Deck 29: Fiscal Policy

Question 1

What are the main categories of the federal government outlays?

A)transfer payments, expenditures on goods and services, and debt interest
B)indirect taxes, farmers' subsidies, and debt interest
C)personal income taxes, expenditures on goods and services, and debt interest
D)investment income, debt interest and transfer payments
E)property taxes and sales taxes.

Answer 1

A

Question 2

If revenues exceed outlays, the government's budget balance is ________, and the government has a budget ________.

A)negative; deficit
B)positive; surplus
C)positive; deficit
D)negative; surplus
E)zero; deficit

Answer 2

B

Question 3

As a percentage of provincial GDP, provincial government outlays are highest in

A)Alberta.
B)Newfoundland and Labrador.
C)the Yukon Territory.
D)Nunavut.
E)Quebec.

Answer 3

D

Question 4

Fiscal policy is

A)the use of the federal budget to achieve macroeconomic objectives.
B)any policy by the Bank of Canada.
C)budgeting policy by aggregate households.
D)any attempt by the federal government or Bank of Canada to control inflation.
E)effective only when the federal government has a budget surplus.

Question 5

Government debt is

A)equal to revenues minus outlays.
B)always increasing.
C)a phenomena that occurs only during times of war.
D)the total amount of government borrowing.
E)the result of a rising price level.

Question 6

Canada's government debt

A)is smaller than the value of the public capital stock so Canada's debt has not financed public consumption expenditure.
B)is larger than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure.
C)equals the value of the public capital stock.
D)has risen every year since 1975.
E)is smaller than the value of the public capital stock so some of Canada's debt has financed public consumption expenditure.

Question 7

Outlays as a percentage of provincial GDP are the highest in ________, whereas the largest transfers from the federal government are made to ________.

A)Ontario; Northern Canada and the Atlantic provinces
B)British Columbia; Northern Canada and the Atlantic provinces
C)Alberta; Northern Canada and the Atlantic provinces
D)Northern Canada; Northern Canada and the Atlantic provinces
E)Northern Canada and the Atlantic provinces; Quebec

Question 8

Suppose the government starts with a debt of $0. Then in year 1, there is a deficit of $100 billion, in year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a deficit of $20 billion. What is government debt at the end of year 4?

A)$20 billion
B)$140 billion
C)$180 billion
D)somewhat greater than $220 billion, depending on the interest rate
E)somewhat greater than $140 billion, depending on the interest rate

Question 9

If outlays exceed revenues, the government's budget balance is ________, and the government has a budget ________.

A)negative; deficit
B)positive; surplus
C)positive; deficit
D)negative; surplus
E)zero; surplus

Question 10

Which of the following would not increase an existing budget deficit?

A)an increase in interest on the government debt
B)an increase in government expenditures on goods and services
C)an increase in government transfer payments
D)an increase in indirect taxes
E)a decrease in investment income

Question 11

The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal income taxes, $15 million in corporate income taxes, $5 million in indirect taxes, $2 million in investment income, $30 million in transfer payments, $12 million in government expenditure, and $8 million in debt interest. Ricardia has a government budget

A)surplus of $3 million.
B)surplus of $57 million.
C)surplus of $13 million.
D)deficit of $13 million.
E)deficit of $3 million.

Question 12

The category of federal government revenues that fluctuates the most is

A)investment income.
B)transfer payments.
C)personal income taxes.
D)debt interest.
E)indirect taxes.

Question 13

All of the following statements are true except

A)the three components of government outlays are transfer payments, expenditures on goods and services, and debt interest.
B)debt interest has been steadily increasing since 1960.
C)expenditures on goods and services have a downward trend.
D)outlays increased steadily from 1971 through 1985.
E)transfer payments decreased sharply during the 1990s.

Question 14

The main components of government revenues are

A)transfer payments, investment income, and indirect taxes.
B)personal income taxes, corporate income taxes, indirect taxes, and investment income.
C)debt interest, expenditures on goods and services, and income taxes.
D)corporate income taxes, indirect taxes, and transfer payments.
E)debt interest, corporate income taxes, and income taxes.

Question 15

The largest source of revenues for the federal government is

A)transfer payments.
B)expenditures on goods and services.
C)personal income taxes.
D)corporate income taxes.
E)indirect taxes such as the GST.

Question 16

Which of the following is not a source of government revenues?

