Deck 16: Fiscal Policy

Question 1

If tax revenues are $230 billion and the government's outlays are $235 billion, then the budget

A)deficit is $5 billion and government debt will remain the same.
B)deficit is $5 billion and government debt will decrease by $5 billion.
C)surplus is $230 billion and the budget deficit is $235 billion.
D)surplus is $5 billion and government debt will increase by $5 billion.
E)deficit is $5 billion and government debt will increase by $5 billion.

Answer 1

E

Question 2

The greater the tax wedge, the_{--------------------}the amount of employment and the_{--------------------} potential GDP..

A)larger; smaller
B)larger; larger
C)smaller; smaller
D)smaller; larger
E)None of the above because the tax wedge does not effect employment or potential GDP.

Answer 2

smaller; smaller

Question 3

A reason why discretionary fiscal policy might move the economy away from potential GDP
Instead of toward potential GDP is that

A)government programs are always expansionary.
B)economic forecasts consistently underestimate the impact of fiscal policy.
C)government programs automatically move real GDP away from potential GDP.
D)it is difficult to know whether real GDP is above or below potential GDP.
E)during a recession, politicians prefer increases in government spending over decreasing taxes.

Answer 3

D

Question 4

Increasing the income tax rate_{--------------------}the_{--------------------}

A)decreases; supply of labor
B)increases; supply of labor
C)increases; demand for labor
D)decreases; demand for labor
E)does not change; supply of labor

Question 5

-

In the figure above, the _{--------------------}gap is one trillion dollars. To close the gap, the government can change expenditure by_{--------------------}one trillion dollars.

A)recessionary; exactly
B)inflationary; more than
C)recessionary; more than
D)recessionary; less than
E)inflationary; exactly

Question 6

The national debt is the amount

A)by which government outlays exceed tax revenue in a given year.
B)of all future entitlement spending.
C)of debt outstanding that arises from past budget deficits.
D)by which government tax revenue exceed outlays in a given year.
E)of government outlays summed over time.

Question 7

The standard view in economics is that tax cuts without_{--------------------} will _{--------------------}the budget deficit resulting in _{--------------------}.

A)spending cuts; decrease; unemployment
B)increasing spending; decrease; unemployment
C)increasing spending; increase; crowding out investment
D)spending cuts; increase; crowding out investment
E)spending cuts; decrease; crowding out investment

Question 8

The national debt can only be reduced if

A)the economy has a deflationary gap.
B)the federal budget is in surplus.
C)there are no tax multiplier effects.
D)the federal budget is in deficit.
E)the economy has an inflationary gap.

Question 9

Discretionary fiscal policy is handicapped by

A)law-making time lags, estimation of potential GDP, and economic forecasting.
B)automatic stabilizers and induced taxes.
C)induced taxes and automatic stabilizers.
D)economic forecasting, law-making time lags, and induced taxes.
E)automatic stabilizers, law-making time lags, and potential GDP estimation.

Question 10

If the government uses fiscal policy to close a recessionary gap, government

A)expenditure must be increased by more than the gap because of the government expenditure multiplier.
B)taxes can be raised by less than the gap because of the tax multiplier.
C)taxes must be cut by more than the gap because of the tax multiplier.
D)taxes must be raised by more than the gap because of the tax multiplier.
E)expenditure can be increased by less than the gap because of the government expenditure multiplier.

Question 11

-

Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on aggregate demand was larger than the figure above shows, as a result the price level would be_{--------------------}
110 and real GDP would be _{--------------------}$14 trillion.

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

Question 12

The tax multiplier is the

A)magnification effect of a change in taxes on aggregate supply.
B)magnification effect of a change in taxes on aggregate demand.
C)magnification effect of a change in taxes on the national debt.
D)magnification effect of a change in taxes on government expenditures.
E)magnification effect of a change in taxes on the budget deficit.

Question 13

To eliminate a recessionary gap, the government can_{--------------------}government expenditures on goods and services or_{--------------------} taxes.

