Deck 13: Fiscalpolicy

Question 1

If the government wished to shift aggregate demand to the left, it might:

A) decrease military spending.
B) increase the amount of educational grants available.
C) decrease corporate income taxes.
D) All of these would shift the aggregate demand curve to the left.

Answer 1

decrease military spending.

Question 2

Disposable income is:

A) total income minus taxes.
B) total income plus taxes.
C) total income minus depreciation.
D) None of these are true.

Answer 2

total income minus taxes.

Question 3

Which of the following is not an example of fiscal policy?

A) The Federal Reserve cuts interest rates to stimulate the economy in a recession.
B) The government increases spending on infrastructure development.
C) Congress passes new legislation, cutting the corporate income tax.
D) During an economic expansion, the state of New York collects higher payroll taxes.

Answer 3

The Federal Reserve cuts interest rates to stimulate the economy in a recession.

Question 4

If the government increases the income tax rate _______, shifting aggregate demand to the _______.

A) consumption will decrease; left
B) net exports will increase; right
C) investment will increase; right
D) government spending will increase; right

Question 5

Expansionary fiscal policy refers to decisions about taxation and spending that:

A) increase aggregate demand.
B) decrease aggregate demand.
C) increase aggregate supply.
D) decrease aggregate supply.

Question 6

If the government were to decrease spending, aggregate demand would _______ and GDP would _______.

A) fall; fall as well.
B) rise; fall.
C) fall; rise.
D) rise; rise as well.

Question 7

If the government increases the income tax rate:

A) disposable income will decrease.
B) disposable income will increase.
C) disposable income will be unaffected.
D) total income will increase.

Question 8

If congressional policymakers aim to increase aggregate demand, they will likely enact:

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.

Question 9

If the government decreases the income tax rate:

A) GDP will decrease.
B) aggregate demand will decrease.
C) aggregate demand will increase.
D) aggregate supply will increase.

Question 10

The government can enact expansionary fiscal policy by:

A) increasing income taxes.
B) decreasing income taxes.
C) decreasing government spending.
D) increasing corporate income taxes.

Question 11

Fiscal policy most directly affects the economy by increasing or decreasing:

A) aggregate demand.
B) the interest rate.
C) long-run aggregate supply.
D) the money supply.

Question 12

Consumption depends on:

A) total income.
B) disposable income.
C) pre-tax income.
D) Consumption is unrelated to income.

Question 13

If the government increases the income tax rate, consumers will have _______ to spend and will _______ their consumption.

A) less; reduce
B) more; reduce
C) less; increase
D) more; increase

Question 14

Sam earns $45,000 per year working at the IRS. Between state and federal taxes, his income is taxed at 35 percent. What is his disposable income?

A) $45,000
B) $15,750
C) $29,250
D) $35,000

Question 15

If the government cuts funding for public schools, it is enacting:

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.

Question 16

If the government introduces a new bill increasing education spending, it is enacting:

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.

Question 17

Which component of GDP will be affected if the government decreases the income tax rate?

A) Consumption
B) Net exports
C) Government spending
D) A change to the income tax rate will not affect any of these components.

Question 18

If the government were to increase spending, aggregate _______ would shift to the _______.

A) demand; right
B) demand; left
C) supply; right
D) supply; left

Question 19

Government decisions about the level of taxation and public spending are called:

A) fiscal policy.
B) monetary policy.
C) congressional policy.
D) legislative budgeting policy.

Question 20

If the government wished to shift aggregate demand to the right, it might:

A) fund more "shovel-ready" infrastructure projects around the country.
B) increase income taxes.
C) pressure the Fed to decrease the money supply.
D) cut funding for the Environmental Protection Agency.

Question 21

The graph shown displays various economic outcomes. If the economy is currently at equilibrium B, and the government enacts contractionary fiscal policy, in the short run the economy will most likely:

A) move to equilibrium A.
B) remain at equilibrium B.
C) move to equilibrium C.
D) move to equilibrium D.

Question 22

The graph shown displays various economic outcomes. If the economy is currently at equilibrium D, to bring the economy back to its long-run equilibrium the government might:

A) increase spending.
B) increase income taxes.
C) decrease tax credits.
D) All of these would move the economy back to its long-run equilibrium from point D.

Question 23

Which statement describes the effect of crowding out?

A) Consumption and investment are indirectly affected by changes in government spending.
B) Consumption is directly affected by changes in government spending.
C) Consumption and investment are directly affected by changes in government spending.
D) Consumption and investment are not affected by changes in government spending.