A)personal income taxes
B)transfer payments
C)corporate income taxes
D)indirect taxes
E)investment income

Question 17

Which of the following is a government outlay?

A)personal income taxes
B)investment income
C)debt interest
D)indirect taxes
E)corporate income taxes

Question 18

Choose the statement that is incorrect.

A)The federal government debt was 5 percent of GDP in 1970.
B)The debt-to-GDP ratio increased slightly during the 2008-2009 recession.
C)The debt-to-GDP ratio increased from 1974 through 1997, and then began to decrease.
D)The government debt increases when the government has a budget deficit.
E)As a percentage of real GDP, the federal government debt was greater in 2014 than in 1970.

Question 19

All of the following statements are true except

A)total revenues have no strong trends.
B)revenues include corporate income taxes, personal income taxes; indirect taxes and investment income.
C)the main source of fluctuations in revenues is corporate income taxes.
D)indirect taxes decreased during the 2000s.
E)personal income taxes decreased during the 2000s.

Question 20

Prior to World War II, the purpose of the federal budget was to

A)stabilize the economy.
B)achieve macroeconomic objectives such as full employment and price level stability.
C)finance the business of government.
D)provide incentives to encourage investment.
E)oversee revenue equalization among the provinces.

Question 21

According to the Laffer curve, raising the tax rate

A)always increases the amount of tax revenue.
B)always decreases the amount of tax revenue.
C)does not change the amount of tax revenue.
D)might increase, decrease, or not change the amount of tax revenue.
E)has no effect on the amount of tax revenue.

Question 22

Consider all the effects on fiscal policy. A cut in the tax on capital income

A)shifts the AD curve rightward.
B)shifts the SAS curve rightward.
C)shifts the LAS curve rightward.
D)all of the above
E)only B and C

Question 23

An income tax cut that provides a greater incentive to work than an alternative tax cut will result in comparatively

A)higher long-run real GDP and a higher price level.
B)higher long-run real GDP and a lower price level.
C)the same level of long-run real GDP and price level.
D)the same level of long-run real GDP and a higher price level.
E)the same level of long-run real GDP and a lower price level.

Question 24

A tax cut on capital income

A)does not affect potential GDP because the interest rate affects aggregate expenditure only.
B)does not affect potential GDP because it has no impact on the supply of labour.
C)increases potential GDP because workers have greater incentives to work.
D)increases potential GDP because the supply of loanable funds increases.
E)increases potential GDP because households have more disposable income to spend.

Question 25

If the nominal interest rate is 11%, the inflation rate is 4% and the tax rate is 25%, what is the real after-tax interest rate?

A)-1.25 percent
B)4.25 percent
C)5.25 percent
D)8 percent
E)10 percent

Question 26

The difference between the before-tax and after-tax rates is the

A)tax plug.
B)deadweight gain.
C)tax wedge.
D)taxation penalty.
E)deadweight loss.

Question 27

Consider all the effects of fiscal policy. A cut in the income tax

A)shifts the AD curve rightward but does not shift either the LAS or SAS curve.
B)shifts the AD, SAS, and LAS curves rightward.
C)shifts the SAS curve rightward but does not shift either the AD or LAS curve.
D)shifts both the SAS and LAS curves rightward but does not shift the AD curve.
E)shifts the LAS curve rightward but does not shift either the AD or SAS curve.

Question 28

An increase in income taxes

A)does not affect potential GDP because potential GDP depends on technology only.
B)does not affect potential GDP as long as the economy's endowments of resources and the state of technology remain unchanged.
C)increases potential GDP because workers have to work longer hours to maintain the same standard of living before the tax increase.
D)decreases potential GDP because workers' incentives to work are weakened.
E)decreases potential GDP because real GDP decreases when households have less disposable income to spend.

Question 29

If we compare the United States to France, we see that potential GDP per person in France is ________ than that in the United States because the French tax wedge is ________ than the U.S. tax wedge.

A)greater; larger
B)greater; smaller
C)less; larger
D)less; smaller
E)none of the above

Question 30

The Laffer curve is the relationship between

A)government expenditure and potential GDP.
B)the tax rate and potential GDP.
C)tax revenue and potential GDP.
D)the tax rate and the amount of tax revenue.
E)government outlays and revenues.

Question 31

The Laffer curve shows that increasing ________ increases ________ when ________ low.

