Deck 12: Government and Fiscal Policy

Question 1

The government purchases component of aggregate demand includes
I.all purchases by government agencies of goods and services produced by firms.
II.direct production by government agencies themselves.
III.government expenditures on transfer payments.

A)I only
B)I and II only
C)I and III only
D)I, II, and III

Answer 1

B

Question 2

In late 2008, the U.S.government extended unemployment insurance benefits for seven additional weeks, in recognition of the growing unemployment problem.This extension is an example of

A)automatic fiscal policy.
B)discretionary fiscal policy.
C)expansionary monetary policy.
D)supply-side fiscal policy.

Answer 2

B

Question 3

Payments to households that do not require anything in exchange are called

A)transfer payments.
B)government purchases.
C)consumption expenditures.
D)investment expenditures.

Answer 3

A

Question 4

Taxes assessed on firms and employees on wages and salaries earned are called

A)dividend taxes.
B)payroll taxes.
C)corporate profits taxes.
D)earned income taxes.

Question 5

All of the following are instruments of fiscal policy except

A)rebate on payroll taxes.
B)education tax credits.
C)unemployment insurance benefits.
D)an interest rate cut.

Question 6

Which of the following statements characterizes government purchases in the United States between 2001 and 2011?

A)Government purchases as a share of GDP have declined.
B)Government purchases as a share of GDP have increased.
C)Government purchases as a share of GDP have remained constant.
D)Government purchases have fluctuated widely over this period.

Question 7

The government has a budget surplus if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Question 8

The government has a budget deficit if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Question 9

The three major categories of government spending are

A)government purchases, defense spending, and interest payments.
B)defense spending, Medicare and Medicaid, and net interest.
C)government purchases, transfer payments, and net interest.
D)government purchases, defense spending, and transfer payments.

Question 10

Which of the following statements is true regarding the government budget?

A)The government's budget has been in deficit since the 1960s.
B)The government's budget has been in deficit since the 1960s except for a brief period since 2012.
C)The government's budget was generally in surplus until the 1980s, then mostly in deficit since except for a brief period between 1998 and 2001.
D)The government's budget was generally in deficit since the 1960s, except for a brief period between 1998 and 2001.

Question 11

The government has a balanced budget if

A)its total revenues are equal to its total expenditures.
B)its total revenues are less than its total expenditures.
C)its total revenues are greater than its total expenditures.
D)the money supply is less than total expenditures.

Question 12

Government tax and expenditure policies that affect real GDP are called

A)automatic fiscal policy.
B)discretionary fiscal policy.
C)fiscal policy.
D)supply-side policy.

Question 13

Transfer payments typically

A)rise during expansionary periods.
B)fall during recessions.
C)do not change as the economy expands and contracts during the business cycle.
D)fall during expansionary periods and rise during recessionary periods.

Question 14

Medicaid, welfare payments, and Temporary Assistance to Needy Families are classified as

A)unilateral payments.
B)transfer payments.
C)gifts.
D)income redistribution payments.

Question 15

All of the following are examples of transfer payments except

A)welfare benefits to the poor.
B)dividend payments to the wealthy.
C)Social Security payments to the elderly.
D)unemployment compensation to the unemployed.

Question 16

The bulk of federal receipts come from

A)property taxes and personal income tax.
B)personal income tax and from payroll taxes.
C)corporate income taxes and personal income tax.
D)personal income tax and property taxes.

Question 17

State and local tax receipts are dominated by

A)property taxes and state income taxes.
B)state income taxes and sales taxes.
C)property taxes and sales taxes.
D)sales taxes and business taxes.

Question 18

The bulk of transfer payment spending in the United States is undertaken by

A)non-profit organizations in the private sector.
B)state governments.
C)local governments.
D)the federal government.

Question 19

Which of the following statements characterizes government transfer payment spending in the United States between 1960 and 2015?

A)Transfer payment spending by the federal government and by state and local governments has decreased as a percentage of GDP.
B)Transfer payment spending by the federal government and by state and local governments has more than tripled as a percentage of GDP.
C)Transfer payment spending by the federal government and by state and local governments has remained constant as a percentage of GDP.
D)Transfer payment spending by the federal government and by state and local governments has fluctuated widely over this period.

Question 20

Public investment expenditure for highways, schools, and national defense is included in which component of GDP?

A)consumption
B)gross private investment
C)government purchases
D)public investment

Question 21

An example of an automatic stabilizer is

A)personal income taxes.
B)inheritance taxes.
C)veterans' benefits.
D)corporate dividends.

