)results in a rise in the federal deficit that lessens the fall in income.
C)requires the federal government to balance the budget.
D)will lead to a permanent increase in the budget deficit.
E)both a and b

Question 12

Advocates of the public-choice view argue that voting behavior is influenced by the

A)rate of inflation prior to an election.
B)level of economic activity.
C)"favorite son" syndrome.
D)campaign issues.

Question 13

According to the partisan theory,

A)politicians are viewed as working only for their own welfare.
B)there are two parties with flexible goals.
C)moderates and liberals often switch political goals.
D)macroeconomic policy is not a key focus of most politicians.
E)none of the above.

Question 14

If the tax function is T = t₀ + t₁Y where t₁ equals 1/3,and if the marginal propensity to consume out of disposable income is 3/4,then the change in GDP per unit change in t₀ (ΔY/Δt₀)will be

A)− 1.
B)+ 1.
C)− 1.5.
D)− 2.
E)+ 1.5.

Question 15

The structural deficit is

A)directly attributable to the long-run behavior of the economy.
B)not directly attributable to the cyclical behavior of the economy.
C)the result of permanent decisions policymakers have made about tax rates,the level of government spending,and benefit levels for transfer programs.
D)Both b and c

Question 16

According to the partisan theory model,what motivates policy makers? What differentiates one party from another? Which party should be more concerned with budget deficits?

Question 17

Which of the following statements is (are)correct?

A)Even the earliest political business cycle and partisan models assumed that expectations were rational.
B)The partisan model of fiscal policy cannot be modified to be consistent with rational expectations.
C)the myopic,or short-sighted behavior of voters is inconsistent with rational expectations.
D)The earliest political business cycle models assumed that expectations were always rational,whereas the partisan model assumed that expectations were sometimes irrational.

Question 18

Suppose that the MPC out of disposable income was 0.8 and the marginal tax rate was 0.25 for a given economy.In this case,the value of the tax multiplier in the simple Keynesian model would be

A)1.
B)-2.
C)2.5.
D)2.
E)none of the above.

Question 19

The higher the marginal income tax rate,the

A)higher the MPC out of disposable income.
B)lower the MPC out of disposable income.
C)higher the autonomous expenditure multiplier.
D)lower the autonomous expenditure multiplier.
E)None of the above

Question 20

Suppose that the MPC out of disposable income was 0.8 and the tax function for a given economy was T = - 30 + 0.25Y.An increase in the intercept of the tax function of 10 units (from - 30 to - 20)would cause equilibrium income in the simple Keynesian model to fall by

A)-20 units.
B)10 units.
C)20 units.
D)40 units.

Question 21

While deficits in the United States through the 1970s,1980s and early 1990s were high relative to our historical peacetime experience,they

A)were been below average for large industrial countries.
B)were above average when compared to other large industrial countries.
C)were about average for large industrial countries.
D)were the lowest when compared to other large industrial countries.

Question 22

In the Keynesian model,

A)the autonomous expenditure multiplier is lower than the tax multiplier.
B)the autonomous tax multiplier is positive and large.
C)the autonomous tax multiplier is larger (in absolute value)than the tax multiplier.
D)the tax multiplier is equal to 1.
E)none of the above.

Question 23

A change in government spending has a larger effect on income the

A)larger the elasticity of money demand.
B)smaller the elasticity of money demand.
C)steeper the LM curve.
D)flatter the LM curve.

Question 24

If the Federal Reserve increases the money supply at the same time as an expansionary fiscal policy drives up budget deficits,we would expect to see income _____ and interest rates ____.

A)changes be indeterminate; fall
B)fall; fall
C)rise; fall.
D)rise; changes be indeterminate
E)none of the above.

Question 25

Historically,the most important cause of government budget deficits is

A)cutting taxes.
B)printing up too much money.
C)financing wars.
D)electing liberal politicians.
E)business cycles.

Question 26

A change in government spending has a larger effect on income the

A)larger the elasticity of money demand.
B)smaller the elasticity of money demand.
C)steeper the IS curve.
D)flatter the IS curve.

Question 27

Which of the following statements is (are)correct?

A)Expansionary monetary policy and expansionary fiscal that leads to budget deficits create low interest rates.
B)High interest rates in the first half of the 1980s resulted from falls in the budget deficit under the Reagan administration.
C)the best monetary-fiscal policy mix to keep interest rates low would be to raise taxes and raise the money supply.
D)The answer depends upon the school of thought used to evaluate the effects of deficit policies.