A)tax revenue; potential GDP; tax revenue is
B)the tax rate; tax revenue; the tax rate is
C)potential GDP; tax revenue; tax revenue is
D)government outlays; the budget deficit; government expenditure is
E)investment; potential GDP; the interest rate is

Question 32

At the end of 2011, the government of China's debt was ¥4,700 billion. (¥ is yuan, the currency of China). In 2012, the government spent ¥6,000 billion and ended the year with a debt of ¥5,300 billion. How much did the government receive in tax revenue in 2012?

A)¥5,400 billion
B)¥6,600 billion
C)¥600 billion
D)¥5,900 billion
E)¥5,300 billion

Question 33

Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. The real after-tax interest rate is

A)0.5 percent.
B)3.5 percent.
C)4.0 percent.
D)2.0 percent.
E)-0.5 percent.

Question 34

At the end of 2011, the government of France's debt was €1,126 billion. (€ is euro, the currency of France). In 2012, the government spent €1,067 billion and ended the year with a debt of €1,304 billion. How much did the government receive in tax revenue in 2012?

A)€1,245 billion
B)€889 billion
C)€178 billion
D)€1,125 billion
E)€1,482 billion

Question 35

An income tax ________ potential GDP by shifting the labour ________.

A)increases; demand curve rightward
B)decreases; demand curve rightward
C)increases; supply curve rightward
D)decreases; supply curve leftward
E)increases; supply curve and labour demand curve rightward

Question 36

Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. The real after-tax interest rate is

A)-0.5 percent.
B)3.5 percent.
C)3.0 percent.
D)4.0 percent.
E)-3.5 percent.

Question 37

The Laffer Curve has been criticized by mainstream economists because

A)there is no theoretical possibility of higher tax rates leading to lower tax revenues.
B)higher tax rates do not create negative incentive effects.
C)tax cuts are just spent, not saved as predicted by the theory.
D)savers look only at real interest rates, not nominal interest rates.
E)empirically, tax cuts have not led to higher tax revenues.

Question 38

The Federal Budget of 2013 shows

A)a government budget surplus.
B)a balanced budget.
C)a government budget deficit.
D)a decreasing government debt.
E)revenues greater than outlays.

Question 39

Consider all the effects of fiscal policy. An income tax cut

A)increases both real GDP and the price level.
B)increases real GDP but decreases the price level.
C)increases real GDP but leaves the price level unchanged.
D)increases real GDP and the price level may rise or fall.
E)does not change real GDP or the price level.

Question 40

If we compare Canada to France and the United Kingdom, Canada's tax wedge is ________ the French tax wedge and ________ the U.K. tax wedge.

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

Question 41

If the economy is in a recession, and the government has a budget deficit, then there

A)must be a structural deficit.
B)must be a structural surplus.
C)may be a structural deficit, but not a structural surplus.
D)may be a structural surplus, but not a structural deficit.
E)may be either a structural surplus or deficit.

Question 42

Increasing taxes on business and investment ________ short-run aggregate supply and ________ potential GDP.

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

Question 43

Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. The government budget ________ the supply of loanable funds, which ________ the real interest rate and ________ investment.

A)surplus increases; lowers; decreases
B)surplus decreases; raises; increases
C)surplus increases; lowers; increases
D)deficit decreases; raises; decreases
E)surplus increases; raises; decreases

Question 44

The structural deficit is the deficit

A)in a recession.
B)in an expansion.
C)that would occur at potential GDP.
D)caused by the business cycle.
E)that would occur at the trough of the business cycle.

Question 45

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What are autonomous taxes in Ricardia?

A)It depends on the level of real GDP.
B)0.1
C)$2.5 billion
D)$250 billion
E)$25 billion

Question 46

Expenditure on alternative energy and the nation's infrastructure ________ short-run aggregate supply and ________ potential GDP.

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

Question 47

An increase in the tax on capital income ________ the supply of loanable funds and ________ investment.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases
E)decreases the demand for loanable funds; decreases or increases

Question 48

Suppose that in China, investment is $400 billion, saving is $400 billion, tax revenues are $500 billion, exports are $300 billion, and imports are $200 billion. ________ in government expenditure or ________ in taxes will further increase China's budget ________, increase investment and speed economic growth.

