Deck 18: Fiscal Policy

Question 1

_____ is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.

A) Business policy
B) Fiscal policy
C) Monetary policy
D) Trade policy

Answer 1

Fiscal policy

Question 2

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing?

A) real business cycle policy
B) fiscal policy
C) monetary policy
D) growth policy

Answer 2

fiscal policy

Question 3

Fiscal policy:

A) is the decrease in private spending that occurs when government increases spending.
B) occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut they save it to pay future taxes.
C) is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.
D) is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.

Answer 3

is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.

Question 4

Fiscal policy can BEST be defined as the use of:

A) government expenditure and taxation to mitigate recessions only.
B) government expenditure, borrowing, and taxation to influence the business cycle.
C) money supply manipulation to influence the business cycle.
D) international political relations to influence the business cycle.

Question 5

President Obama's fiscal policy response to the 2008 recession involved changes in:

A) government spending only.
B) taxation only.
C) both taxation and government spending.
D) neither government spending nor taxation.

Question 6

The largest spending component of GDP is:

A) consumption.
B) investment.
C) government spending.
D) imports.

Question 7

To fight a recession, the federal government can:

A) increase taxes.
B) increase its spending.
C) increase interest rates.
D) decrease the discount rate.

Question 8

People holding more cash because of a decrease in consumer confidence would cause:

A) a decrease in both the growth rate of output and inflation.
B) a decrease in the growth rate of output and an increase in the inflation rate.
C) an increase in the growth rate of output and a decrease in the inflation rate.
D) an increase in both the growth rate of output and inflation.

Question 9

In the absence of any policy intervention, when $\vec { C }$ falls the result will be:

A) higher inflation and lower real growth.
B) lower inflation and real growth.
C) higher inflation and real growth.
D) lower inflation and higher real growth.

Question 10

As the recession continued in early 2009, consumer confidence most likely:

A) increased.
B) decreased.
C) remained constant.
D) became too difficult to calculate accurately.

Question 11

When $\vec { C }$ falls, the LRAS curve:

A) shifts to the right.
B) shifts to the left.
C) becomes flatter.
D) does not move.

Question 12

Fiscal policy refers to changes in:

A) government regulations that affect the level of market competition.
B) interest rates that affect the credit markets.
C) the money supply in an attempt to raise the standard of living.
D) government spending or taxes in an attempt to influence the overall economy.

Question 13

One way the government can use fiscal policy to fight a recession is to:

A) spend less money.
B) increase Social Security payments.
C) cut taxes.
D) reduce welfare subsidies.

Question 14

Fiscal policy involving _____ is designed to influence business cycle fluctuations.

A) the taxation of income
B) government spending
C) government borrowing
D) taxation, government spending, and borrowing

Question 15

Which of these would help a government fight a recession?

A) raising taxes
B) cutting taxes
C) cutting spending
D) paying down the national debt

Question 16

Fiscal policy includes federal government policy on:

A) government spending only.
B) taxes only.
C) both government spending and taxes.
D) neither government spending nor taxes.

Question 17

The primary tools of fiscal policy are:

A) money supply and money demand.
B) government expenditure and money supply.
C) government expenditure and taxation.
D) taxation and interest rates.

Question 18

A decrease in consumers' confidence in banks would lead to _____ in the velocity of money and result in the AD curve shifting to the _____.

A) an increase; left
B) an increase; right
C) a decrease; left
D) a decrease; right

Question 19

If the economy is in a recession, the most appropriate fiscal policy would be to:

A) decrease government spending in order to balance the budget.
B) decrease both government spending and taxes.
C) increase government spending and cut taxes, thus running a higher budget deficit.
D) increase government spending and increase taxes in order to keep the budget balanced.

Question 20

When $\vec { C }$ falls, the aggregate demand curve:

A) shifts to the right.
B) shifts to the left.
C) becomes steeper.
D) becomes flatter.

Question 21

A problem that makes fiscal policy less effective is that:

A) fiscal policy must be offset by monetary policy.
B) government spending is a relatively small portion of GDP.
C) government spending does not directly affect aggregate demand.
D) higher taxes or increased borrowing to fund government spending can reduce aggregate demand.

Question 22

When using fiscal policy to fight a recession, the government will:

A) decrease taxes and/or increase government expenditures.
B) increase taxes and/or decrease government expenditures.
C) institute technological advancement in the economy.
D) decrease government expenditures.