Question 24

When congressional policymakers wish to reduce aggregate demand, they might enact:

A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) contractionary monetary policy.
D) expansionary monetary policy.

Question 25

The graph shown displays various economic outcomes. At which equilibrium would the government most likely decide to decrease taxes?

A) Point A
B) Point B
C) Point C
D) Point D

Question 26

The graph shown displays various economic outcomes. At which equilibrium would the government most likely decide to increase its spending?

A) Point C
B) Point A
C) Point D
D) This cannot be answered without more information.

Question 27

The government can enact contractionary fiscal policy by:

A) reducing its spending.
B) decreasing personal income taxes.
C) decreasing corporate income taxes.
D) All of these are ways to enact contractionary fiscal policy.

Question 28

Contractionary fiscal policy occurs when the overall effect of decisions about taxation and spending is to:

A) reduce aggregate demand.
B) increase aggregate demand.
C) reduce aggregate supply.
D) increase aggregate supply.

Question 29

The graph shown displays various economic outcomes. If the economy is currently at equilibrium D, to bring the economy back to its long-run equilibrium the government might:

A) decrease spending.
B) decrease income taxes.
C) increase corporate income taxes.
D) All of these would move the economy back to its long-run equilibrium from point D.

Question 30

When an initial spending change causes a larger change in overall output, this exemplifies:

A) the multiplier effect.
B) crowding out.
C) the income effect.
D) the substitution effect.

Question 31

If the government were to increase taxes, it would be enacting:

A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) contractionary monetary policy
D) expansionary monetary policy.

Question 32

The graph shown displays various economic outcomes. Assuming the economy is currently at equilibrium A, the government would likely enact _______ fiscal policy in an effort to move aggregate demand to the _______.

A) expansionary; right
B) contractionary; left
C) expansionary; left
D) contractionary; right

Question 33

If the government were to reduce spending on the school lunch program, it would be enacting:

A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) contractionary monetary policy.
D) expansionary monetary policy.

Question 34

If the government increases payments to dairy farmers for their excess supply:

A) interest rates will decrease.
B) aggregate demand will increase.
C) contractionary fiscal policy will be enacted.
D) None of these are true.

Question 35

The graph shown displays various economic outcomes. At which equilibrium would the government likely enact contractionary fiscal policy?

A) Point A
B) Point B
C) Point C
D) Point D

Question 36

If the government enacts contractionary fiscal policy, it:

A) must want to slow economic activity.
B) could increase taxes.
C) expects aggregate demand to decrease.
D) All of these are true.

Question 37

If the economy is currently at equilibrium D, we can conclude that the:

A) economy is expanding.
B) government will enact contractionary fiscal policy.
C) unemployment rate is very low.
D) All of these are likely to be true.

Question 38

The graph shown displays various economic outcomes. If the government were to successfully enact expansionary fiscal policy, the economy's equilibrium would most likely move from:

A) A to B.
B) B to C.
C) C to D.
D) D to B.

Question 39

The graph shown displays various economic outcomes. Assuming the economy is currently at equilibrium A, we can conclude:

A) the economy is in a recession.
B) the economy is producing less than its potential level of output.
C) there must be unemployment of resources.
D) All of these are true.

Question 40

The graph shown displays various economic outcomes. If fiscal policy moves the economy from equilibrium A to equilibrium B:

A) the economy has not been restored to its full potential output.
B) the economy has been restored to its full potential output.
C) the economy has overheated and equilibrium has pushed output beyond its potential.
D) unemployment has increased.

Question 41

The graph shown displays various economic outcomes. If the economy is currently at equilibrium B, and the government increases its spending:

A) the level of output will increase.
B) the economy will experience deflation.
C) the unemployment rate will increase.
D) All of these are likely to be true.

Question 42

The graph shown displays various economic outcomes. If the economy is currently at equilibrium D, and the government does nothing, then eventually:

A) SRAS will shift to the right, and the economy will have Y ₃ output with lower prices.
B) SRAS will shift to the left, and the economy will have Y ₃ output at higher prices.
C) LRAS will shift to the left until equilibrium is reached.
D) AD will shift to the right, restoring long-run equilibrium.

Question 43

The process of deciding on and passing fiscal policy legislation creates a(n) _______ lag.

A) information
B) formulation
C) implementation
D) direction

Question 44

When the government enacts fiscal policy:

A) long-run potential output is always decreased.
B) the intervention takes a long time to actually occur.
C) the economy returns to its long-run equilibrium more quickly than it can correct itself.
D) All of these are true.

