Deck 12: Fiscal Policy

Question 1

Government outlays consist of

A) all governmental purchases resulting from contracts with the private sector and foreign organizations
B) government purchases,transfer payments,and interest on the national debt
C) any purchase by an organization that is not trying to earn a profit
D) government purchases and transfer payments minus the interest on the national debt
E) total receipts from all organizations doing business with any level of government

Answer 1

government purchases,transfer payments,and interest on the national debt

Question 2

Nominal federal spending is a

A) good indicator of how responsibility the federal government is
B) good indicator of the overall economy's performance
C) measure of the public's concern for the educational needs of the country
D) warning sign that our governmental officials are sometimes out of control
E) misleading measure of government's effect,unless it is seen in the context of the country's income

Answer 2

misleading measure of government's effect,unless it is seen in the context of the country's income

Question 3

Which of the following is a government purchase?

A) The income tax
B) The property tax
C) Social Security benefits paid to a retired government worker
D) Food stamps
E) The salary of a federal judge.

Answer 3

The salary of a federal judge.

Question 4

Relative to GDP,interest on the national debt

A) has grown at a steady rate during the last 40 years
B) has remained constant in recent decades
C) grew especially rapidly during the 1980s
D) declined slightly during the 1980s
E) fluctuates as retirement portfolios change their allocation of government securities

Question 5

If we look at governmental budgets over time using nominal figures,we

A) have a clearer understanding of the real size of the budget
B) are able to focus on the real impact of government spending on potential GNP
C) tend to overestimate the size of the budgetary growth
D) usually underestimate the size of the burden of the debt
E) are ignoring what we can learn from nominal data

Question 6

Which of the following is most sensitive to fluctuations in GDP?

A) government purchases
B) government nonmilitary spending
C) transfer payments
D) military spending
E) interest on the national debt

Question 7

Which case represents the largest increase in the real national debt?

A) The price level increases by 500 percent and nominal debt increases by 500 percent.
B) The price level increases by 200 percent and nominal debt increases by 600 percent.
C) The price level decreases by 50 percent and nominal debt increases by 300 percent.
D) The price level increases by 400 percent and nominal debt increases by 200 percent.
E) The price level decreases by 90 percent and nominal debt increases by 200 percent.

Question 8

We expect a rise in transfer payments when

A) the needs of the poor receive more publicity
B) taxes rise
C) GDP rises and inflation soars
D) the retirement age remains unchanged over time
E) recessions occur

Question 9

The federal government's budget been in deficit every year since 1959.

Question 10

Transfer payments provide benefits to

A) all those in need
B) those who have paid into governmental funds through their workplace
C) those who are eligible recipients
D) those who provide some service to the government
E) anyone transferring from one stage of their life to another

Question 11

In the 2000s,government budget deficits became larger as a percent of GDP.

Question 12

Federal government outlays as a fraction of GDP tripled between 1959 and 2009.

Question 13

Over the past several decades,federal transfer payments as a fraction of GDP have trended upward.

Question 14

The federal government's revenue has declined steadily relative to GDP since 1960.

Question 15

Which of the following is a transfer payment?

A) The federal government's budget deficit
B) Unemployment compensation payments
C) Military spending
D) Wages of government employees
E) The excise tax on gasoline.

Question 16

The cumulative total of the federal government's budget deficits has been greater than the total of its surpluses.

Question 17

From the 1960s through the 1990s military expenditures increased as a percentage of GDP and they were a major influence in the continued growth of government outlays.

Question 18

Which of the following can occur simultaneously?

A) An increase in the national debt and a budget surplus
B) A decrease in the national debt and a balanced budget
C) An unchanged national debt and a budget deficit
D) Positive national debt and a budget surplus
E) A decreasing national debt and a budget deficit.

Question 19

Tax avoidance reduces the federal government's revenue flow.