Question 22

Which of the following is an automatic stabilizer?
I.inheritance taxes
II.government payments to war veterans
III.aid to families with dependent children
IV.sales taxes

A)I, II, III, and IV
B)I, II, and III only
C)II and III only
D)III only

Question 23

The national debt

A)is the sum of all past federal deficits plus any surpluses.
B)grows when the government runs a deficit.
C)grows when government spending increases.
D)is a major problem facing the U.S.government.

Question 24

The use of government expenditures and taxes to influence the level of economic activity is
Called

A)deficit management policy.
B)debt management policy.
C)financial policy.
D)fiscal policy.

Question 25

Suppose a country's debt rises by 6% and its GDP rises by 5%.What happens to the debt-GDP ratio?

A)It rises if there is a budget deficit that period.
B)It falls.
C)It rises.
D)There is insufficient information to answer the question.

Question 26

If the federal budget is initially balanced and government expenditures remain constant, then a
Decrease in GDP will

A)decrease tax revenues and create a budget surplus.
B)increase tax revenues and create a budget surplus.
C)decrease tax revenues and create a budget deficit.
D)increase tax revenues and create a budget deficit.

Question 27

Suppose in the beginning of 2013, a country has a national debt of $8,000 billion.Its GDP in
2013 is $32,000 billion and its budget deficit of $1,600 billion.Compute its debt-GDP ratio at the end of the year.

A)about 5.0%
B)about 20,0%
C)about 25.0%
D)about 30%

Question 28

All of the following are examples of automatic stabilizers except

A)personal income taxes.
B)means-tested federal transfer payments.
C)welfare benefits.
D)government emergency spending.

Question 29

Suppose a country has a national debt of $5,000 billion, a GDP of $20,000 billion, and a
Budget surplus of $130 billion.How much will its new national debt be?

A)$5,130 billion
B)$4, 870 billion
C)$15,130 billion
D)$19, 870 billion

Question 30

The national debt

A)is the difference between total government revenues and government expenditures.
B)is the sum of all past federal deficits plus any surpluses.
C)is the sum of all past federal deficits less any surpluses.
D)grows when government spending increases.

Question 31

If the federal budget is initially balanced and government expenditures remain constant, then an
Increase in GDP will _________ tax revenues and create a budget _________.

A)increase tax revenues and create a budget surplus.
B)increase tax revenues and create a budget deficit.
C)decrease tax revenues and create a budget surplus.
D)decrease tax revenues and create a budget deficit.

Question 32

Suppose in the beginning of 2013, a country has a national debt of $5,000 billion.Its GDP in 2013 is $20,000 billion and its budget surplus of $130 billion.Compute its debt-GDP ratio at the end of the year.

A)2.6%
B)25.0%
C)24.4%
D)6.5%

Question 33

Personal income taxes and transfer payments

A)acts as automatic stabilizers.
B)magnify fluctuations in GDP.
C)are discretionary fiscal policy tools only.
D)are influenced by monetary policy.

Question 34

Judged by international standards, the national debt of the United States, in terms of its national
Debt as a percentage of GDP is

A)the highest among the developed nations.
B)the lowest among the developed nations.
C)above average among the developed nations.
D)below average among the developed nations.

Question 35

The sum of all past federal deficits minus any surpluses is called the

A)transfer balance.
B)national deficit.
C)national debt.
D)national budget.

Question 36

What is an automatic stabilizer?

A)It refers to a discretionary policy that is triggered when actual output is not equal to potential output to improve the economy's performance.
B)It refers to a stabilization program that keeps inflation in check automatically.
C)It refers to any government program that tends to reduce fluctuations in GDP automatically.
D)It refers to a government program that is automatically triggered when the economy enters a recession.

Question 37

Which of the following statements is true about the U.S.national debt?
I.Relative to the level of economic activity, the debt is well below the levels reached during
World War II.
II.The ratio of debt to GDP fell in the last years of the twentieth
Century; it began rising again in 2002 and has risen substantially since the 2008 recession.
III.Judged by international standards, the U.S.national debt relative to its GDP is above average among developed nations.

A)I only
B)II only
C)III only
D)I, II, and III

Question 38

One method of assessing the degree to which current fiscal policies affect future generations is through a device called

A)inter-temporal fiscal accounting.
B)generational accounting.
C)long-term debt assessment technique.
D)fiscal stabilization tool.

Question 39

Suppose a country has a national debt of $2,000 billion, a GDP of $28,000 billion, and a
Budget deficit of $115 billion.How much will its new national debt be?