A)increase; increase
B)decrease; decrease
C)decrease; increase
D)increase; decrease
E)increase; not change

Question 14

An increase in taxes on labor income shifts the labor supply curve_{--------------------}and the_{--------------------}

A)leftward; after-tax wage rate does not change
B)leftward; before-tax wage rate does not change
C)leftward; after-tax wage rate falls
D)rightward; before-tax wage rate rises
E)leftward; after-tax wage rate rises

Question 15

Although _{--------------------}initially proposes and ultimately approves the budget, the discussion and amendment process rests with_{--------------------} .

A)the Senate; the President
B)the President; Congress
C)the U.S. Treasury; Congress
D)Congress; the Federal Reserve
E)Congress; the President

Question 16

When comparing a $100 billion increase in government expenditure to a $100 billion decrease in tax revenue, the effect of the increase in government expenditure on aggregate demand is

A)greater than the effect of the tax decrease.
B)equal to the effect of the tax decrease.
C)positive whereas the effect of the tax decrease is negative.
D)less than the effect of the tax decrease.
E)negative whereas the effect of the tax decrease is positive.

Question 17

If the budget deficit is $50 billion and the structural deficit is $10 billion, the cyclical deficit is

A)$50 billion
B)$60 billion.
C)$10 billion.
D)$40 billion.
E)More information is need to answer the question.

Question 18

In 2009, Congress passed tax laws to reduce income tax rates for some taxpayers. This action is called

A)an automatic fiscal policy.
B)a discretionary revenue policy.
C)an annual tax policy.
D)a discretionary fiscal policy.
E)induced tax policy.

Question 19

Needs-tested spending

A)decreases in recessions and increases in expansions.
B)increases in recessions and decreases in expansions.
C)does not change with the level of economic activity.
D)is always increasing regardless of whether we are in an expansion or a recession.
E)cannot be changed unless the government changes the spending laws.

Question 20

$\begin{array} { c c c } \hline & \begin{array} { c } \text { Government } \\\text { outlays } \\\text { (trillions of }\end{array} & \begin{array} { c } \text { Tax revenue } \\\text { (trillions of }\end{array} \\\text { Year } & \text { 2005 dollars) } & \text { 2005 dollars) } \\\hline 2008 & 0.75 & 0.80 \\2009 & 0.80 & 0.83 \\2010 & 0.87 & 0.86 \\2011 & 0.95 & 0.95 \\2012 & 1.06 & 1.02 \\\hline\end{array}$
During which years did the country have a budget deficit?

A)2012 only
B)2010 and 2012
C)all except 2011
D)2008 and 2009
E)2011 only

Question 21

If an economy is in an equilibrium with an inflationary gap, policy-makers can use

A)discretionary fiscal policy and cut taxes.
B)automatic fiscal policy and increase government expenditure.
C)discretionary fiscal policy and increase government expenditure.
D)automatic fiscal policy and cut taxes.
E)discretionary fiscal policy and decrease government expenditure.

Question 22

The balanced budget multiplier is based on the _{--------------------}point that the multiplier is larger than the multiplier so that an equal increase in government expenditure and taxes _{--------------------} aggregate demand.

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

Question 23

The balanced budget multiplier applies when a $50 billion increase in government expenditure is financed by a $50 billion_{--------------------} in tax revenue and the balanced budget multiplier shows that in this case there is _{--------------------}effect on aggregate demand.

A)decrease; a positive
B)increase; a positive
C)decrease; no
D)increase; a negative
E)increase; no

Question 24

As contrasted to the mainstream view, Keynesian economists believe that_{--------------------} than mainstream economists believe.

A)fiscal stimulus is weaker
B)the real GDP growth rate is higher
C)potential GDP is smaller
D)the multiplier effect is larger
E)the burden of government debt on future generations is larger

Question 25

Government tax revenues_{--------------------} during an expansion and _{--------------------} during a recession, which leads to larger budget deficits during the_{--------------------} phase of the business cycle.