Question 23

During a recession, consumers hold more money by cutting back on their spending, resulting in _____ in inflation and _____ in real growth.

A) a decrease; an increase
B) a decrease; a decrease
C) an increase; an increase
D) an increase; a decrease

Question 24

When consumers reduce spending, the reduction in the velocity of money is split between:

A) a decrease in growth and an increase in inflation.
B) a decrease in growth and a decrease in inflation.
C) a decrease in money supply and a decrease in growth.
D) a decrease in money supply and decrease in inflation.

Question 25

The BEST type of negative shock for fiscal policy to respond to is a negative shock to:

A) aggregate demand.
B) short-run aggregate supply.
C) the LRAS curve.
D) inflation.

Question 26

An increase in government spending causes:

A) the aggregate demand curve to shift to the left.
B) the aggregate demand curve to shift to the right.
C) an upward movement along the aggregate demand curve.
D) a downward movement along the aggregate demand curve.

Question 27

The economist John Maynard Keynes said, "In the long run, we are all _____."

A) old
B) tired
C) dead
D) sticky

Question 28

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy
(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession?

A) Wages will become flexible and spending growth will recover to increase aggregate demand, moving the economy to point X.
B) Wages will remain sticky and aggregate demand will fall farther, moving the economy to point Y.
C) Aggregate demand will rise above the LRAS curve, moving the economy to point W.
D) The economy will remain in a recession at point Z.

Question 29

When consumers cut back on spending _____fall(s).

A) the velocity of money
B) the money supply
C) interest rates
D) tax rates

Question 30

When the government conducts fiscal policy, it makes up for a decrease in $\vec { C }$ with:

A) an increase in $\vec { G }$ .
B) a decrease in $\overrightarrow { N X }$ .
C) an increase in $\vec{ M }$ .
D) a decrease in $\bar { Y } _ { R }$ .

Question 31

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy
(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to:

A) 5%.
B) 7%.
C) 15%.
D) 10%.

Question 32

In the short run, an increase in government spending growth will cause the inflation rate to:

A) increase.
B) decrease.
C) remain unchanged.
D) become unpredictable.

Question 33

Which statement is NOT a reason government spending sometimes increases growth?

A) Spending can lower inflation and keep prices and wages steady.
B) Spending can move unemployed factors of production into productive activities.
C) Spending can encourage additional private investment.
D) Spending can increase consumer confidence.

Question 34

In the short run, a decrease in consumption growth will cause the inflation rate to:

A) increase.
B) decrease.
C) remain unchanged.
D) become unpredictable.

Question 35

Which could be sources of funding for a government that wants to increase government expenditures?

A) taxes only
B) borrowing only
C) both taxes and borrowing
D) neither taxes nor borrowing

Question 36

In working to correct a recession with fiscal policy, the government can:

A) wait for wages and prices to become more flexible.
B) increase the money supply.
C) increase its expenditures and/or decrease taxes to shift the LRAS curve.
D) raise its expenditures and/or lower taxes to increase aggregate demand.

Question 37

In the short run, a decrease in consumption growth will cause the real GDP growth to:

A) increase.
B) decrease.
C) remain unchanged.
D) become unpredictable.

Question 38

A decrease in consumption growth will cause:

A) AD to shift to the left.
B) SRAS to shift to the left.
C) LRAS to shift to the left.
D) AD, SRAS, and LRAS to shift to the left.

Question 39

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy
(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, effective fiscal policy would take which action to correct an economy in recession at point Z?

A) increase aggregate demand to move the economy to point X
B) increase the LRAS curve to a level above 3%
C) decrease the LRAS curve to a level below 2%
D) increase aggregate demand to move the economy to point W

Question 40

In the short run, an increase in government spending growth will cause the real GDP growth to:

A) increase.
B) decrease.
C) remain unchanged.
D) become unpredictable.

Question 41

An increase in government spending growth will cause the AD curve to:

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 42

Assume the government cancels a large infrastructure program, causing construction firms in the area to earn less and lay off workers. Consequently, businesses in the area suffer from a decrease in sales. This story illustrates:

A) a reverse multiplier effect.
B) an increase in aggregate demand.
C) a negative technology shock.
D) the crowding out effect.

Question 43

Fiscal policy can offset a positive shock to aggregate demand by raising:

A) the discount rate.
B) the growth rate of the money supply.
C) taxes.
D) government spending.

Question 44

A decrease in consumption growth will cause inflation to fall in:

A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question 45

When the government increases its spending growth, the subsequent increase in nongovernment spending stimulates aggregate demand and is called the _____ effect.