Question 20

The national debt

A) is currently greater than the annual federal deficit
B) is reduced by the revenue generated from the federal deficit
C) decreases as the deficit is reduced
D) is a flow variable
E) varies depending on developments in the stock market

Question 21

The large U.S.government budget deficits in the early 1980s were caused by

A) wasteful military spending
B) declining transfer payments triggered by more expenditures on education and training
C) President Reagan's attitude toward deficits
D) a recession,expanded military spending,and income tax cuts
E) recessionary gaps in GDP

Question 22

The U.S.government has tended to keep its deficit-to-GDP ratio significantly above 10 percent for the last 50 years.

Question 23

The national debt

A) exists because of past government budget deficits
B) is the difference between the government's spending and revenue in a given year
C) is the amount households owe on credit cards,mortgages and other loans
D) is a flow variable
E) is the same as the government's budget deficit

Question 24

In the long run,

A) continuing budget surpluses cause interest rates to fall,thereby stimulating investment spending
B) any deviation from a balanced budget will plunge the economy into recession
C) there can be no economic growth unless the government's budget is in surplus
D) there can be no economic growth unless the government's budget is balanced
E) government spending must increase as a fraction of GDP

Question 25

In an expansion,tax payments tend to increase and transfer payments tend to decrease.

Question 26

Suppose you are the president of a large bank.In which situation would you be most reluctant to loan money to a country?

A) Its nominal debt is $10 trillion.
B) Its nominal debt is 1 percent of nominal GDP.
C) Its nominal deficit is $150 billion.
D) Its real deficit is 100 percent of real GDP.
E) Its real debt is 1 percent of real GDP.

Question 27

The national debt

A) can be paid off without major economic effects
B) need never be paid off
C) is no more serious a problem than is a corporation's debt
D) should not exist during a period of economic prosperity
E) is the simple sum of post budget deficits

Question 28

Government debt and interest payments on that debt

A) are problems if they grow faster than GDP
B) are unrelated in the short run
C) are unrelated in the long run,but not in the short run
D) generally grow faster than government spending
E) contributed to the crisis experienced by the U.S.economy in the late 1990s

Question 29

In the long run,

A) large government budget deficits cause productivity to increase,thereby leading to inflation
B) large government budget deficits drive down interest rates and reduce investment spending
C) large government budget surpluses mean reductions in the money supply
D) changes in the government budget deficit have no effect on the capital stock
E) large government budget deficits drive up interest rates and reduce investment spending.

Question 30

When the U.S.government runs a deficit,it usually does the following:

A) It buys government bonds from the public
B) It asks the Treasury Department to print money to pay for the deficit
C) It sells new government bonds to the public
D) It borrows money directly from the Federal Reserve
E) It asks the Federal Reserve to print money to pay for the deficit.

Question 31

In the long run,

A) higher consumption spending means a larger capital stock and a higher standard of living
B) higher investment spending means higher interest rates
C) higher investment spending means a larger capital stock and a higher standard of living
D) higher interest rates means higher consumption spending
E) higher government spending means a larger capital stock and a higher standard of living

Question 32

Which of the following is true?

A) The federal budget deficit is a flow and so is the national debt.
B) The national debt is both a stock and a flow.
C) The federal budget deficit is a stock and the national debt is a flow.
D) The federal budget deficit is a flow and the national debt is a stock.
E) The federal budget deficit is a stock and so is the national debt.

Question 33

Which of the following is true? The federal government's budget

A) was always in surplus until the 1980s
B) is in deficit now but has been in surplus in most of the past 40 years
C) has been virtually perfectly balanced for the past 5 years
D) deficit has averaged around zero for the last several decades
E) switched from deficits to surpluses in the late 1990s

Question 34

Under what condition can the U.S.government continue to pay interest on a rising debt without eventually needing to increase the average tax rate?

A) If the national debt grows at the same rate as nominal GDP
B) If the nominal interest on the national debt grows faster than nominal GDP
C) If the total interest payments on the national debt grow faster than nominal GDP
D) If the national debt grows faster than nominal GDP
E) If the real interest on the national debt grows faster than real GDP.

