Deck 14: Fiscal Policy

Question 1

When revenues exceed the government's expenses, the budget

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

Answer 1

has a surplus and the national debt is decreasing.

Question 2

As contrasted to the Keynesian view, mainstream economists believe that ________ than Keynesian economists believe.

A) the effects from fiscal stimulus are weaker
B) the multiplier effect is larger
C) potential GDP is less important
D) any crowding-out effect is smaller
E) the real GDP growth rate is larger

Answer 2

the effects from fiscal stimulus are weaker

Question 3

Other things remaining the same, the ________ a government's credit rating, the ________ is the interest it faces.

A) lower; higher
B) higher; higher
C) lower; smaller
D) smaller; lower
E) lower; lower

Answer 3

lower; higher

Question 4

When revenues ________ expenses is negative, then the government has a budget ________.

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

Question 5

If you take a HECS-HELP student loan and repay after you graduate, you redistribute your income. In particular you consume ________ than your income when you are young and in university and ________ your income after you graduate.

A) less, more than
B) more; more than
C) more; less than
D) less; less than
E) None of the above

Question 6

The government has a budget surplus if

A) government expenses are greater than tax revenues.
B) revenues are greater than expenses.
C) a fiscal stimulus is being used to combat a recession.
D) the budget is balanced.
E) there is no national debt.

Question 7

When the government's expenses equal its revenues, then the budget

A) is in deficit.
B) is in surplus.
C) is legal only because expenditures equal tax revenues.
D) is balanced.
E) could be either in surplus or deficit.

Question 8

The use of the Commonwealth budget to achieve macroeconomic objectives of full employment and high and sustainable economic growth is

A) called government GDP policy.
B) done only when there is a budget deficit.
C) done only when there is a budget surplus.
D) called fiscal policy.
E) called monetary policy.

Question 9

When the government's expenses exceed its revenues, the government debt

A) shrinks thanks to the budget deficit.
B) grows to finance the budget surplus.
C) grows to finance the budget deficit.
D) shrinks thanks to the budget surplus.
E) does not change because it has nothing to do with government outlays and tax revenue.

Question 10

The largest source of Commonwealth government revenue in the 2017/18 budget was

A) indirect taxes like the GST.
B) company tax.
C) non-tax revenue.
D) taxes on individuals such as income tax.
E) taxes on the sale of beer and tobacco.

Question 11

The government debt is the amount

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

Question 12

The table above gives a nation's government outlays and tax revenues for 2008 through to 2012.
Based on the table above, during which years did the country have a budget surplus?

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

Question 13

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

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

Question 14

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

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

Question 15

National debt decreases in a given year when a country has

A) a balanced budget.
B) a budget supplement.
C) a budget surplus.
D) no discretionary fiscal policy.
E) a budget deficit.

Question 16

The table above gives a nation's government outlays and tax revenues for 2008 through to 2012.
Based on the table above, during which years did the country have a budget deficit?

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

Question 17

The table above gives a nation's government outlays and tax revenues for 2008 through to 2012.
Based on the table above, during which years did the country have a balanced budget?

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

Question 18

A credit rating provides information on an investor's level of default risk. The highest rating is

A) AAA.
B) BB.
C) AA+.
D) A+.
E) AAB.

Question 19

In Australia for the year 2017/18, the Commonwealth government had a ________ so the national debt was ________.

A) budget surplus; increasing
B) budget deficit; increasing
C) budget deficit; decreasing
D) balanced budget; not changing
E) budget surplus; decreasing

Question 20

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

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

Question 21

Induced taxes are defined as taxes

A) that rise in recessions and fall in expansions.
B) we are forced to pay for services from the government.
C) that vary with real GDP.
D) that are avoided with the use of legal tax shelters.
E) that explicitly state the amount to be paid.

Question 22

Discretionary fiscal policy is a fiscal policy action, such as

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

Question 23

If government expenditure on goods and services increases by $100 billion, then aggregate demand

A) remains unchanged.
B) increases by $100 billion.
C) decreases by more than $100 billion.
D) increases by more than $100 billion.
E) increases by less than $100 billion.

Question 24

When an economy is above full employment and the government has a budget deficit, that deficit

A) is equal to the structural deficit minus the cyclical deficit.
B) is equal to the cyclical deficit minus the structural deficit.
C) is equal to the cyclical deficit.
D) exceeds the structural deficit.
E) is less than the structural deficit.

