Deck 13: Fiscal Policy, Deficits, and Debt

Question 1

Which group has a direct responsibility for providing analysis, advice, and assistance to the U.S. president on economic matters?

A) The Congressional Budget Office
B) The Council of Economic Advisors
C) The Joint Economic Committee
D) The Federal Reserve Board

Answer 1

The Council of Economic Advisors

Question 2

The Council of Economic Advisers gives economic advice to the:

A) president.
B) U.S. Senate.
C) U.S. House of Representatives.
D) Federal Reserve System.

Answer 2

president.

Question 3

-Refer to the above diagram. The economy is at equilibrium at point A. What fiscal policy would be most appropriate to control demand-pull inflation?

A) Decrease aggregate demand by increasing taxes.
B) Increase aggregate demand by decreasing taxes.
C) Decrease aggregate supply by increasing taxes.
D) Increase aggregate demand by increasing government spending.

Answer 3

Decrease aggregate demand by increasing taxes.

Question 4

- Refer to the above diagram. The economy is at equilibrium at point B. What fiscal policy would increase real GDP?

A) Increase aggregate demand from AD₂ to AD₁ by decreasing taxes.
B) Decrease aggregate demand from AD₂ to AD₃ by increasing government spending.
C) Decrease aggregate demand from AD₂ to AD₃ by decreasing government spending.
D) Increase aggregate demand from AD₂ to AD₃ by decreasing taxes.

Question 5

- Refer to the above diagram. The economy is at equilibrium at point C. What fiscal policy would increase real GDP?

A) Increase aggregate demand from AD₂ to AD₁ by decreasing taxes.
B) Decrease aggregate demand from AD₂ to AD₃ by increasing taxes.
C) Increase aggregate demand from AD₁ to AD₂ by increasing government spending.
D) Make no change because the economy is at or near its full-employment level of real output.

Question 6

- Refer to the above diagram. An expansionary fiscal policy can best be represented by a:

A) shift in the aggregate demand curve from AD₂ to AD₁.
B) shift in the aggregate demand curve from AD₃ to AD₂.
C) shift in the aggregate demand curve from AD₁ to AD₂.
D) movement along the aggregate demand curve.

Question 7

- Refer to the above diagram. A contractionary fiscal policy can best be represented by a:

A) shift in the aggregate demand curve from AD₁ to AD₂.
B) shift in the aggregate demand curve from AD₃ to AD₂.
C) shift in the aggregate demand curve from AD₁ to AD₃.
D) movement along the aggregate demand curve.

Question 8

-Refer to the above diagram. The economy is at equilibrium at point B. If the goal is to move the economy to point A, the appropriate way to accomplish this is through:

A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) a shift in the aggregate demand curve from AD₁ to AD₃.
D) an increase in taxes.

Question 9

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

A) increased government spending or increased taxation, or a combination of the two actions.
B) increased government spending or decreased taxation, or a combination of the two actions.
C) increased government spending or increased taxation, but not a combination of the two actions.
D) decreased government spending or decreased taxation, or a combination of the two actions.

Question 10

-Refer to the above graph. Assume that the economy is in a recession with a price level of P₂ and output level Q₄. The government then adopts an expansionary fiscal policy to shift the aggregate demand curve. What will be the most likely new equilibrium price level and output?

A) P₂ and Q₄
B) P₁ and Q₁
C) P₂ and Q₂
D) P₁ and Q₃

Question 11

- Refer to the above graph. Assume that the economy initially has a price level of P₂ and output level Q₂. The price level is flexible and the government decides to adopt a contractionary fiscal policy. What would most likely be the new equilibrium price level and output?

A) P₂ and Q₄
B) P₁ and Q₁
C) P₂ and Q₂
D) P₁ and Q₃

Question 12

- Refer to the above graph. Assume that the economy initially has a price level of P₂ and output level Q₂. If the price level is downwardly inflexible and the government decides to adopt a contractionary fiscal policy, what would most likely be the new equilibrium price level and output?

A) P₂ and Q₄
B) P₁ and Q₁
C) P₂ and Q₂
D) P₁ and Q₃

Question 13

- Refer to the above diagram, in which Q_f is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

A) AD₀.
B) AD₁.
C) AD₂.
D) AD₃.

Question 14

- Refer to the above diagram, in which Q_f is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

A) AD₀.
B) AD₂.
C) AD₃.
D) None of these.

Question 15

-Refer to the above diagram, in which Q_f is the full-employment output. If the economy's present aggregate demand curve is AD₂:

A) the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes.
B) the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes.
C) government should undertake neither an expansionary nor a contractionary fiscal policy.
D) the economy is achieving its maximum possible output.