A)$2,115 billion
B)$1,885 billion
C)$28,115 billion
D)$25,885 billion

Question 40

Suppose a country's debt rises by 6% and its GDP rises by 8%.What happens to the debt-GDP ratio?

A)It rises if there is a budget deficit that period.
B)It falls.
C)It rises.
D)There is insufficient information to answer the question.

Question 41

During a recession, unemployment insurance ensures that

A)firms layoff fewer of its employees than it would if there is no unemployment insurance.
B)disposable income increases as GDP falls.
C)disposable income does not fall by as much as GDP decreases.
D)the marginal propensity to consume increases.

Question 42

Which of the following describes a discretionary fiscal policy action/program?

A)the progressive income tax system
B)the unemployment compensation program
C)Congress authorizes a temporary increase in unemployment insurance benefits for an additional seven weeks.
D)the system of welfare programs

Question 43

Automatic stabilizers are considered

A)discretionary fiscal policies.
B)discretionary monetary policies.
C)non-discretionary fiscalpolicies.
D)non-discretionary monetarypolicies.

Question 44

In 2003, Congress passed a substantial cut in income taxes.The Federal Reserve also lowered interest rates.How can these two actions be categorized?

A)Both actions can be categorized as fiscal policy.
B)Both actions can be categorized as monetary policy.
C)The tax cut can be categorized as monetary policy and the lowering of interest rates can be categorized as fiscal policy.
D)The tax cut can be categorized as fiscal policy and the lowering of interest rates can be categorized as monetary policy.

Question 45

Discretionary fiscal policy refers to

A)deliberate government efforts to stabilize the economy through government spending and taxes.
B)the use of automatic stabilizers and intervention policies to stabilize the economy.
C)any government policy that requires a lag period of at least three months.
D)the deliberate use of government spending and taxes to complement the effects of monetary policy in an effort to stabilize the economy.

Question 46

Which of the following is an advantage of automatic stabilizers?

A)The lag for automatic stabilizers is relatively long.
B)It is much easier to measure the impact of automatic stabilizers compared to the impact of discretionary fiscal policy.
C)There is no administrative cost to implementing automatic stabilizers.
D)Because they affect disposable personal income directly, automatic stabilizers act swiftly to reduce the degree of changes in real GDP.

Question 47

Automatic stabilizers

A)increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)are changes in taxes or government spending that increase aggregate demand without requiring policymakers to act when the economy goes into recession.
C)are changes in taxes or government spending that policymakers agree to when the economy goes into recession.
D)are part of discretionary fiscal policy.

Question 48

In general, personal income taxes

A)rise automatically during a recession.
B)rise automatically during an expansion.
C)rise automatically during a contraction.
D)are decreased during a recession through legislative actions of Congress.

Question 49

Changes in expenditures and taxes that occur through automatic stabilizers

A)shift the aggregate demand curve to the right in the event of an economic expansion.
B)shift the aggregate demand curve to the left in the event of an economic contraction.
C)do not shift the aggregate demand curve.
D)cause a movement up along the aggregate demand curve the event of an economic expansion and a movement down along the aggregate demand curve the event of an economic contraction.

Question 50

During an economic expansion,

A)higher income tax revenues tend to automatically increase a budget deficit or reduce a budget surplus.
B)higher income tax revenues tend to automatically increase a budget surplus or reduce a budget deficit.
C)lower income tax revenues tend to automatically increase a budget deficit or reduce a budget surplus.
D)lower income tax revenues tend to automatically increase a budget surplus or reduce a budget deficit.

Question 51

A transfer payment that rises automatically during a recession is

A)interest payments on the national debt.
B)unemployment compensation.
C)Social Security payments to retired persons.
D)government payments to war veterans.

Question 52

During an expansion, which of the following occur because of automatic stabilizers?
I.Income tax revenues tend to rise.
II.Government transfer payments tend to rise.
III.The government's budget deficit tends to fall or its budget surplus tends to rise.
IV.They tend to amplify the rise in real GDP.

A)I and III only
B)I, II, and III only
C)I, III, and IV only
D)I, II, III, and IV

Question 53

During a contraction,

A)higher income tax revenues tend to automatically increase a budget deficit or reduce a budget surplus.
B)higher income tax revenues tend to automatically increase a budget surplus or reduce a budget deficit.
C)lower income tax revenues tend to automatically increase a budget deficit or reduce a budget surplus.
D)lower income tax revenues tend to automatically increase a budget surplus or reduce a budget deficit.