A)A decrease; an increase; surplus
B)An increase; a decreases; deficit
C)An increase; an increase; surplus
D)A decrease; a decrease; deficit
E)A decrease; an increase; deficit

Question 49

The government increases the tax rate on labour income. At the equilibrium level of employment, the before-tax wage rate ________ and the after-tax wage rate ________.

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

Question 50

A tax on interest income

A)decreases the demand for loanable funds but does not change the real interest rate.
B)increases the demand for loanable funds and raises the real interest rate.
C)increases the supply of loanable funds and lowers the real interest rate.
D)decreases the supply of loanable funds and has no influence on the real interest rate.
E)has no effect on the demand for loanable funds.

Question 51

The government is proposing to increase the tax rate on labour income and asks you to report on the supply-side effects of such an action. According to the research of Edward C. Prescott, cross-country evidence for Canada, the United States, the United Kingdom, and France shows all of the following except

A)the greater the tax wedge, the smaller the level of employment and the smaller the potential GDP.
B)potential GDP per person in France is 14 percent below that of the United States (per person)and the entire difference can be attributed to the difference in the tax wedge in the two countries.
C)potential GDP per person in the United Kingdom is 41 percent below that of the United States (per person)and about a third of the difference arises from the different tax wedges.
D)between Canada, the United States, France, and the United Kingdom, the tax wedge is greatest in the United Kingdom, and the country with the smallest tax wedge has the smallest potential GDP.
E)potential GDP per person in Canada is 16 percent below that of the United States but this difference is due to different productivities.

Question 52

A tax on labour income

A)decreases the demand for labour but does not change the real wage rate.
B)increases the demand for labour and raises the real wage rate.
C)increases the supply of labour and lowers the real wage rate.
D)decreases the supply of labour and has no influence on the real wage rate.
E)has no effect on the demand for labour.

Question 53

If the economy is in an expansion, and the federal government is running a deficit, then a recession would automatically

A)decrease the deficit.
B)increase taxes.
C)increase government outlays.
D)increase the deficit.
E)both C and D

Question 54

Norland has the budget deficit of $15 billion. According to the government economists, Norland has a structural deficit of $3 billion. What is a cyclical deficit in Norland?

A)$18 billion
B)$15 billion
C)$10 billion
D)$12 billion
E)zero

Question 55

Everything else remaining the same, as the economy enters a recession,

A)tax revenues rise and interest payments on the debt rise.
B)tax revenues and transfer payments rise.
C)government outlays rise and tax revenues fall.
D)government outlays tend to fall and tax revenues fall.
E)interest payments on the debt rise and tax revenues fall.

Question 56

Lowering taxes on employment ________, which ________ the equilibrium quantity of labour.

A)increases the supply of labour and the demand for labour; increases
B)increases the demand for labour; increases
C)increases the supply of labour; increases
D)decreases the supply of labour and increases the demand for labour; decreases
E)decreases the demand for labour and increases the supply of labour; decreases

Question 57

Everything else remaining the same, as the economy enters an expansion,

A)tax revenues rise and transfer payments fall.
B)tax revenues and transfer payments fall.
C)tax revenues and transfer payments rise.
D)tax revenues fall and transfer payments remain constant.
E)transfer payments and interest on the debt rise.

Question 58

The cyclical deficit

A)is a persistent economic phenomenon.
B)occurs when the economy is at full employment.
C)arises purely because real GDP does not equal potential GDP.
D)is an accumulation of the government debt.
E)exceeds the structural surplus.

Question 59

A decrease in the tax on capital income ________ the real interest rate and ________ investment and economic growth.

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

Question 60

Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What is the real GDP when the government has a balanced budget?

A)$100
B)$250
C)$1,250 billion
D)$750 billion
E)$1,000 billion

Question 61

During a recession, revenues

A)and government outlays decrease.
B)decrease and government outlays increase.
C)increase and government outlays decrease.
D)and government outlays increase.
E)remain constant and government outlays increase.

Question 62

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If real GDP equals $550 billion, the budget is

A)in balance.
B)a surplus of $60 billion.
C)a surplus of $40 billion.
D)a deficit of $60 billion.
E)a deficit of $40 billion.

Question 63

Discretionary fiscal policy

A)requires action by Parliament.
B)is triggered by the state of the economy.
C)involves only a change in government outlays and no change in revenues.
D)involves only a change in personal income tax rates.
E)occurs during recessions but not during expansions.