A)decrease; increase; expansion
B)increase; increase; recession
C)increase; decrease; expansion
D)increase; decrease; recession
E)decrease; decrease; expansion

Question 26

When taxes are cut, aggregate demand _{--------------------}and aggregate supply _{--------------------}

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

Question 27

The annual statement of the outlays, tax revenues, and surplus or deficit of the government of the
United States is the federal

A)budget.
B)surplus record.
C)debt to the public.
D)deficit record.
E)spending.

Question 28

-
In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must increase government expenditure by _{--------------------}$1 trillion and/or decrease taxes by _{--------------------}$1 trillion.

A)recessionary; less than; more than
B)recessionary; exactly; exactly
C)recessionary; more than; more than
D)inflationary; less than; less than
E)recessionary; less than; less than

Question 29

The supply-side effects of a change in taxes on labor income means that _{--------------------}in taxes on labor income shift the_{--------------------} .

A)an increase; labor supply curve rightward
B)a decrease; labor demand curve leftward
C)an increase; labor supply curve leftward and the labor demand curve rightward
D)a decrease; labor demand curve rightward
E)an increase; labor supply curve leftward

Question 30

The federal budget

A)can have a deficit, a surplus, or a balance.
B)is required to balance by law.
C)can have a deficit or a surplus but cannot be balanced.
D)can have a deficit but not a surplus.
E)can have a surplus but not a deficit.

Question 31

Needs-tested spending is defined as

A)spending by the President on the White House.
B)spending that increases in expansions and decreases in recessions.
C)spending by Congress on its own perks of office.
D)spending on programs for people qualified to receive benefits.
E)taxes paid by those qualified by their income.

Question 32

The government expenditure multiplier reflects the magnification on_{--------------------} from a change in government expenditure on goods and services.

A)potential GDP
B)aggregate supply
C)the budget deficit
D)aggregate demand
E)tax receipts

Question 33

Ignoring any supply-side effects, if government expenditure on goods and services decrease by $10 Billion and taxes decrease by $10 billion, then real GDP_{--------------------} and the price level _{--------------------}.

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

Question 34

An increase in government expenditure can_{--------------------} potential GDP and an increase in taxes can_{--------------------} potential GDP.

A)never change; never change
B)increase; increase
C)increase; never change
D)increase; decrease
E)decrease; decrease

Question 35

If the structural deficit is $800 billion and the cyclical deficit is $600 billion, the actual budget deficit Is _{--------------------}.

A)$200 billion
B)$800 billion
C)$600 billion
D)$1,400 billion
E)None of the above answers are correct.

Question 36

If a tax cut increases aggregate demand more than aggregate supply, real GDP_{--------------------} and the price level _{--------------------}.

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

Question 37

Ignoring any supply-side effects, to close an inflationary gap of $100 billion with a government expenditure multiplier of 5, the government could

A)decrease government expenditure on goods and services by $100 billion
B)lower taxes by more than $20 billion.
C)decrease government expenditure on goods and services by $20 billion.
D)increase government expenditure on goods and services by $20 billion.
E)lower taxes by $100 billion.

Question 38

If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand

A)decreases no matter what happens to aggregate supply.
B)remains the same.
C)increases no matter what happens to aggregate supply.
D)increases only if aggregate supply decreases.
E)increases only if aggregate supply increases.

Question 39

If government expenditures on goods and services increases by $20 billion, then aggregate demand

A)increases by less than $20 billion.
B)decreases by more than $20 billion.
C)decreases by $20 billion.
D)increases by $20 billion.
E)increases by more than $20 billion.

Question 40

The cyclical deficit is the portion of the deficit

A)that is the result of nondiscretionary federal spending.
B)created by fluctuations in real GDP.
C)that does not add to the national debt.
D)that is the result of discretionary federal spending.
E)that would exist if the economy were at full employment.