Question 54

Suppose Congress increases the corporate profit tax rates.This is an example of

A)discretionary fiscal policy of the expansionary variety.
B)automatic fiscal policy of the expansionary variety.
C)discretionary fiscal policy of the contractionary variety.
D)automatic fiscal policy of the contractionary variety.

Question 55

A contractionary fiscal policy
I.decreases a government budget deficit or increases a government budget surplus.
II.includes tax cuts.
III.may include discretionary cuts in transfer payments.

A)I, II, and III
B)I and II only
C)I and III only
D)II and III only

Question 56

Expansionary fiscal policy includes

A)increasing taxes and increasing government purchases.
B)lowering interest rates, decreasing taxes and increasing transfer payments.
C)decreasing taxes and increasing government expenditures.
D)lowering the interest rates, decreasing taxes and decreasing government spending.

Question 57

Contractionary fiscal policy includes

A)increasing taxes and increasing government purchases.
B)raising interest rates, increasing taxes, and decreasing transfer payments.
C)increasing taxes and decreasing government expenditures.
D)raising interest rates, decreasing taxes, and decreasing government spending.

Question 58

Which of the following describes a discretionary fiscal policy action/program?

A)the progressive income tax system
B)The government increases funding for the Dislocated Worker Program, a federal initiative that provides retraining and career counseling.
C)the unemployment compensation program
D)the system of welfare programs

Question 59

An expansionary fiscal policy
I.includes an increase in government spending.
II.includes tax cuts.
III.increases a government budget deficit or reduces a government budget surplus.

A)I, II, and III
B)I and II only
C)I and III only
D)II and III only

Question 60

During a recession, rising transfer payments and falling tax collections
I.help cushion households from the impact of the recession.
II.buffers the fall in real GDP (relative to a situation where transfer payments do not rise and
Tax revenues do not fall)
.
III.tend to increase a budget deficit or reduce a budget surplus.

A)I only
B)I and II only
C)II and III only
D)I, II, and III

Question 61

A recessionary gap can be closed with

A)using a contractionary monetary policy.
B)an increase in taxes.
C)a decrease in government purchases.
D)using an expansionary fiscal policy.

Question 62

Use the following to answer questions
Exhibit: Fiscal Policy 1
(Exhibit: Fiscal Policy 1)
.Assume that the economy is initially at Y₁.A nonintervention policy would result in the restoration of potential output by allowing the

A)the aggregate demand curve to shift to the right.
B)the short-run aggregate supply curve to shift to the right.
C)the aggregate demand curve to shift to the left.
D)the short-run aggregate supply curve to shift to the left.

Question 63

Use the following to answer questions
Exhibit: Fiscal Policy 1
(Exhibit: Fiscal Policy 1)
If discretionary fiscal policy is used to eliminate the gap, policy actions will

A)shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P₁ and output level, Y_p.
B)shift the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level, P₁ and output level, Y_p.
C)shift the aggregate demand curve to the right until long-run equilibrium is restored at a price level, P₂ and output level, Y_p.
D)shift the aggregate demand curve and the short-run aggregate supply curve to the right until long-run equilibrium is restored at a price level corresponding to point d and output level, Y_p.

Question 64

Use the following to answer questions
Exhibit: Fiscal Policy 2
(Exhibit: Fiscal Policy 2)
At output level Y_r,

A)potential output is greater than actual output.
B)the expected price level equals actual price level.
C)the actual unemployment rate is less than the natural rate of unemployment.
D)aggregate demand will fall over time to restore equilibrium.

Question 65

An expansionary fiscal policy shifts the aggregate demand curve

A)to the right and is used to close an inflationary gap.
B)to the right and is used to close a recessionary gap.
C)to the left and is used to close an inflationary gap.
D)to the left and is used to close a recessionary gap.

Question 66

Use the following to answer questions
Exhibit: Fiscal Policy 1
(Exhibit: Fiscal Policy 1)
In this situation, if policymakers want to close the output gap with fiscal policies that will stimulate aggregate demand, what should they do?

A)establish a consumption tax to encourage savings
B)increase government spending
C)loosen environmental regulations to lower businesses cost of production
D)raise interest rates

Question 67

Use the following to answer questions
Exhibit: Fiscal Policy 2
(Exhibit: Fiscal Policy 2)
If discretionary fiscal policy is used to eliminate the gap, policy actions will

A)shift the aggregate demand curve to the left until long-run equilibrium is restored at a price level, P_j and output level, Y_p.
B)shift the aggregate demand curve and the short-run aggregate supply curve to the left until long-run equilibrium is restored at a price level P_k and output level, Y_p.
C)shift the aggregate demand curve to the left until long-run equilibrium is restored at a price level, P_r and output level, Y_p.
D)shift the short-run aggregate supply curve to the left until long-run equilibrium is restored at a price level, P_r and output level, Y_p.

