Deck 16: Fiscal Policy

Question 1

Which of the following is a government expenditure,but is not a government purchase?

A) The federal government buys a Humvee.
B) The federal government pays the salary of an FBI agent.
C) The federal government pays out an unemployment insurance claim.
D) The Federal government pays to support research on Aids.

Answer 1

The federal government pays out an unemployment insurance claim.

Question 2

Which of the following would be considered an active fiscal policy?

A) The Fed increases the money supply.
B) Tax incentives are offered to encourage the purchase of fuel efficient cars.
C) Spending on the war in Afghanistan is increased to promote homeland security.
D) A tax cut is designed to stimulate spending passed during a recession.

Answer 2

A tax cut is designed to stimulate spending passed during a recession.

Question 3

Social Security

A) has not been successful in reducing poverty among elderly Americans.
B) is a system whereby current retirees are paid from taxes collected from current workers.
C) has a greater number of workers per retiree today as compared to when it started.
D) currently pays retirees benefits equal to what they paid into the system.

Answer 3

is a system whereby current retirees are paid from taxes collected from current workers.

Question 4

Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act,which is an example of discretionary fiscal policy aimed at increasing

A) real GDP and employment.
B) tax revenues and the federal budget surplus.
C) disposable income and interest rates.
D) the money supply and money demand.

Question 5

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability,high rates of economic growth,and high employment.

A) taxes; interest rates
B) taxes; the money supply
C) interest rates; money supply
D) taxes; expenditures

Question 6

What is fiscal policy,and who is responsible for fiscal policy?

Question 7

Which of the following statements about the Social Security,Medicare,and Medicaid programs is true?

A) Spending on these three programs will rise from 9.7% of GDP currently to 10.2% of GDP by 2050.
B) Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.
C) Some economists have argued for decreasing taxes to help with these programs' funding problems.
D) Some economists have argued for increasing benefits to help with these programs' funding problems.

Question 8

Included in government expenditures are government purchases and transfer payments.

Question 9

As a percentage of GDP,federal expenditures ________ from 1950 to the early 1990s,________ from 1992 to 2001,and have ________ since 2001.

A) rose; fell; risen
B) fell; fell; risen
C) rose; rose; fallen
D) fell; rose; fallen

Question 10

What is the difference between federal purchases and federal expenditures?

Question 11

An increase in the money supply is a discretionary fiscal policy which will increase aggregate demand.

Question 12

Which of the following is the largest category of federal government expenditures?

A) defense spending
B) transfer payments
C) interest on the debt
D) grants to state and local governments

Question 13

Give an example of an automatic stabilizer.Explain how automatic stabilizers work in the case of recession.

Question 14

Active changes in tax and spending by government intended to smooth out the business cycle are called ________,and changes in taxes and spending that occur passively over the business cycle are called ________.

A) automatic stabilizers; discretionary fiscal policy
B) discretionary fiscal policy; automatic stabilizers
C) automatic stabilizers; monetary policy
D) discretionary fiscal policy; conscious fiscal policy

Question 15

Which of the following is an example of discretionary fiscal policy?

A) an increase in unemployment insurance payments during a recession
B) an increase in income tax receipts with rising income during an expansion
C) the tax cuts passed by Congress in 2001 to combat the recession
D) a decrease in food stamps issued during an expansion or boom

Question 16

________ and ________ are the largest sources of revenue collected by the federal government.

A) Individual income taxes; corporate income taxes
B) Individual income taxes; social insurance taxes
C) Corporate income taxes; excise and other taxes
D) Excise and other taxes; individual income taxes

Question 17

The fastest growing category of government expenditure is

A) grants to state and local governments.
B) defense spending.
C) transfer payments.
D) government purchases.

Question 18

The majority of dollars spent by government prior to the Great Depression was spending at the ________ level. In the post World War II period,two-thirds to three quarters of all dollars spent by government in the United States are spent at the ________ level.

A) federal; state and local
B) state and local; federal
C) state and local; state
D) local; state

Question 19

Prior to the 1930s,the majority of dollars spent by government was spent at the state and local levels.

Question 20

Forecasts by the Congressional Budget Office show spending on Social Security,Medicare,and Medicaid rising from 10.4 percent of GDP in 2010 to ________ percent of GDP in 2050,and by 2050 the federal government will be spending,as a fraction of GDP,________ on these three programs as it currently spends on all its programs.

A) 15.2 percent; more
B) 15.2 percent; half as much
C) 18.9 percent; more
D) 18.9 percent; half as much

Question 21

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

A) an increase in government purchases
B) an increase in the supply of money
C) an increase in individual income taxes
D) a decrease in transfer payments

Question 22

Expansionary fiscal policy is used to increase aggregate demand in an attempt to fight rising inflation.

Question 23

Which of the following is considered expansionary fiscal policy?

A) Congress decreases the income tax rate.
B) Congress increases defense spending.
C) Legislation increases a college tuition deduction from federal income taxes.
D) The Arizona legislature cuts highway spending to balance its budget.