Question 45

Fiscal policy is often difficult to successfully implement because:

A) there is a lag between the time the policy is chosen and when it gets enacted.
B) a decision must be made without all the relevant information.
C) there is a risk of overshooting or undershooting the goal of full employment.
D) All of these are true.

Question 46

The graph shown displays various economic outcomes. If the economy is currently at equilibrium B, and the government does nothing, then eventually:

A) SRAS will shift to the right, and the economy will have Y ₃ output with lower prices.
B) SRAS will shift to the left, and the economy will experience stagflation.
C) LRAS will shift to the left until equilibrium is reached.
D) AD will shift to the right, restoring long-run equilibrium.

Question 47

Effective fiscal policy can be difficult to enact because:

A) most of the money is lost to corruption.
B) the economy rarely needs fiscal stimulus.
C) the government lacks all relevant information needed to decide the magnitude of change.
D) All of these are true.

Question 48

Fiscal policy can:

A) influence the economy in the short run.
B) bring the economy back to its long run equilibrium faster than it can correct itself.
C) cause inflation.
D) All of these are true.

Question 49

One reason the government will enact fiscal policy instead of waiting for the economy to correct itself is because the automatic adjustment:

A) can take a very long time.
B) leads to a lower level of potential GDP.
C) will cause inflation.
D) causes greater turbulence in the economy.

Question 50

During parts of the Roaring 20s, the stock market increased by 20 percent per year, and the overall economy grew by 40 percent over the course of the decade. In response, the government should have:

A) enacted expansionary fiscal policy.
B) enacted contractionary fiscal policy.
C) increased government spending.
D) decreased taxes.

Question 51

The government would most likely enact contractionary fiscal policy during _______.

A) an asset price bubble
B) economic recession
C) a long period of stagflation
D) None of these are an advantageous time to conduct contractionary fiscal policy.

Question 52

A lack of understanding regarding the current state of the economy creates a(n) _______ lag.

A) information
B) formulation
C) implementation
D) direction

Question 53

The consequence of expansionary fiscal policy is:

A) inflation.
B) deflation.
C) a greater level of potential output.
D) a lower level of potential output.

Question 54

What is the impact of expansionary fiscal policy on prices and output?

A) Prices increase and output decreases
B) Prices decrease and output increases
C) Prices and output increase
D) Prices and output decrease

Question 55

Keynesian policy:

A) shifts aggregate demand with the goal of reaching full employment.
B) includes open market operations by the Fed to increase the money supply.
C) promotes taxing more to boost economic activity.
D) All of these are true.

Question 56

When the SRAS curve shifts to the left, the economy faces lower output and higher prices, otherwise known as stagflation. If the government then enacts expansionary fiscal policy, what will be the effect on the economy?

A) Higher output and higher prices
B) Higher output and lower prices
C) Lower output and lower prices

Question 57

Lags in the policy-making process come from:

A) a lack of understanding regarding the current state of the economy.
B) the process of deciding on and passing legislation.
C) the time it takes for policy to impact the economy.
D) All of these are true.

Question 58

Economist John Maynard Keynes is famous for saying, "In the long run, we are all dead." This quote refers to the:

A) length of time it can take the economy to recover back to potential GDP without policy intervention.
B) inflation that results from government intervention in the economy.
C) fact that no policy can affect the long-run equilibrium.
D) notion that all policy options to intervene in the economy are equally sub-optimal in the long run.

Question 59

What is the impact of contractionary fiscal policy on prices and output?

A) Prices increase and output decreases
B) Prices decrease and output increases
C) Prices and output increase
D) Prices and output decrease

Question 60

When the government decides to enact fiscal policy:

A) full information must have been readily available before the decision was made.
B) the expedited process of approval aids with quick enactment.
C) the economy moves closer to potential GDP than it otherwise would.
D) implementation of the policy may take time.

Question 61

Fiscal policy that the government chooses to adopt is called:

A) an automatic stabilizer.
B) discretionary fiscal policy.
C) monetary policy.
D) contractionary policy.

Question 62

When output deviates from potential GDP, automatic stabilizers work to push the economy:

A) in the same direction that correctly timed and formulated discretionary policy would.
B) to lower rates of inflation.
C) away from risky financial investments.
D) None of these.

Question 63

Increased government spending on unemployment insurance during a recession is an example of:

A) an automatic stabilizer.
B) discretionary fiscal policy.
C) expansionary fiscal policy.
D) contractionary fiscal policy.