Question 68

If there is a recessionary gap in the economy, discretionary fiscal policy would likely involve
An action to

A)shift the aggregate demand curve to the right.
B)shift the aggregate demand curve to the left.
C)shift both the aggregate demand curve and aggregate supply curve to the right.
D)shift both the aggregate demand curve and aggregate supply curve to the left.

Question 69

Use the following to answer questions
Exhibit: Fiscal Policy 2

-A change in government purchases shifts the aggregate demand curve by an amount equal to the

A)change in consumption *marginal propensity to consume.
B)change in government purchases * money multiplier.
C)change in government purchases *spending multiplier.
D)change in the spending multiplier *change in government purchases.

Question 70

Use the following to answer questions
Exhibit: Fiscal Policy 1
(Exhibit: Fiscal Policy 1)
The economy is initially at output level Y₁ and there is

A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)a short-run and a long-run equilibrium.

Question 71

An inflationary gap can be closed with

A)using an expansionary monetary policy.
B)using a policy action such as a reduction in taxes.
C)using a policy action such as a reduction in government purchases.
D)imposing price controls to prevent prices from rising.

Question 72

Use the following to answer questions
Exhibit: Fiscal Policy 2
(Exhibit: Fiscal Policy 2)
Assume that the economy is initially at Y_r.A nonintervention policy
Would return the economy to its potential output by

A)allowing the short-run aggregate supply to shift to the right.
B)allowing the short-run aggregate supply to shift to the left.
C)allowing the aggregate demand to shift to the left.
D)allowing the aggregate demand to shift to the right.

Question 73

If there is an inflationary gap in the economy, discretionary fiscal policy would likely involve
An action to

A)shift the aggregate demand curve to the right.
B)shift the aggregate demand curve to the left.
C)shift both the aggregate demand curve and aggregate supply curve to the right.
D)shift both the aggregate demand curve and aggregate supply curve to the left.

Question 74

Use the following to answer questions
Exhibit: Fiscal Policy 2
(Exhibit: Fiscal Policy 2)
If real GDP is equal to Y_r, there is

A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)a short-run and a long-run equilibrium.

Question 75

Use the following to answer questions
Exhibit: Fiscal Policy 1
(Exhibit: Fiscal Policy 1)
At output level Y₁,

A)potential output is greater than actual output.
B)the economy is operating at a point outside its production possibilities curve.
C)the actual unemployment rate is less than the natural rate of unemployment.
D)aggregate demand will fall to restore equilibrium.

Question 76

In the United States, most of the government's taxing and spending is

A)to stabilize the economy and move it to its potential output.
B)to bring about greater income equality.
C)to keep inflation at a moderate level.
D)for purposes other than economic stabilization.

Question 77

Use the following to answer questions
Exhibit: Fiscal Policy 2
Suppose the economy is in long-run equilibrium.If the federal government cuts government
Spending, which of the following is likely to result?

A)an increase in real GDP and an increase in the price level
B)an increase in unemployment and an increase in the price level
C)a decrease in unemployment and a decrease in the price level
D)a decrease in the price level and an increase in unemployment

Question 78

A contractionary fiscal policy shifts the aggregate demand curve

A)to the right and is used to close an inflationary gap.
B)to the right and is used to close a recessionary gap.
C)to the left and is used to close an inflationary gap.
D)to the left and is used to close a recessionary gap.

Question 79

Suppose fiscal authorities raise state income tax rates.As a result, disposable income falls, thereby

A)decreasing consumption spending, and causing the aggregate demand curve to shift to the left.
B)decreasing consumption spending, and causing a movement along a given aggregate demand curve.
C)increasing saving, and causing the aggregate demand curve to shift to the left.
D)increasing saving, and causing a movement along a given aggregate demand curve.

Question 80

Use the following to answer questions
Exhibit: Fiscal Policy 2
(Exhibit: Fiscal Policy 2)
Suppose real GDP is equal to Y_r.If policymakers want to close the output gap with demand management policies, what should they do?

A)lower corporate profit tax rates to encourage investments
B)increase investment tax credits to businesses
C)decrease government spending on transfer payments and on final goods and services
D)lower interest rates