Question 16

-Refer to the above diagram, in which Q_f is the full-employment output. If the economy's current aggregate demand curve is AD₀, it is experiencing:

A) a positive GDP gap.
B) a negative GDP gap.
C) inflation.
D) an adverse supply shock.

Question 17

- Refer to the above diagram, in which Q_f is the full-employment output. If the economy's current aggregate demand curve is AD₃, it is experiencing:

A) a positive GDP gap.
B) a negative GDP gap.
C) a recession.
D) cost-push inflation.

Question 18

- Refer to the above diagram, in which Q_f is the full-employment output. If the economy's current aggregate demand curve is AD₀, it would be appropriate for the government to:

A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.

Question 19

- Refer to the above diagram, in which Q_f is the full-employment output. If the economy's current aggregate demand curve is AD₃, it would be appropriate for the government to:

A) reduce government expenditures and taxes by equal-size amounts.
B) reduce government expenditures or increase taxes.
C) increase government expenditures or reduce taxes.
D) reduce unemployment compensation benefits.

Question 20

A government economist states that " the collection of personal income tax revenues automatically falls during a recession." This statement best describes how the progressive income tax system:

A) increases crowding out in the economy.
B) decreases real interest rates in the economy.
C) offsets the timing problem for fiscal policy.
D) serves as an automatic stabilizer for the economy.

Question 21

In the United States, income taxes and transfer payments:

A) are the source of most of the operational lag with fiscal policy.
B) act as automatic stabilizers for fluctuations in income.
C) decrease interest rates and the net export effect.
D) destabilize the economy.

Question 22

A new member of Congress notes that " personal income tax collections automatically fall and transfers and subsidies automatically rise as national income declines." This observation best describes how the personal income tax, transfers, and subsidies:

A) serve as built-in stabilizers.
B) produce the cyclically adjusted budget.
C) cause crowding out and reduce equilibrium GDP.
D) contribute to the recognition lag with fiscal policy.

Question 23

-Refer to the above graph. If the full-employment level of GDP for this economy is at H, the:

A) cyclically adjusted budget will produce a surplus.
B) cyclically adjusted budget will produce a deficit.
C) actual budget will produce a deficit.
D) actual budget will produce a surplus.

Question 24

- Refer to the above graph. Automatic stability in this economy could be decreased by:

A) shifting the government expenditure line upward but parallel to its current position.
B) changing the tax system so that the tax line is shifted upward but parallel to its present position.
C) changing the government expenditures line so that it has a negative slope.
D) changing the tax system so that the tax line has a flatter slope.

Question 25

The actual and cyclically adjusted budgets will be equal when:

A) the rate of inflation is zero.
B) the economy is at full employment.
C) the balanced-budget multiplier is 1.
D) taxes have no effect on fiscal policy.

Question 26

Another term for the full-employment budget is the:

A) actual budget.
B) cyclical budget.
C) cyclically adjusted budget.
D) administrative budget.

Question 27

The cyclically adjusted budget is also called the:

A) actual budget.
B) cyclical budget.
C) administrative budget.
D) full-employment budget.

Question 28

-Refer to the above diagram. Assume that G and T₁ are the relevant curves and that the economy is currently at B, which is its full-employment GDP. This economy has a:

A) cyclically adjusted budget surplus only.
B) cyclically adjusted budget deficit only.
C) cyclically adjusted budget surplus and an actual budget surplus.
D) cyclically adjusted deficit and an actual budget deficit.

Question 29

- Refer to the above diagram. Assume that G and T₁ are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):

A) cyclically adjusted budget surplus.
B) cyclically adjusted budget deficit.
C) actual budget deficit.
D) actual budget surplus.

Question 30

-Refer to the above diagram. Assume that G and T₁ are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has:

A) a cyclically adjusted budget deficit.
B) an actual budget deficit.
C) an actual budget surplus.
D) neither a surplus nor deficit in the actual budget.

Question 31

-Refer to the above diagram. Assume that G and T₂ are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n):

A) cyclically adjusted budget surplus.
B) actual budget deficit.
C) cyclically adjusted budget deficit.
D) actual budget surplus.

Question 32

- Refer to the above diagram. Assume that G and T₁ are the relevant curves, the economy is currently at B, and the full-employment GDP is A. This economy has a(n):

A) cyclically adjusted budget surplus.
B) actual budget deficit.
C) cyclically adjusted budget deficit.
D) actual budget surplus.