Question 64

When an economy is in an economic boom, discretionary fiscal policy would call for _______ and automatic stabilizers would _______.

A) lowering tax rates; lower tax revenues
B) lowering tax revenues; lower tax rates
C) increasing tax rates; increase tax revenues
D) increasing tax rates; lower tax revenues

Question 65

Discretionary fiscal policy:

A) can magnify the automatic stabilization effects of existing policies.
B) only magnifies the automatic stabilizer effects of policies that stimulate the economy.
C) often counters the effect of automatic stabilizers that already exist.
D) None of these are true.

Question 66

Which of the following scenarios is an example of an automatic stabilizer?

A) Increased unemployment rates cause the government to pay out more in unemployment insurance.
B) Tax revenues increase due to a rise in nominal income during an economic expansion.
C) Unemployment rates are reduced during an economic expansion and so government spending on TANF payments decreases.
D) All of these scenarios exemplify automatic stabilizers.

Question 67

After the housing bubble popped in 2007, Congress did not pass a stimulus bill until February 2009. This is an example of:

A) an information lag.
B) a formulation lag.
C) an implementation lag.
D) a direction lag.

Question 68

Automatic stabilizers are:

A) taxes and government spending that affect fiscal policy without specific action from policymakers.
B) fiscal policies that the government chooses to adopt.
C) expansionary fiscal policies.
D) Keynesian policies.

Question 69

Margot is complaining about how much she pays in taxes now that the economy is finally doing well. Even though she's in the same tax bracket as she was last year, she got a raise and is paying $500 more in taxes this year. Margot's increased tax payment to the government is an example of:

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) discretionary fiscal policy.
D) an automatic stabilizer.

Question 70

Discretionary fiscal policy is:

A) that which the government chooses to adopt.
B) affected by taxes and government spending, without specific action from policymakers.
C) that which the government enacts only for a short period of time.
D) taxes and government spending Congress does not adopt.

Question 71

The existing tax rates on income in the United States:

A) act as an automatic stabilizer.
B) curtail spending slightly when incomes rise and people have to pay more in taxes.
C) encourage spending slightly when incomes fall and people have to pay less in taxes.
D) All of these are true.

Question 72

During times of economic expansion, spending on unemployment insurance:

A) decreases, since more people are able to find work.
B) increases, since wages typically rise during expansions.
C) stays the same, as government spending is unaffected by the business cycle.
D) depends on whether or not the government implements discretionary fiscal policy.

Question 73

When an economy is in a recession, discretionary fiscal policy would call for _______ and automatic stabilizers would _______.

A) lowering tax rates; lower tax revenues
B) increasing tax rates; increase tax revenues
C) increasing tax revenues; increase tax rates
D) increasing tax rates; lower tax revenues

Question 74

The amount of time it takes for fiscal policy to have an impact on the economy creates a(n) _______ lag.

A) information
B) formulation
C) implementation
D) direction

Question 75

During a severe recession, the government allows citizens to pay less in taxes. This is an example of:

A) discretionary fiscal policy.
B) an automatic stabilizer.
C) contractionary fiscal policy.
D) expansionary fiscal policy.

Question 76

Income taxes are an example of:

A) an automatic stabilizer.
B) discretionary fiscal policy.
C) expansionary fiscal policy.
D) contractionary fiscal policy.

Question 77

With the economy booming, the government starts to worry about the increasing rate of inflation, and decides to cut its spending on highway maintenance and defer it to the future. This is an example of:

A) an automatic stabilizer.
B) discretionary fiscal policy.
C) expansionary fiscal policy.
D) None of these are true.

Question 78

Jasper has been working a lot of overtime during the most current economic expansion. As a result, his income is high enough for him to move from the 12 percent tax bracket to the 22 percent tax bracket. The increased amount Jasper pays to the government is an example of:

A) discretionary fiscal policy slowing the economy.
B) an automatic stabilizer slowing the economy.
C) discretionary fiscal policy encouraging economic activity.
D) automatic stabilizers encouraging economic activity.

Question 79

In a booming economy, fiscal policy automatically becomes _______ as tax rates _______ and welfare payments _______.

A) contractionary; rise; fall
B) expansionary; rise; fall
C) contractionary; fall; rise
D) expansionary; fall; rise

Question 80

After the housing bubble popped in 2007, the National Bureau of Economic Research did not officially declare a recession until a year later. This announcement is an example of:

A) an information lag.
B) a formulation lag.
C) an implementation lag.
D) a direction lag.