Question 41

A cut in the income tax rate _{--------------------}the tax wedge and employment, saving, and_{--------------------} investment.

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

Question 42

In order to reduce inflationary pressure on the economy, what fiscal policy can the government use?

A)cut interest rates
B)increase the quantity of money
C)raise taxes
D)increase government expenditure on goods and services
E)cut taxes

Question 43

A tax cut that increases the budget deficit results in_{--------------------}in the _{--------------------} loanable funds.

A)a decrease; demand for
B)an increase; demand for
C)an increase; supply of
D)a decrease; supply of
E)no change; either the demand for or the supply of

Question 44

The last U.S. president to be in office when the government had a budget surplus was

A)Dwight D. Eisenhower.
B)George W. Bush.
C)Bill Clinton.
D)Ronald Reagan.
E)George H. Bush.

Question 45

-
The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP.

In the figure above, the_{--------------------}gap is equal to_{--------------------}

A)recessionary; $1 trillion
B)recessionary; $13 trillion
C)inflationary; $1 trillion
D)recessionary; $12 trillion
E)inflationary; $12 trillion

Question 46

Ignoring any supply-side effects, when taxes are hiked, real GDP_{--------------------} and the price level_{--------------------}
.

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

Question 47

Which of the following is a limitation of discretionary fiscal policy?
I. law-making lags
Ii. estimating potential GDP
Iii. income gap

A)ii only
B)i only
C)iii only
D)i, ii, and iii
E)i and ii

Question 48

Which of the following is an example of an automatic fiscal policy action?

A)an increase in spending on defense goods resulting from increased world tensions
B)an increase in the tax rate resulting from a desire to shrink the budget deficit
C)a decrease in the tax rate resulting from an effort to increase aggregate demand to combat a recession
D)increased unemployment benefit payments resulting from higher unemployment
E)None of the above answers are correct.

Question 49

The balanced budget multiplier is

A)positive because the magnitude of government expenditure multiplier is smaller than the magnitude of tax multiplier.
B)positive because the magnitude of government expenditure multiplier is larger than the magnitude of tax multiplier.
C)equal to zero.
D)negative because the magnitude of the tax multiplier is larger than the magnitude of the government expenditure multiplier.
E)negative because the magnitude of government expenditure multiplier is larger than the magnitude of the tax multiplier.

Question 50

Discretionary fiscal policy is defined as fiscal policy

A)left to the discretion of military authorities.
B)initiated by a Presidential proclamation.
C)initiated by an act of Congress.
D)with multiplier effects.
E)triggered by the state of the economy.

Question 51

In a recession, needs-tested spending_{--------------------}and induced taxes_{--------------------}

A)increases; decrease
B)decreases; increase
C)increase; do not change
D)increases; increase
E)decreases; decrease

Question 52

When the government's expenditures exceed its tax revenues, the budget

A)has a deficit and the national debt is increasing.
B)has a deficit and the national debt is decreasing.
C)has a surplus and the national debt is increasing.
D)is balanced and the national debt is increasing.
E)None of the above because by law the government's expenditures cannot exceed its tax revenue.

Question 53

The quantity of employment is determined in the_{--------------------} market and that quantity, along with the _{--------------------}, determines potential GDP

A)goods and services; labor market
B)labor market; production function
C)loanable funds; production function
D)labor market; tax wedge
E)labor market; tax rate

Question 54

Mainstream economists believe that Keynesian economists overstate the effect of the multiplier effect. Which of the following statements would mainstream economists NOT consider to be accurate?

A)A fiscals stimulus does not provide a 'free lunch' but does 'crowd out' private consumption expenditure and investment.
B)A fiscal stimulus is a vital tool to fight recession and depression due to the multiplier effect.
C)Effects of a fiscal stimulus are incapable of working fast enough to make a difference.
D)A fiscal stimulus results in bigger government, lower potential GDP, and slower real GDP growth.
E)Effects of a fiscal stimulus are small and short lived.