Question 24

If the economy is growing beyond potential real GDP,which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.

Question 25

Tax increases on business income decrease aggregate demand by decreasing

A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.

Question 26

To combat a recession with discretionary fiscal policy,Congress and the president should

A) decrease government spending to balance the budget.
B) decrease taxes to increase consumer disposable income.
C) lower interest rates and increase investment by increasing the money supply.
D) raise taxes on interest and dividends, but not on personal income.

Question 27

Decreasing government spending ________ the price level and ________ equilibrium real GDP.

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

Question 28

The problem causing most recessions is too little

A) money (currency plus checking accounts).
B) spending.
C) unemployment.
D) taxes.

Question 29

Figure 27-1

Refer to Figure 27-1.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to

A) decrease the required reserve ratio.
B) sell government securities.
C) increase government expenditures.
D) decrease transfer payments.

Question 30

Figure 27-2

Refer to Figure 27-2.In the graph above,suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

A) a decrease in income taxes
B) a decrease in interest rates
C) a decrease in government purchases
D) an increase in the money supply

Question 31

Expansionary fiscal policy will

A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) not shift the aggregate demand curve.
D) shift the short-run aggregate supply curve to the left.

Question 32

Figure 27-3

Refer to Figure 27-3.In the graph above,suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

A) an increase in transfer payments
B) an increase in interest rates
C) an increase in the marginal income tax rate
D) an open market purchase of Treasury bills

Question 33

A decrease in individual income taxes ________ disposable income,which ________ consumption spending.

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

Question 34

Figure 27-1

Refer to Figure 27-1.In the graph above,if the economy is at point A,an appropriate fiscal policy by the Congress and the president would be to

A) lower the discount rate of interest.
B) execute an open market sale of government securities.
C) increase government transfer payments.
D) increase marginal income tax rates.

Question 35

An increase in government spending increases the supply of money in our economy.

Question 36

Identify each of the following as (i)part of an expansionary fiscal policy,(ii)part of a contractionary fiscal policy,or (iii)not part of fiscal policy.
a.The personal income tax rate is lowered.
b.Congress cuts spending on defense.
c.College students are allowed to deduct tuition costs from their federal income taxes.
d.The corporate income tax rate is lowered.
e.The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas.

Question 37

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

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

Question 38

How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy?

Question 39

Consider the following statement,"The Federal Reserve fights recessions by increasing the money supply so people will have more money to spend." What is wrong with the statement and how can it be corrected?

Question 40

Contractionary fiscal policy involves decreasing government purchases or increasing taxes.

Question 41

Table 27-3

Refer to Table 27-3.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014,which of the following will be higher than if the Congress and the president had taken no action?

A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate

Question 42

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

A) $200 billion.
B) less than $200 billion.
C) more than $200 billion.
D) None of the above are correct. This policy shifts the long-run aggregate supply curve.

Question 43

To complement actions by the Fed to reduce inflation,Congress and the President can cut spending and/or raise taxes.

Question 44

The government purchases multiplier is defined as

A)
B)
C)
D)

Question 45

Figure 27-6

Refer to Figure 27-6.Given that the economy has moved from A to B in the graph above,which of the following would the appropriate fiscal policy to achieve potential GDP?

A) increase taxes
B) increase government spending
C) decrease the money supply
D) increase interest rates

Question 46

Figure 27-4

Refer to Figure 27-4.Given that the economy has moved from A to B in the graph above,which of the following would be the appropriate fiscal policy to achieve potential GDP?

A) increase taxes
B) increase government spending
C) contractionary fiscal policy
D) decrease interest rates

Question 47

Figure 27-7

Refer to Figure 27-7.In the graph above,suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B.Which of the following policies could the Congress and the president use to move the economy to point C?

A) increase income taxes
B) increase government spending
C) buy Treasury bills
D) decrease the discount rate

Question 48

What are the key differences between how we illustrate a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

Question 49

Table 27-5

Refer to Table 27-5.The economy is in the state described by the table above.Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2,assuming that no policy is pursued.Then illustrate and explain the appropriate fiscal policy to use in this situation.Assume that the policy results in the economy producing potential GDP.

Question 50

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

A) induced; investment; autonomous
B) induced; consumption; autonomous
C) autonomous; consumption; induced
D) autonomous; investment; induced

Question 51

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

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

Question 52

Table 27-4

Refer to Table 27-4.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014,which of the following will be lower than if the Congress and the president had taken no action?

A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate

Question 53

Figure 27-8

Refer to Figure 27-8.If government purchases increase by $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph below,the difference in real GDP between point A and point B will be

A) $100 billion.
B) less than $100 billion.
C) more than $100 billion.
D) There is insufficient information given here to draw a conclusion.

Question 54

If policy makers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply,the appropriate fiscal policy response is to

A) increase taxes.
B) increase government spending.
C) use expansionary fiscal policy.
D) increase interest rates.

Question 55

Table 27-2

Refer to Table 27-2.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should

A) buy Treasury securities.
B) conduct expansionary fiscal policy.
C) decrease government purchases.
D) decrease the discount rate.