Question 33

- Refer to the above diagram. Discretionary fiscal policy designed to slow the economy is illustrated by:

A) the shift of curve T₁ to T₂.
B) the shift of curve T₂ to T₁.
C) a movement from a to c along curve T₂.
D) a movement from d to b along curve T₁.

Question 34

-Refer to the above diagram. Discretionary fiscal policy designed to expand GDP is illustrated by:

A) the shift of curve T₁ to T₂.
B) the shift of curve T₂ to T₁.
C) a movement from a to c along curve T₂.
D) a movement from d to b along curve T₁.

Question 35

The Economic Stimulus Act of 2008:

A) provided about $152B in economic stimulus, primarily through checks sent to households.
B) provided about $152B in economic stimulus, primarily through tax cuts to businesses.
C) provided about $600B in economic stimulus, primarily through checks sent to households.
D) provided about $152B in economic stimulus, primarily through checks sent to banks that had made mortgage loans.

Question 36

As a percentage of potential GDP, the largest actual budget deficit occurred in which year?

A) 2009.
B) 2007.
C) 2001.
D) 2015.

Question 37

Which of the following statements is most accurate about fiscal policy since the end of the Great Recession?

A) The cyclically adjusted budget remained in deficit, but those deficits became smaller from 2009 to 2015, so fiscal policy became contractionary.
B) The cyclically adjusted budget remained in deficit and those deficits became smaller from 2009 to 2015, but fiscal policy remained expansionary.
C) Cyclically adjusted deficits rose steadily from 2009 to 2015, so fiscal policy became increasingly expansionary.
D) Cyclically adjusted deficits that occurred in 2009 eventually gave way to cyclically adjusted surpluses as the economy recovered.

Question 38

One of the timing problems with fiscal policy is an "operational lag" that occurs between the:

A) beginning of a recession and the time that it is recognized that the event is occurring.
B) time the need for fiscal action is recognized and the time that action is actually taken.
C) time that fiscal action is taken and the time that action has an impact on output, employment, and the price level.
D) time that fiscal action has an impact on output, employment, and the price level and the time by which it can be determined if the policy is effective.

Question 39

Proponents of the notion of a "political business cycle" suggest that:

A) the cyclically adjusted budget is a better indicator of the state of the economy than the actual budget.
B) cyclical swings in the economy are produced by the inherent instability found in capitalist economies.
C) a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes.
D) there is a trade-off among goals that tends to make the economic policies of state and local governments procyclical.

Question 40

The United States is experiencing recession, so Congress adopts an expansionary fiscal policy. State governments face a budget shortfall and raise taxes to balance their budgets. The actions of state governments would:

A) slightly increase aggregate supply.
B) slightly increase aggregate demand.
C) partially reinforce the fiscal policy.
D) partially offset the fiscal policy.

Question 41

The crowding-out effect works through interest rates to:

A) increase the effectiveness of expansionary fiscal policy.
B) decrease the effectiveness of expansionary fiscal policy.
C) decrease the effectiveness of contractionary fiscal policy.
D) increase the effectiveness of contractionary fiscal policy.

Question 42

Which cause-and-effect chain would best explain the reason for a crowding-out effect? An expansionary fiscal policy:

A) increases interest rates that decrease private investment spending.
B) decreases interest rates that increase private investment spending.
C) increases interest rates that increase private investment spending.
D) decreases interest rates that decrease private investment spending.

Question 43

If the government adopts an expansionary fiscal policy that requires more government borrowing in the money market, then interest rates are likely to:

A) fall and partially reinforce the effects of the fiscal policy.
B) rise and partially offset the effects of the fiscal policy.
C) fall and partially offset the effects of the fiscal policy.
D) rise and partially reinforce the effects of the fiscal policy.

Question 44

Suppose the United States pursued an expansionary fiscal policy to stimulate its economy and eliminate a recession. The crowding-out effect suggests that:

A) private investment would decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy.
B) private investment would decrease, thus increasing aggregate demand and partially offsetting the fiscal policy.
C) net exports would increase, thus decreasing aggregate demand and partially offsetting fiscal policy.
D) net exports would increase, thus increasing aggregate demand and partially reinforcing the fiscal policy.

Question 45

Whether crowding out occurs is most likely to depend on:

A) whether there is full employment in the economy.
B) whether the actions of state governments are procyclical.
C) the political business cycle.
D) the timing of fiscal policy.

Question 46

An expansionary fiscal policy may be:

A) offset by lowering tax rates.
B) reinforced by raising tax rates.
C) reinforced by the crowding-out effect.
D) partially offset by the crowding-out effect.

Question 47

What real or potential economic problem is posed by the public debt and its growth?