Question 55

If we compare the United States to France, the U.S. tax wedge is_{--------------------}the French tax wedge.

A)equal to
B)larger than
C)smaller in the labor market and larger in the goods market than
D)not comparable to
E)smaller than

Question 56

The government expenditure multiplier and the tax multiplier are

A)identical in size.
B)different in size and the government expenditure multiplier is larger.
C)not comparable because the government expenditure multiplier applies to aggregate demand and the tax multiplier applies to aggregate supply.
D)different in size and the tax multiplier is larger.
E)not comparable because the government expenditure multiplier applies to aggregate supply and the tax multiplier applies to aggregate demand.

Question 57

Discretionary fiscal policy is a fiscal policy action, such as

A)a tax cut, initiated by an act of Congress.
B)an increase in the quantity of money.
C)an interest rate cut, initiated by an act of Congress.
D)a decrease in tax receipts, initiated by the state of the economy.
E)an increase in payments to the unemployed, initiated by the state of the economy.

Question 58

-
According to the figure above, if there is no income tax, the equilibrium real wage rate is and the equilibrium hours of labor are_{--------------------} .

A)$20; 200 billion
B)$30; 200 billion
C)$30; 250 billion
D)$35; 200 billion
E)The equilibrium is not shown.

Question 59

If we compare the United States to France, we see that potential GDP per person in France is_{--------------------} that in the United States because the French tax wedge is _{--------------------} the U.S. tax wedge.

A)less than; larger than
B)greater than; larger than
C)less than; smaller than
D)greater than; smaller than
E)the same as; the same as

Question 60

The government expenditure multiplier is used to determine the

A)amount aggregate demand is affected by a change in government expenditure.
B)extent to which automatic stabilizers must be changed in order to avoid recessions.
C)amount aggregate supply is affected by a change in government expenditure.
D)extra scrutiny government action receives.
E)amount private consumption is decreased by government expenditure.

Question 61

When the government's outlays equal its tax revenue, the budget

A)is balanced and the national debt is not changing.
B)has a deficit and the national debt is decreasing.
C)has a surplus and the national debt is increasing.
D)has a surplus and the national debt is decreasing.
E)has a deficit and the national debt is increasing.

Question 62

The magnitude of the tax multiplier is_{--------------------} the magnitude of the government expenditure multiplier.

A)exactly one half
B)greater than
C)smaller than
D)the inverse of
E)equal to

Question 63

-

An economy is at a short-run equilibrium as illustrated in the above figure. An appropriate fiscal
Policy option to move the economy to full employment is to increase

A)tax rates and move the economy to a full-employment equilibrium at point b.
B)government expenditure and move the economy to a full-employment equilibrium at point b.
C)tax rates and move the economy to a full-employment equilibrium at point c.
D)lower the interest rate by increasing the quantity of money and move the economy to a full-employment equilibrium at point b.
E)government expenditure and move the economy to a full-employment equilibrium at point c.

Question 64

Needs-tested spending

A)is directing government spending and taxes to states that need the most help.
B)is giving tax cuts to wealthy people so they will increase their spending.
C)cannot be changed without changes in the laws.
D)includes homeland defense spending.
E)includes transfer payments such as food stamps and unemployment benefits.

Question 65

-
Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on _{--------------------}aggregate supply was larger than the figure above shows, as a result the price level would be_{--------------------}
110 and real GDP would be _{--------------------}$14 trillion.

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

Question 66

When tax revenues_{--------------------}

A)minus; surplus
B)plus; surplus
C)divided by; surplus
D)minus; deficit
E)plus; deficit

Question 67

The law-making time lag is best described as the time that it takes

A)the President to sign a bill sent from Congress.
B)Congress to pass laws needed to change taxes or spending.
C)Congress to realize that new laws must be passed to change taxes or spending.
D)a jury to render a verdict.
E)a newly passed law to become the norm in daily lives.