Question 25

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

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

Question 26

Ignoring any supply-side effects, suppose the government is considering cutting taxes by $100 billion or increasing government expenditures on goods and services by $100 billion. Then

A) both policies would increase aggregate demand but the increase in government expenditure has a smaller effect.
B) both policies would increase aggregate demand but the tax cut has a smaller effect.
C) the tax cut would increase aggregate demand and the increase in government expenditure would decrease aggregate demand.
D) both policies would increase aggregate demand by the same amount.
E) the tax cut would decrease aggregate demand and the increase in government expenditure would increase aggregate demand.

Question 27

Automatic changes in tax revenues and expenses that occur as a result of fluctuations in real GDP are referred to as automatic

A) taxes and expenditure.
B) government.
C) discretionary taxes and expenditure.
D) discretionary policy.
E) stabilisers.

Question 28

The structural deficit or surplus is the

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

Question 29

If the Commonwealth government cuts taxes by $10 billion, aggregate demand

A) decreases by $10 billion
B) decreases by $10 billion multiplied by the tax multiplier.
C) increases by $10 billion.
D) increases by $10 billion multiplied by the government expenditure multiplier.
E) increases by $10 billion multiplied by the tax multiplier.

Question 30

Do automatic fiscal stabilisers eliminate business cycles?

A) Yes
B) No, they make business cycle fluctuations more severe.
C) No, because they have no effect if the business cycle is the result of some unanticipated change.
D) No, they increase the likelihood that a business cycle occurs.
E) No, but they do moderate business cycles.

Question 31

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

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

Question 32

An example of automatic fiscal policy is

A) Parliament passing a tax rate reduction package.
B) the Reserve Bank reducing interest rates as economic growth slows.
C) the Commonwealth government expanding spending at the Department of Education and Training.
D) expenditure for unemployment benefits increasing as economic growth slows.
E) a change in taxes that has no multiplier effect.

Question 33

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

Question 34

If government expenditure on goods and services increases by $10 billion, then aggregate demand

A) increases by $10 billion multiplied by the tax multiplier.
B) decreases by $10 billion multiplied by the government expenditure multiplier.
C) increases by $10 billion.
D) increases by $10 billion multiplied by the government expenditure multiplier.
E) decreases by $10 billion.

Question 35

The structural surplus

A) equals the actual surplus plus the cyclical surplus.
B) is legally required to be positive.
C) is the government budget surplus that would exist if the economy was at full employment.
D) fluctuates over the business cycle.
E) is, by definition, equal to the negative of the cyclical deficit.

Question 36

Automatic stabilisers include

A) changes in the cash rate brought about by the Reserve Bank.
B) changes in discretionary spending.
C) increases or decreases in tax rates.
D) changes in induced taxes.
E) changes in induced taxes and changes in discretionary spending.

Question 37

Which of the following is true?

A) Automatic stabilisers help to reduce the impact of a recession.
B) Discretionary fiscal policy cannot eliminate a recession.
C) Automatic stabilisers are used to eliminate recessions.
D) Discretionary fiscal policy can automatically eliminate a recession.
E) Automatic stabilisers make discretionary policy more effective by increasing the magnitude of the multipliers.

Question 38

In an expansion, tax revenues increase proportionally more than real GDP without the need for any government policy. This increase is an example of

A) automatic monetary policy.
B) discretionary fiscal policy.
C) automatic fiscal policy.
D) discretionary monetary policy.
E) the effect of deficit spending.

Question 39

The magnitude of the government expenditure multiplier is ________ the magnitude of the tax multiplier.

A) not comparable to
B) equal to
C) less than
D) greater than
E) for expansionary policy greater than and for contractionary policy less than

Question 40

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

Question 41

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP.
In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes.

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

Question 42

The figure above shows a labour market with an income tax.
The tax wedge in the figure above is equal to ________ per hour, which creates an after-tax real wage rate of ________ per hour and employment of ________ billion hours per year.

A) $5; $35; 200
B) $10; $35; 250
C) $15; $30; 250
D) $15; $20; 200
E) $10; $35; 200

Question 43

If an economy is at an equilibrium with an inflationary gap, policymakers can use

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

Question 44

If the economy is at an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services.

A) cutting; increasing
B) raising; increasing
C) cutting; decreasing
D) raising; decreasing
E) raising; not changing

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 one trillion dollars. To close the gap, the government can change expenditure by ________ one trillion dollars.

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

Question 46

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

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

Question 47

In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases.

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

Question 48

A fiscal stimulus works to close a recessionary gap by shifting the

A) AD curve rightward.
B) AD curve leftward.
C) potential GDP line leftward.
D) AS curve leftward.
E) AD curve leftward and the AS curve leftward.

Question 49

Ignoring any supply-side effects, if government expenditure on goods and services decreases by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the price level ________.