A) crowding out
B) endowment
C) multiplier
D) automatic stabilizing

Question 46

If consumption growth decreases, the government spending "multiplier effect" means that in order to counter the recession:

A) the government cannot use fiscal policy.
B) the government is forced to use both tax cuts and increases in $\vec { G }$
.
C) fiscal policy needs to raise $\vec { G }$
By less than the decrease in $\vec { C }$
.
D) fiscal policy needs to raise $\vec { G }$
By more than the decrease in $\vec { C }$
.

Question 47

Figure: Aggregate Demand Shifts 3 Refer to the figure. If the government lowers its spending growth so that the AD curve shifts from AD₁ to AD₂, the multiplier effect will cause the AD curve to:

A) shift back to AD₁.
B) remain at AD₂.
C) shift farther to AD₃.
D) shift all the way out to AD₄.

Question 48

Examples of expansionary fiscal policy include increases in:

A) government spending.
B) income taxes.
C) the money supply.
D) interest rates.

Question 49

The multiplier effect is the:

A) subsequent consumer spending that increases AD from expansionary fiscal policy.
B) subsequent consumer spending that increases AD from contractionary fiscal policy.
C) increase in GDP from an increase in the money supply and decrease in taxes.
D) increase in GDP from increased consumer savings and private investment.

Question 50

A decrease in consumption growth will cause aggregate demand to:

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 51

A decrease in consumption growth will cause the LRAS curve to:

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 52

Figure: Aggregate Demand Shifts 2 Refer to the figure. Suppose the economy is initially at point A in the diagram. If a decrease in investment spending causes a shift of the AD curve from AD₁ to AD₂, then the government can avoid a short-run recession by:

A) increasing taxes so that the AD curve shifts back to AD₁.
B) increasing taxes so that the AD curve shifts further in to AD₃.
C) increasing government spending so that the AD curve shifts back to AD₁.
D) increasing government spending so that the AD curve shifts further in to AD₃.

Question 53

Fiscal policy involves:

A) government borrowing to finance the national debt.
B) government taxes and spending that affect the income distribution among people.
C) government taxes, spending, and borrowing that affect business fluctuations.
D) the change of the money supply that affects business fluctuations.

Question 54

Figure: Aggregate Demand Shifts Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD₁ to AD₄, then the government can avoid a short-run increase in inflation by:

A) increasing taxes so that the AD curve shifts back to AD₁.
B) increasing taxes so that the AD curve shifts further out to AD₅.
C) increasing government spending so that the AD curve shifts back to AD₁.
D) increasing government spending so that the AD curve shifts further out to AD₅.

Question 55

To fight a recession, the government can:

A) increase spending.
B) increase taxes.
C) buy bonds.
D) increase interest rates.

Question 56

Figure: Aggregate Demand and Fiscal Policy Refer to the figure. Assume the government of an economy in recession at point Y in the diagram is aware of the expenditure multiplier when it formulates policy decisions. If it chooses to increase government spending growth by 4percentage points, it should expect the economy to:

A) move at least to point W.
B) move at least to point X.
C) move at least to point Z.
D) stay at point Y.

Question 57

An increase in government spending growth will cause the LRAS curve to:

A) shift inward.
B) shift outward.
C) remain unchanged.
D) first shift outward and then shift inward.

Question 58

As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they live. What is the economic term for this effect?

A) hastening
B) multiplier
C) duplicator
D) spending

Question 59

Other things being equal, a decrease in government spending growth causes:

A) the AD curve to shift to the right.
B) the AD curve to shift to the left.
C) the LRAS curve to shift to the right.
D) the LRAS curve to shift to the left.

Question 60

Imagine an economy in a recession resulting from a decrease in consumer spending. In the best case scenario, increased government spending to fight the recession would:

A) be offset by a decrease in inflation.
B) need to be a little more than the initial fall in consumer spending to make up for lost GDP.
C) not need to be as large as the initial fall in consumer spending.
D) need to be exactly the same amount as the initial fall in consumer spending.

Question 61

In what way are monetary and fiscal policies similar?

A) They both target aggregate demand to overcome business fluctuations.
B) They are both effective when the economy suffers from real shocks.
C) Both involve a multiplier effect.
D) Neither involves a lag.

Question 62

Which statement does NOT limit the effectiveness of fiscal policy?