Question 35

In the long run,

A) a larger budget deficit means a larger money supply
B) lower investment spending means slower growth of the standard of living
C) a larger budget deficit means lower consumption spending
D) a larger budget surplus means a smaller capital stock
E) government spending has no effect on the budget deficit or surplus.

Question 36

What does it mean for the government to "roll over" its debt?

A) Buying bonds from the public to pay off old bonds
B) Continuing to pay interest on old bonds
C) Issuing new bonds to pay off old bonds
D) Running a budget surplus to pay off old bonds
E) Printing money to pay off old bonds.

Question 37

In an expansion,

A) federal budget deficits tend to rise
B) federal budget deficits tend to fall
C) the federal debt tends to rise faster than in a recession
D) federal government tax receipts tend to fall
E) there is pressure on the Fed to monetize the debt

Question 38

Which factors led to the large rise in the government's budget deficit in the early 1980s?

A) The Clinton Administration's health care program
B) A cutback in military spending
C) An income tax increase
D) A build up in military spending
E) A large and unprecedented economic expansion.

Question 39

In a recession,tax payments tend to increase and transfer payments tend to decrease.

Question 40

In the long run,large and continuing budget surpluses

A) mean higher taxes and a lower standard of living
B) mean a larger money supply and higher interest rates
C) are a problem because they crowd out private spending
D) permit the government to lower taxes,thereby encouraging work,investment,and saving
E) mean a larger money supply and lower interest rates

Question 41

Government outlays

A) are the same as "G" in the short-run macro model.
B) do not include transfer payments.
C) are always smaller than government purchases.
D) are always greater than government purchases.
E) tend to decline in the long run.

Question 42

The national debt must be paid back in the future.

Question 43

If the national debt is growing no faster than GDP,

A) the government will have to raise taxes
B) the nation's standard of living will fall
C) government investment spending will be negative
D) the government can pay interest on the debt without having to raise taxes
E) the government will be unable to pay interest on the debt

Question 44

As a percentage of GDP,non-military government purchases have remained very low and stable.

Question 45

Which of the following correctly represents the budget deficit?

A) Tax revenue - government purchases
B) Tax revenue - government outlays
C) Government purchases - tax revenue
D) Government outlays - tax revenue
E) Government outlays - tax revenue - transfer payments.

Question 46

Federal revenue as a percentage of GDP dropped significantly in the early 2000s because

A) of increased transfer payments due to the recession.
B) of decreased transfer payments due to the recession.
C) of tax-rate decreases passed by the Bush administration and Congress as well as recessionary impacts.
D) of tax-rate increases passed by the Bush administration and Congress as well a recessionary effects.
E) of tax-rate increases passed by the Bush administration .

Question 47

In the long run,

A) fiscal policy has no effect on the labor force participation rate.
B) lower tax rates can lower the labor force participation rate.
C) less generous transfer payments can raise the labor force participation rate.
D) higher tax rates can raise the labor force participation rate.
E) None of the above.

Question 48

An economic expansion causes

A) the federal budget deficit to rise.
B) federal government tax receipts to fall.
C) federal government spending to rise.
D) transfer payments to fall.
E) transfer payments to rise.

Question 49

Which of the following cases represent the smallest increase in the real national debt?

A) The price level increases by 200 percent and the nominal debt increases by 200 percent.
B) The price level increases by 200 percent and the nominal debt increases by 100 percent.
C) The price level increases by 200 percent and the nominal debt increases by 500 percent.
D) The price level increases by 100 percent and the nominal debt increases by 300 percent.
E) None of the above.

Question 50

The government can safely take on more debt

A) as long as private firms are taking on more debt
B) as long as the debt involves no interest payments
C) if GDP is growing faster than the debt is growing
D) if the interest rate is below 3 percent
E) as long as the debt is growing by less than 3 percent per year

Question 51

In the long run,

A) the government's tax policies do not affect the rate of investment spending.
B) lower tax rates will have no effect on the average standard of living.
C) lower tax rates will lead to faster growth in the average standard of living.
D) higher tax rates will lead to slower growth in the average standard of living.
E) the debt and the deficit will converge to zero.