A) It can lead the nation to bankruptcy.
B) It causes expansionary economic policy making.
C) It may crowd out investment in new capital goods.
D) It places an unwarranted economic burden on future generations.

Question 48

When aggregate demand shifts because of expansionary fiscal policy, then the impact of the fiscal policy for:

A) increasing GDP will be weakened by an increase in the price level.
B) increasing GDP will be strengthened by the decrease in the price level.
C) decreasing GDP will be strengthened if crowding out occurs.
D) increasing GDP will be weakened if crowding out occurs.

Question 49

A government budget deficit occurs when government expenditures are:

A) greater than government revenues.
B) less than government revenues.
C) increasing and government revenues are increasing.
D) decreasing and government revenues are decreasing.

Question 50

The public debt is the:

A) difference between federal assets and liabilities over time.
B) difference between current tax revenues and government expenditures.
C) accumulation of federal budget surpluses and deficits over time.
D) accumulation of payments for goods and services purchased by the federal government over time.

Question 51

How is the public debt calculated?

A) By adding up consumption, investment, government purchases, and net exports and then cumulating the annual totals over the years of the nation
B) By subtracting consumption and investment from government spending each year and then cumulating the annual totals over the years of the nation
C) By subtracting current government spending from current government tax revenues
D) By computing the difference between annual government tax revenues and annual government spending and cumulating the differences over the years of the nation

Question 52

To track the interest on the public debt over time and compare it to the productive capacity of the economy, it is best:

A) measured relative to the GDP.
B) compared to consumer spending.
C) examined relative to budget deficits.
D) measured relative to the Consumer Price Index.

Question 53

In 2015, the public debt was about:

A) $7.5 trillion.
B) $13.6 trillion.
C) $18.2 trillion.
D) $10.7 trillion.

Question 54

A person states that "a large public debt will bankrupt the U.S. government." An economist is likely to respond:

A) yes because a large public debt means that the U.S. government will not be able to meet its financial obligations.
B) yes because this public debt will reduce our ability to borrow the necessary funds from foreign nations.
C) no because the government can refinance the public debt by selling new bonds.
D) no because most of the public debt is held by foreign nations.

Question 55

One important consequence of the public debt in the United States is that:

A) income inequality is reduced.
B) incentives to work are increased.
C) it transfers a portion of real output to foreign nations.
D) there is greater saving at every level of disposable income.

Question 56

Which would be considered a real burden of the public debt on the domestic output of the United States? Public debt that is held by:

A) U.S. citizens.
B) domestic corporations.
C) foreign corporations.
D) the Federal Reserve System.

Question 57

As of 2014, the Social Security program (excluding Medicare) constitutes what percentage of U.S. GDP?

A) 8.5 percent.
B) less than one-half of 1 percent.
C) 11.4 percent.
D) 12.2 percent.

Question 58

What was the first year that Social Security revenues fell below Social Security retirement payments?

A) 2009.
B) 2014.
C) 2010.
D) As of 2015, Social Security revenues continue to exceed Social Security retirement payments.

Question 59

Based on recent estimates, in what year is the Social Security trust fund expected to be exhausted?

A) 2033.
B) It was exhausted in 2009.
C) 2086.
D) 2040.

Question 60

Which of the following is the primary reason for the current and impending shortfalls in Social Security funding?

A) Baby boomers moving into retirement age in large numbers.
B) Reductions in payroll taxes used to fund Social Security.
C) High unemployment rates among Millennial workers.
D) Massive increases in Social Security retirement benefits.

Question 61

The Council of Economic Advisors was established to give economic advice and assistance to the U.S. president.

Question 62

Discretionary fiscal policy is independent of Congress and based on the progressivity of the tax system.

Question 63

State and local governments' fiscal policies typically reinforce the fiscal policy of the federal government to counter recession and inflation.

Question 64

The concept of a "political business cycle" suggests that a possible cause of macroeconomic instability is due to the use of fiscal policy for political purposes.

Question 65

The public debt as a percent of GDP is lower in the United States than in many other industrial nations.

Question 66

Interest payments as a percent of GDP reflect the level of taxation (average tax rate) required to service the public debt.

Question 67

Half of the public debt is owned by foreign individuals and institutions.

Question 68

Over 95 percent of the total public debt is held by banks and private individuals.

Question 69

Most of the public debt can be considered a public credit.

Question 70

The financing of the public debt can increase interest rates and reduce private investment spending.

Question 71

If government spending that gives rise to a budget deficit is for public investment projects such as highways, this spending can increase the economy's future production capacity.

Question 72

When the public debt is held by foreigners, it is not a real burden on real domestic output.