A) Changes in private spending offset the effects of government spending or taxation.
B) The size of government is small in comparison with the economy as a whole.
C) Fiscal policy is subject to long and uncertain lags.
D) Government spending and taxes have little effect on aggregate demand.

Question 63

In order for fiscal policy to effectively offset a $1 million decrease in consumer spending, the government would MOST likely have to:

A) keep a balanced budget.
B) increase spending by $1 million.
C) increase spending by more than $1 million.
D) increase spending by less than $1 million.

Question 64

As a result of the multiplier effect, a tax cut causes a:

A) larger shift of the aggregate demand curve to the left.
B) smaller shift of the aggregate demand curve to the left.
C) larger shift of the aggregate demand curve to the right.
D) smaller shift of the aggregate demand curve to the right.

Question 65

Use the following to answer questions: Figure: A Real Shock Refer to the figure. After a real shock, the economy is operating at point Y in the figure. In the presence of crowding out, fiscal policy that would have shifted aggregate demand from AD₀ to AD₂ will only move the economy to point:

A) A.
B) B.
C) V.
D) X.

Question 66

When expansionary fiscal policy increases income and thus consumer spending, the additional increase in AD it causes is called the:

A) crowding out effect.
B) secondary effect.
C) spending effect.
D) multiplier effect.

Question 67

Which refers to the decrease in private spending when government spending increases?

A) the multiplier effect
B) the timing effect
C) the automatic stabilizing effect
D) the crowding out effect

Question 68

Which poses a limit to fiscal policy?

A) crowding out
B) the size of government expenditures
C) legislative lags
D) crowding out, the size of government expenditures, and legislative lags

Question 69

What are the four major limits to fiscal policy?

A) crowding out, a drop in the bucket, a matter of timing, and real shocks
B) poor information, the multiplier effect, the bandwagon effect, and election timing
C) sticky wages, Ricardian equivalence, recognition lag, and crowding out
D) aggregate demand deficiency, unemployed resources, long-run expenses, and implementation lag

Question 70

When an increase in government spending leads to a decrease in private spending it is called:

A) crowding out.
B) a drop in the bucket.
C) bad timing.
D) the implementation lag.

Question 71

If the government increases its spending, financing methods that can cause crowding out include:

A) raising taxes only.
B) selling bonds only.
C) both raising taxes and selling bonds.
D) neither raising taxes nor selling bonds.

Question 72

The size of the spending multiplier increases from:

A) an increased response of consumption to a change in income.
B) a decreased response of consumption to a change in income.
C) an increase in the income tax rate on marginal income.
D) an increase in consumer purchases of imports to a change in income.

Question 73

The multiplier effect from an increase in government spending causes additional increases in aggregate demand through:

A) a decrease in taxes.
B) even more government spending.
C) an increase in consumer spending.
D) a decrease in interest rates.

Question 74

(Figure: A Real Shock) Refer to the figure. After a real shock, the economy is operating at point Y in the figure. Assuming there is no crowding out, fiscal policy that shifts aggregate demand from AD₀ to AD₂ will move the economy to point:

A) A.
B) B.
C) V.
D) X.

Question 75

When expansionary fiscal policy subsequently increases income and consumer spending, the subsequent increase in AD is called the _____ effect.

A) expansionary
B) secondary
C) multiplier
D) crowding out

Question 76

Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should _____ in order to restore the economy back to its original growth rate.

A) do nothing
B) increase government spending by more than $200 million
C) reduce government spending by less than $200 million
D) increase government spending by $200 million and cut taxes by $200 million

Question 77

The multiplier concept is important because it shows:

A) why fiscal policy is always effective.
B) how small changes in government spending may have large impacts on overall output.
C) how changes in taxes are multiplied into larger government revenues.
D) why decreases in the tax rate may actually increase tax revenues overall.

Question 78

Which statement is NOT a major limit to the effectiveness of fiscal policy?

A) A single increase in government spending may not be enough to stimulate the economy.
B) The crowding out effect is transmitted through financial markets.
C) Fiscal policy is not very effective in combating supply side shocks.
D) A multiplier effect is associated with changes in spending and taxation.

Question 79

The difficulties of using fiscal policy to affect the economy include:

A) the automatic stabilizing effect.
B) the crowding out effect.
C) the time lag of policy's effect on AD.
D) the multiplier effect.

Question 80

Which of the following limits the effectiveness of fiscal policy?

A) crowding out
B) the multiplier effect
C) the big bucket effect
D) free riding behavior