Question 28

According to the party cycle theory,recessions

A)will be nonexistent in the near future.
B)are most apt to occur when a liberal president is elected.
C)are most likely to occur during the first couple of years following the election of a conservative president.
D)are here to stay.

Question 29

Assuming a simultaneous reduction in income taxes and transfer payments of $50 billion,then aggregate disposable income will

A)be higher than before.
B)be lower than before.
C)remain constant.
D)None of the above

Question 30

The structural deficit is the deficit that

A)is composed by of nondiscretionary spending by the federal government.
B)results from the economy being below its natural rate of output.
C)exists when output is at its natural rate of output.
D)results from temporary tax cuts.
E)all of the above

Question 31

Currently,virtually the entire deficit in the U.S.is

A)cyclical.
B)structural.
C)transitional.
D)frictional.

Question 32

According to the concept of rational expectations

A)budget deficits are irrelevant to output in the short-run.
B)higher deficits should increase output in the short-run if they are expected.
C)lower deficits can be used to stabilize output during expansions.
D)none of the above.

Question 33

Which of the following hypotheses about voter behavior have been advanced in public-choice literature?

A)Voters are myopic
B)Unemployment is more likely to result in vote loss than is higher inflation
C)Deficit bias of the budget process
D)Both a and c
E)All of the above

Question 34

A deficit-financed tax cut will ____ national savings and _____ private consumption.

A)have no effect on; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 35

Based on current budget projections,in the U.S.over the next 20 years the

A)structural deficit rises will fall sharply as tax revenues rise.
B)cyclical deficit will fall as the economy expands.
C)structural deficit will rise sharply as a higher proportion of the population retires.
D)structural deficit will fall sharply as more people enter the workforce.
E)none of the above.

Question 36

Measuring the size of future government deficits is complicated by all of the following except uncertainty about

A)liabilities for future entitlements.
B)future economic growth.
C)future inflation.
D)the future assets of the U.S.government.

Question 37

Which of the following statements is (are)correct?

A)Rational expectations imply rational voters that make do not make mistakes.
B)The partisan model of fiscal policy are consistent with rational expectations
C)short-sighted behavior in voting is inconsistent with rational expectations.
D)The earliest political business cycle models assumed that expectations were always rational.
E)none of the above.

Question 38

Advocates of the public-choice view argue that elected officials

A)will always respond to inflation with expansionary policies but will respond to unemployment with restrictive policies.
B)will actively respond to inflation with restrictive policies but are reluctant to respond to unemployment with expansionary policies.
C)will always respond to both inflation and unemployment with expansionary policies.
D)None of the above

Question 39

In the IS-LM model,when government spending and taxes increase by the same amount

A)income and interest rates remain unchanged.
B)interest rates and income rise.
C)interest rates and income fall.
D)changes in interest rates are indeterminate but income rises.
E)none of the above.

Question 40

From the net tax function: T = t₀ + t₁Y,where t₀ < 0 and t₁ > 0,it follows that,as income rises

A)average taxes falls and the surplus declines.
B)average taxes rises and the deficit increases.
C)average taxes falls and the deficit declines.
D)Average taxes and the deficit do not change.

Question 41

High budget deficits may:

A)encourage overly expansionary fiscal policy.
B)create higher inflation.
C)increase the risk of sovereign debt default.
D)all of the above.

Question 42

During the 2000s,the Federal government's deficit rose because of

A)large tax cut in 2001 and 2004..
B)large increases in government spending.
C)increases in both the cyclical and structural deficits.
D)a recession in 2001.
E)all of the above.

Question 43

Assume that the total deficit is $100 billion and the economy is above potential output.Now the level of economic activity falls back to its potential level output,leading to an decrease in tax revenues increase by $50 billion an increase in transfer payments fell by $10 billion.Then,what is the structural deficit?

A)$100 billion
B)$110 billion
C)$150 billion
D)$160 billion
E)can't tell based on information given.

Question 44

During a recession the:

A)actual budget deficit is smaller than the structural budget deficit.
B)cyclical budget deficit is larger than the structural budget deficit.
C)actual budget deficit is larger than the structural budget deficit.
D)structural budget deficit is larger than the cyclical budget deficit.
E)none of the above.