Question 52

The federal government

A) runs a deficit when tax revenues are greater than government purchases.
B) runs a surplus when tax revenues are smaller than government purchases.
C) runs a deficit when tax revenues are greater than government outlays.
D) runs a surplus when tax revenues are greater than government outlays.
E) runs a surplus when tax revenues are smaller than transfer payments..

Question 53

The national debt

A) will be zero when the federal budget is balanced.
B) has been shrinking in the last 30 years.
C) is equal to the government's budget deficit.
D) can grow without negative economic effects.
E) is a flow measure while the deficit is a stock measure.

Question 54

The federal government

A) runs a deficit when tax revenues are greater than government purchases.
B) runs a surplus when tax revenues are smaller than government purchases.
C) runs a deficit when tax revenues are smaller than government outlays.
D) runs a surplus when tax revenues are greater than government purchases.
E) runs a surplus when tax revenues are smaller than transfer payments..

Question 55

When positive spending shocks occur,transfer payments automatically fall.

Question 56

When negative spending shocks occur,transfer payments automatically fall.

Question 57

Which of the following is true?

A) As the national debt increases relative to GDP,interest on the debt relative to GDP declines.
B) As the national debt decreases relative to GDP,interest on the debt relative to GDP rises.
C) As the national debt increases relative to GDP,interest on the debt relative to GDP rises.
D) The national debt relative to GDP has been constant in recent years.
E) The national debt relative to GDP has been falling in the last few years.

Question 58

Before about 1975

A) any federal deficits were at least 5 percent of GDP.
B) most federal deficits were less than 2 percent of GDP.
C) the federal government never ran deficits.
D) the federal government always ran a surplus.
E) any federal deficits were at least 7 percent of GDP.

Question 59

To judge the size of government debts and deficits,we should use real values.

Question 60

In the long run,

A) an increase in the federal budget deficit can lower the interest rate and investment spending.
B) an increase in the federal budget deficit can raise the interest rate and investment spending.
C) a decrease in the federal budget deficit can lower the interest rate and raise investment spending.
D) a decrease in the federal budget deficit can raise the interest rate and lower investment spending.
E) a decrease in the federal budget deficit can lower the interest rate and lower investment spending.

Question 61

The formula for calculating the tax multiplier is

A) MPC/(1 - MPC)
B) MPC/(1 + MPC)
C) -MPC/(MPC - 1)
D) -MPC/(1 - MPC)
E) MPC + (1 - MPC)

Question 62

Suppose the MPC is 0.85.If government purchases increase by $10 billion and net taxes fall by $10 billion,equilibrium output will

A) fall by $10 billion
B) increase by $10 billion
C) increase by $20 billion
D) increase by $66.7 billion
E) increase by $123.3 billion

Question 63

One way to describe the tax multiplier is that it equals the

A) the spending multiplier
B) the negative of the spending multiplier minus1.0
C) the GNP gap minus the GDP gap
D) the reciprocal of the marginal propensity to consume
E) the best estimate of the optimal tax rate

Question 64

When calculating the effect of a tax cut on equilibrium GDP,the tax multiplier is always

A) 2.0 smaller than the spending multiplier
B) 1.0 smaller than the spending multiplier and negative in sign
C) positive
D) positive and larger than the spending multiplier
E) negative and larger than the spending multiplier

Question 65

In the short run,the impact of a $50 billion tax package on GDP will be

A) greater than $50 billion because of the multiplier effect
B) less than $50 billion because of the tax code
C) greater than $50 billion because of the tax code
D) exactly $50 billion
E) greater than $50 billion because of crowding out.

Question 66

Countercyclical fiscal policy can

A) only be employed in reaction to an existing recession
B) only be employed in reaction to an existing boom
C) be employed to prevent a potential recession or boom or in reaction to an existing recession or boom
D) only be employed to prevent a potential boom
E) only be employed to prevent a potential recession.

Question 67

Under which of the following circumstances should we be concerned about a rising national debt?