Question 56

To combat inflation,Congress and the president should

A) decrease government spending.
B) decrease taxes.
C) raise interest rates.
D) increase transfer payments.

Question 57

Table 27-1

Refer to Table 27-1.Consider the hypothetical information in the table above for potential real GDP,real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy.If the Congress and the president want to keep real GDP at its potential level in 2014,they should

A) decrease income taxes.
B) decrease government purchases.
C) decrease the money supply.
D) increase the level of interest rates.

Question 58

An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply.

Question 59

Figure 27-5

Refer to Figure 27-5.In the graph above,suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B.Which of the following policies could the Congress and the president use to move the economy to point C?

A) increase government purchases
B) decrease government purchases
C) increase income taxes
D) sell Treasury bills

Question 60

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce the president and the Congress to conduct contractionary fiscal policy. Briefly explain the condition of the economy and what the president and the Congress are attempting to do.

Question 61

The tax multiplier is calculated as "one minus the government purchases multiplier."

Question 62

Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.

Question 63

A tax rebate,which is expected to be offered in this and all future years,will

A) have a small positive effect on consumption and aggregate demand.
B) have no effect on consumption and aggregate demand.
C) will have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate.
D) increase aggregate supply and aggregate demand.

Question 64

Cutting taxes

A) will lower disposable income and lower spending.
B) will raise disposable income and lower spending.
C) will lower disposable income and raise spending.
D) will raise disposable income and raise spending.

Question 65

An equal increase in government purchases and taxes will cause

A) an increase in real GDP.
B) no change in real GDP.
C) an increase in the budget surplus.
D) a reduction in cyclically adjusted budget surplus.

Question 66

Figure 27-9

Refer to Figure 27-9.An increase in government purchases of $200 billion causes aggregate demand to shift ultimately from AD₁ to AD₂.Assuming a constant price level,the difference in real GDP between point A and point B will be ________ $200 billion.

A) equal to
B) less than
C) greater than
D) There is insufficient information given here to draw a conclusion.

Question 67

Suppose real GDP is $14 trillion and potential real GDP is $14.4 trillion.An increase in government purchases of $400 billion would cause real GDP to ________ potential real GDP (assuming a constant price level).

A) equal
B) be less than
C) be more than
D) There is insufficient information given here to draw a conclusion.

Question 68

The tax multiplier

A) is negative.
B) is larger in absolute value as compared to the government spending multiplier.
C) is a measure of how much taxes will fall when income is falling.
D) is always less than one.

Question 69

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending,and ________ the size of the multiplier effect.

A) decreasing; increasing
B) decreasing; decreasing
C) increasing; increasing
D) increasing; decreasing

Question 70

A permanent tax cut would likely ________ consumption spending ________ than would a tax rebate like the one issued in 2008.

A) increase; more
B) increase; less
C) decrease; more
D) decrease; less

Question 71

A tax rebate by the government would

A) increase your pretax income, but not your disposable income.
B) increase your disposable income, but not your pretax income.
C) decrease your pretax income, but not your disposable income.
D) decrease your disposable income, but not your pretax income.

Question 72

If the absolute value of the tax multiplier equals 1.6,real GDP is $13 trillion,and potential real GDP is $13.4 trillion,then taxes would need to be cut by ________ to restore the economy to potential real GDP.

A) $250 billion
B) $400 billion
C) $640 billion
D) None of the above are correct. Taxes should be increased in this case.

Question 73

Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to increase government purchases by

A) $500 billion.
B) less than $500 billion.
C) more than $500 billion.
D) None of the above are correct. Congress must act to decrease government purchases in this case.

Question 74

A one-time tax rebate,which is not expected to be extended in future years,will

A) have a small positive effect on consumption and aggregate demand.
B) have no effect on consumption and aggregate demand.
C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate.
D) increase aggregate supply and aggregate demand.

Question 75

Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to decrease taxes by

A) $500 billion.
B) less than $500 billion.
C) more than $500 billion.
D) None of the above are correct. Congress should raise taxes in this case.

Question 76

A government tax rebate of $1,000 would ________ your disposable income by ________.

A) increase; less than $1,000
B) increase; $1,000
C) decrease; less than $1,000
D) decrease; $1,000

Question 77

A change in tax rates

A) has a less complicated effect on GDP than does a tax cut of a fixed amount.
B) has a larger multiplier effect the smaller the tax rate.
C) will not affect disposable income.
D) will not affect the size of the multiplier.

Question 78

If Congress wanted to counteract the effects of a recession it could

A) increase tax rates.
B) increase taxes by a fixed amount.
C) increase government purchases.
D) decrease defense spending.

Question 79

If the government purchases multiplier equals 2,and real GDP is $14 trillion with potential real GDP $14.5 trillion,then government purchases would need to increase by ________ to restore the economy to potential real GDP.

A) $7.25 trillion
B) $1 trillion
C) $500 billion
D) $250 billion

Question 80

In the case of an upward-sloping aggregate supply curve,the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.