Question 68

The federal budget is decided upon by the

A)United States Congress and the Federal Reserve System.
B)the United States Treasury alone.
C)President of the United States and the Federal Reserve system.
D)President of the United States and the United States Treasury.
E)President of the United States and the United States Congress.

Question 69

How could an expansionary fiscal policy increase real GDP and lower the price level?

A)if aggregate supply decreases more than aggregate demand decreases
B)if aggregate supply decreases more than aggregate demand increases
C)if aggregate supply increases more than aggregate demand increases
D)if aggregate supply decreases less than aggregate demand decreases
E)if the aggregate supply increases equals the aggregate demand increase

Question 70

An income tax on labor income decreases the_{--------------------} of potential GDP and a tax on interest income decreases the_{--------------------} of potential GDP.

A)growth rate; level
B)level; growth rate
C)growth rate; growth rate
D)level; level
E)None of the above answers is correct.

Question 71

Needs-tested spending

A)increases as real GDP increases.
B)makes recessions more severe.
C)increases as unemployment increases.
D)decreases as unemployment increases.
E)decreases in recession.

Question 72

-
In the figure above, the_{--------------------} gap is one trillion dollars. To close the gap, the government can_{--------------------} government expenditure and/or_{--------------------} taxes.

A)recessionary; decrease; increase
B)inflationary; increase; increase
C)inflationary; decrease; increase
D)recessionary; increase; decrease
E)recessionary; decrease; decrease

Question 73

Since 2000, the U.S. government has generally had a government budget _{--------------------}and so the national debt has _{--------------------}.

A)deficit; increased
B)surplus; increased
C)deficit; not changed
D)surplus; decreased
E)deficit; decreased

Question 74

The magnitude of the tax multiplier is smaller than the magnitude of the government expenditure multiplier because

A)a decrease in government expenditure decreases tax revenue.
B)an increase in taxes decreases expenditures.
C)a change in taxes creates additional induced taxes.
D)a change in taxes does not change expenditures.
E)a change in taxes does not change expenditures by as much as the same size change in government expenditure.

Question 75

If the government reduces expenditure on goods and services by $30 billion, then aggregate demand

A)increases by more than $30 billion and real GDP increases.
B)decreases by $30 billion and real GDP decreases.
C)increases by $30 billion and real GDP increases.
D)increases and potential GDP increases.
E)decreases by more than $30 billion and real GDP decreases.

Question 76

The government collects tax revenues of $100 million and has $105 million in outlays. The budget balance is a

A)deficit of $5 million.
B)surplus of $105 million.
C)surplus of $100 million and a deficit of $105 million.
D)deficit of $105 million.
E)surplus of $5 million.

Question 77

The structural deficit or surplus is the

A)difference between actual government outlays and what would be government revenues if the economy were at full employment.
B)government budget deficit or surplus that would occur if the economy were at full employment.
C)change in national debt that will result from current budgetary policies.
D)difference between actual government outlays and actual government revenues.
E)actual government budget deficit or surplus minus expenditures for capital improvements.

Question 78

If the federal government has a budget surplus, then it is definitely the case that

A)tax revenues are rising and government outlays are falling.
B)tax revenues exceeds government outlays.
C)tax revenues are falling and government outlays are rising.
D)government outlays exceed tax revenues.
E)tax revenues and government outlays are equal.

Question 79

Automatic stabilizers are defined as

A)actions taken by an act of Congress to stabilize the economy.
B)policy that has no multiplier effects.
C)actions taken by the President without Congressional consent to stabilize the economy.
D)policy that stabilizes without the need for action by the government.
E)discretionary policy taken to stabilize the economy.

Question 80

In the labor market, the income tax creates a tax wedge which raises the _{--------------------}wage rate, reduces the _{--------------------}wage rate, and _{--------------------}employment.

A)after-tax; before-tax; decreases
B)after-tax; before-tax; does not affect.
C)before-tax; after-tax; increases
D)before-tax; after-tax; does not affect
E)before-tax; after-tax; decreases