Question 64

During an expansion, revenues

A)and government outlays decrease.
B)decrease and government outlays increase.
C)increase and government outlays decrease.
D)and government outlays increase.
E)remain constant and government outlays increase.

Question 65

Automatic fiscal policy

A)requires action by Parliament.
B)is triggered by the state of the economy.
C)involves only a change in government outlays and no change in revenues.
D)involves only a change in personal income tax rates.
E)occurs during recessions but not during expansions.

Question 66

If the economy is in a recession and the federal government is running a deficit, then an expansion would

A)automatically balance the budget.
B)automatically increase the deficit.
C)automatically decrease the deficit.
D)leave the deficit unchanged.
E)increase the deficit only if the interest rate rises.

Question 67

A structural deficit

A)is present only if real GDP is greater than potential.
B)exists even if real GDP equals potential.
C)equals the cyclical deficit plus the actual deficit.
D)is greater than a cyclical deficit.
E)occurs when the economy is in a recession.

Question 68

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. A discretionary fiscal restraint policy would be shown as

A)a movement from left to right along the revenues curve.
B)a movement from left to right along the outlays curve.
C)an upward shift of the revenues curve.
D)an upward shift of the outlays curve.
E)both A and C

Question 69

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If real GDP equals $550 billion, the structural deficit is

A)zero.
B)$60 billion.
C)a surplus of $60 billion.
D)a surplus of $40 billion.
E)unknown given the available information.

Question 70

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. An automatic increase in tax revenues would be shown as a

A)movement from left to right along the revenues curve.
B)movement from left to right along the outlays curve.
C)shift upwards in the revenues curve.
D)shift upwards in the the outlays curve.
E)both A and C

Question 71

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If potential GDP is $750 billion,

A)neither a structural surplus nor a structural deficit exists.
B)the structural deficit is $60 billion.
C)the structural deficit is $40 billion.
D)the structural surplus is $60 billion.
E)the structural surplus is $40 billion.

Question 72

Which one of the following happens automatically if the economy goes into a recession?

A)Government outlays increase and revenues do not change.
B)Revenues decrease and government outlays do not change.
C)The government budget deficit increases or the government budget surplus decreases.
D)The government budget deficit decreases.
E)Both government outlays and revenues increase, and the deficit stays the same.

Question 73

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. Automatic fiscal policy would be shown as a movement

A)from right to left along the revenues curve.
B)from left to right along the revenues curve.
C)from right to left along the outlays curve.
D)from left to right along the outlays curve.
E)all of the above

Question 74

Which of the following is an example of a fiscal policy designed to counter a recessionary gap?

A)increasing debt interest payments
B)increasing taxes
C)decreasing transfer payments
D)increasing transfer payments
E)decreasing government expenditures on goods and services

Question 75

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. Discretionary expansionary fiscal policy would be shown as

A)a movement from left to right along the revenues curve.
B)a movement from left to right along the outlays curve.
C)an upward shift of the revenues curve.
D)an upward shift of the outlays curve.
E)both A and C

Question 76

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If potential GDP is $750 billion, and actual real GDP is $650 billion, the cyclical deficit is

A)zero.
B)$60 billion.
C)$40 billion.
D)equal to the structural deficit.
E)$180 billion.

Question 77

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. Discretionary fiscal policy would be shown as a movement

A)from right to left along the revenues curve.
B)from left to right along the revenues curve.
C)from right to left along the outlays curve.
D)from left to right along the outlays curve.
E)none of the above

Question 78

A cyclical deficit occurs when

A)government outlays are greater than revenues.
B)government outlays are less than revenues.
C)there is a deficit due to the fact real GDP is greater than potential GDP.
D)there is a deficit due to the fact real GDP is less than potential GDP.
E)there is a deficit even when real GDP equals potential GDP.

Question 79

Figure 29.3.1
Use the figure below to answer the following questions.

Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. The budget is balanced when real GDP equals

A)$550 billion.
B)$600 billion.
C)$650 billion.
D)$700 billion.
E)$750 billion.

Question 80

Consider the economy of NoTax, where the government expenditure multiplier is 2.5. If the government desires to shift the AD curve rightward by $5 billion, the correct increase in government expenditure is

A)$2 billion.
B)$2.5 billion.
C)$3 billion.
D)$7.5 billion.
E)$8.33 billion.