A) When it rises at a slower pace than GDP.
B) When the government runs deficits over a long period of time,such as a decade.
C) When it rises at a faster pace than GDP.
D) When the government does not run enough surpluses to counteract prior deficits.
E) When it rises at a slower pace than the money supply.

Question 68

A key tool of countercyclical fiscal policy is

A) the interest rate
B) the federal funds rate
C) government spending
D) the regulatory code
E) Presidential executive orders.

Question 69

A key tool of countercyclical fiscal policy is

A) the interest rate
B) the federal funds rate
C) the tax code
D) the regulatory code
E) Presidential executive orders.

Question 70

For any change in net taxes,we can calculate the resulting change in equilibrium GDP by using the following formula:

A) change in GDP = -MPC/(1 - MPC)
B) change in GDP = [-MPC/(1 - MPC)]× change in taxes
C) change in GDP = MPC ×change in taxes
D) change in GDP = MPC/(1 - MPC)
E) change in GDP = [-MPC/(1 - MPC)] + change in taxes

Question 71

Countercyclical fiscal policy is viewed by most economists

A) as the perfect instrument for preventing boom and bust economies
B) as a useful but imperfect instrument for reacting to boom and bust economies
C) having no impact in the short run or long run.
D) doing more damage than good in both the short run and long run.
E) as having an impact only in the long run.

Question 72

If the MPC is 0.8 and net taxes increase by $100 billion,what is the effect on equilibrium output?

A) There is no effect;equilibrium output is not affected by a change in net taxes.
B) Equilibrium output will fall by $80 billion.
C) Equilibrium output will fall by $125 billion.
D) Equilibrium output will fall by $400 billion.
E) Equilibrium output will fall by $500 billion.

Question 73

Countercyclical fiscal policy refers to

A) any fiscal policy that cycles between budget surpluses and budget deficits
B) the use of taxes and government spending to keep the economy close to potential GDP in the short run
C) any fiscal policy that is employed during a business cycle
D) the use of open market purchases of bonds to keep the economy close to potential GDP in the short run
E) the use of changes in tax rates to keep the economy at potential output in the long run.

Question 74

Countercyclical fiscal policy has a serious problem with

A) the timing of its enactment and impact.
B) the easy reversibility of policy.
C) the tendency of the Federal Reserve to immediately counter Congressional action.
D) the courts as it has been held to be unconstitutional.
E) Presidential executive orders.

Question 75

If the MPC is 0.6 and if government purchases and net taxes both increase by $20 billion,by how much will equilibrium output change?

A) It will increase by $80 billion.
B) It will increase by $20 billion.
C) It will not change because the changes in government purchases and net taxes will cancel each other out.
D) It will decrease by $20 billion.
E) It will decrease by $80 billion.

Question 76

If the expenditure multiplier is 6.5,the tax multiplier is

A) 7.5
B) 5.5
C) -5.5
D) -6.5
E) -7.5

Question 77

In the short run,the impact of a $50 billion spending package on GDP will be

A) greater than $50 billion because of the multiplier effect
B) less than $50 billion because of the tax code
C) greater than $50 billion because of the tax code
D) exactly $50 billion
E) greater than $50 billion because of crowding out.

Question 78

If net taxes are cut,consumer

A) spending is not affected
B) spending increases by the amount of the tax cut
C) spending increases by an amount less than the full amount of the tax cut
D) saving increases by the full amount of the tax cut
E) spending increases by two-thirds of the amount of the tax cut and consumer saving increases by one-third of the amount of the tax cut

Question 79

Countercyclical fiscal policy has a serious problem with

A) overshooting the desired impact by a factor of 10.
B) the irreversibility of actions.
C) the tendency of the Federal Reserve to immediately counter Congressional action.
D) the courts as it has been held to be unconstitutional.
E) overshooting the desired impact by a factor of 3.

Question 80

If the MPC is 0.75,what is the value of the government purchases multiplier?

A) -1.33
B) 3.0
C) -3.0
D) 4.0
E) -4.0