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

Question 50

Which of the following is a limitation of discretionary fiscal policy?
i. The legislation time lag
ii. Estimating potential GDP
iii. The income gap

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

Question 51

The figure above shows a labour market with an income tax.
According to the figure above, if there is no income tax, the equilibrium real wage rate is ________ and the equilibrium hours of labour are ________.

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

Question 52

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) during a recession, politicians prefer increases in government spending over decreasing taxes.
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) economic forecasts consistently underestimate the impact of fiscal policy.

Question 53

An increase in income tax shifts the labour supply curve ________, and the ________.

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

Question 54

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

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

Question 55

Once supply-side effects are taken into account, income tax cuts can change
i. the supply of labour.
ii. potential GDP.
iii. the growth rate of potential GDP.

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

Question 56

In the labour 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) before-tax; after-tax; does not affect
C) before-tax; after-tax; decreases
D) before-tax; after-tax; increases
E) after-tax; before-tax; does not affect.

Question 57

An increase in government expenditure can ________ potential GDP and an increase in taxes can ________ potential GDP.

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

Question 58

There are four limitations to the effectiveness of discretionary fiscal policy. Which item below is NOT one of these limitations?

A) The fiscal multiplier
B) The shrinking area of Parliamentary discretion
C) The legislation time lag
D) Estimating potential GDP
E) Errors in economic forecasting

Question 59

The supply-side effects show that an income tax cut ________ employment and ________ potential GDP.

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

Question 60

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

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

Question 61

The figure above shows a labour market with an income tax.
In the figure above, the tax wedge is equal to ________ per hour, the after-tax real wage rate is equal to ________, and the before-tax real wage rate is equal to ________.

A) $20; $30; $35
B) $10; $30; $30
C) $15; $20; $35
D) $30; $20; $35
E) $20; $30; $20

Question 62

If a tax cut increases aggregate demand more than aggregate supply, real GDP ________ and the price level ________.

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

Question 63

The figure above shows an economy's aggregate demand curve and aggregate supply curve.
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 ________ $17 trillion.

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

Question 64

An income tax cut ________ aggregate demand and ________ aggregate supply.

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

Question 65

The figure above shows an economy's aggregate demand curve and aggregate supply curve.
Suppose the shift from AD₀ to AD₁ and from AS₀ to AS₁ in the figure above is the result of fiscal policy. Which of the policies below could lead to these shifts?
i. An increase in government expenditure
ii. A tax cut
iii. A decrease in government expenditure
iv. A tax increase

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

Question 66

Income taxes create a wedge between the wage rate paid by ________ and received by workers and thereby ________ employment and ________ potential GDP.

A) firms; raises; increases
B) firms; raises; decreases
C) firms; lowers; increases
D) firms; lowers; decreases
E) households; lowers; decreases

Question 67

The quantity of employment is determined in the ________ market and that quantity, along with the ________, determines potential GDP.

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

Question 68

If the income tax rate is 20 per cent and the tax rate on consumption expenditure is 15 per cent, then the tax wedge is

A) 5 per cent.
B) 2 per cent.
C) 35 per cent.
D) 300 per cent.
E) None of the above answers is correct.

Question 69

A tax cut that increases the budget deficit results in ________ in the ________ loanable funds.

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

Question 70

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

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

Question 71

If the nominal interest rate is 10 per cent, the inflation rate is 6 per cent, and the tax rate on interest income is 25 per cent, what is the after-tax real interest rate?

A) 3.5 per cent
B) 1.5 per cent
C) 6.0 per cent
D) 4.0 per cent
E) 3.0 per cent

Question 72

Suppose the tax rate on interest income is 25 per cent, the real interest rate is 4 per cent, and the inflation rate is 4 per cent. In this case, the real after-tax interest rate is

A) 4.0 per cent.
B) 3.5 per cent.
C) 1.0 per cent.
D) 0.5 per cent.
E) 2.0 per cent.

Question 73

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) the same as; the same as
E) greater than; smaller than

Question 74

The figure above shows an economy's aggregate demand curve and aggregate supply curve.
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 ________ $17 trillion.

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

Question 75

If fiscal stimulus creates a large budget ________, then in the long run economic growth ________.

A) surplus; decreases
B) surplus; increases
C) deficit; increases
D) deficit; decreases
E) None of the above answers is correct.

Question 76

When the government cuts the income tax rate, the real wage rate paid by employers ________ and the real wage rate received by workers ________ and potential GDP ________.

A) increases; increases; increases
B) increases; decreases; increases
C) decreases; increases; increases
D) decreases; increases; decreases
E) decreases; decreases; increases