Deck 10: Fiscal Policy

Question 1

What effect would a cut in taxes combined with an increase in transfer payments have on AD?

A)It would decrease AD.
B)It would increase AD.
C)It would have an indeterminate effect on AD.
D)It would leave AD unchanged.

Answer 1

It would increase AD.

Question 2

When do budget surpluses exist?

A)when government spending equals its tax revenues
B)when expansionary fiscal policies increase real GDP and the price level
C)when government tax revenues exceed its spending
D)when government spending exceeds its tax revenues

Answer 2

when government tax revenues exceed its spending

Question 3

What type of tax is designed to take a larger percentage from high incomes as compared to lower incomes?

A)Regressive
B)Positive
C)Progressive
D)Negative

Answer 3

Progressive

Question 4

After income taxes,what is the next largest single source of revenue for the federal government?

A)social security contributions
B)tariff revenues
C)consumption taxes
D)federal property taxes

Question 5

What has the government traditionally used to influence the demand side of the economy?

A)spending only
B)taxing and spending
C)supply management
D)demand management

Question 6

What does expansionary fiscal policy consist of?

A)decreased government purchases and increased taxes
B)decreased government purchases and decreased taxes
C)increased government purchases and increased taxes
D)increased government purchases and decreased taxes

Question 7

What is the largest single component of federal expenditures?

A)foreign aid
B)defence spending
C)social services
D)interest on the national debt

Question 8

What effect would an increase in government purchases,combined with an increase in taxes,have on AD?

A)It would leave AD unchanged.
B)It would decrease AD.
C)It would have an indeterminate effect on AD.
D)It would increase AD.

Question 9

If government policy makers are worried about the inflationary potential of the economy,which of the following would NOT be a correct fiscal policy change?

A)reducing transfer payments
B)increasing consumption taxes
C)increasing the budget surplus
D)increasing government purchases of goods and services

Question 10

What action might the government take if it wanted to offset the effect of a fall in consumer confidence on AD?

A)decrease the budget deficit
B)decrease transfer payments
C)decrease government purchases
D)decrease taxes

Question 11

You are a member of Parliament when the economy is in a recession.If your goal is to achieve a fully employed labour force,which of the following fiscal policy scenarios should you follow?

A)Raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments.
B)Raise government purchases, reduce taxes, and/or increase transfer payments.
C)Decrease government purchases, increase taxes, and/or cut transfer payments.
D)Eliminate a federal budget deficit or add to a federal budget surplus.

Question 12

What does contractionary fiscal policy consist of?

A)increased government purchases and decreased taxes
B)decreased government purchases and increased taxes
C)decreased government purchases and decreased taxes
D)increased government purchases and increased taxes

Question 13

When are budget deficits created?

A)when interest on government debt is increasing
B)when government tax revenues exceeds its spending
C)when government spending equals its tax revenues
D)when government spending exceeds its tax revenues

Question 14

How does the government use fiscal policy to regulate aggregate demand?

A)by manipulating the energy department
B)by manipulating the money supply
C)by manipulating taxation and spending
D)by manipulating the treasury

Question 15

What effect would an increase in transfer payments combined with a decrease in government purchases have on AD?

A)It would have an indeterminate effect on AD.
B)It would increase AD.
C)It would leave AD unchanged.
D)It would decrease AD.

Question 16

What is the largest single source of revenue for the federal government?

A)consumption taxes
B)social security contributions
C)income taxes
D)tariff revenues

Question 17

How does a change in taxes primarily affect aggregate demand?

A)a tax change alters disposable income and consumption spending
B)a tax change alters exports and net exports
C)a tax change alters investment by an equal and opposite amount
D)a tax change alters government purchases by an equal amount

Question 18

What type of expenditures comprises the largest component of provincial and local government budgets?

A)health care
B)education
C)interest on outstanding debt
D)social services

Question 19

If the government wanted to move the economy out of a current recession,which of the following might be an appropriate policy action?

A)decreasing government purchases of goods and services
B)increasing transfer payments
C)increasing taxes
D)decreasing government debt

Question 20

What effect would an increase in taxes combined with a decrease in government purchases have on AD?

A)It would increase AD.
B)It would leave AD unchanged.
C)It would decrease AD.
D)It would have an indeterminate effect on AD.

Question 21

If net exports increase by $10 billion and the MPC to 0.6,what will the resulting increase in the consumption component of AD be?

A)$25 billion
B)$15 billion
C)$6 billion
D)$4 billion

Question 22

What type of tax takes a lower percentage of high incomes as compared to lower incomes?

A)Progressive
B)Regressive
C)Proportional
D)Negative

Question 23

Which of the following is an example of a regressive tax?

A)a tax on gasoline
B)a flat rate income tax
C)the current Canadian federal income tax
D)property taxes

Question 24

What type of taxation is the gasoline tax an example of?

A)progressive taxation
B)regressive taxation
C)necessary taxation
D)neutral taxation

Question 25

What type of taxes are the GST,PST,and HST examples of?

A)Regressive
B)Positive
C)Negative
D)Progressive

Question 26

If the marginal propensity to consume is 4/5,what is the multiplier?

A)1/5
B)1
C)5
D)20

Question 27

If the MPC is 0.8,what decrease in government purchases would be called for to achieve a $50 billion decrease in AD?

A)$10 billion
B)$40 billion
C)$50 billion
D)$62.5 billion

Question 28

What type of tax is the current Canadian income tax an example of?

A)a regressive tax
B)a negative tax
C)a positive tax
D)a progressive tax

Question 29

Which of the following is an example of a progressive tax?

A)a local property tax
B)a provincial sales tax
C)the federal income tax
D)a tax on alcohol

Question 30

If MPC is 0.8,what size effect would a $200 billion increase in government purchases have on the "first round" of induced added consumption?

A)$80 billion
B)$160 billion
C)$200 billion
D)$800 billion

Question 31

If the marginal propensity to consume is 2/3,what is the multiplier?

A)1.5
B)3
C)30
D)66

Question 32

What effect would a $10 billion decrease in government purchases have on AD?

A)It would decrease AD by $4 billion if MPC = 0.4.
B)It would increase AD by $50 billion if MPC = 0.8.
C)It would increase AD by $20 billion if MPC = 0.5.
D)It would decrease AD by $30 billion if MPC = 2/3.

Question 33

How is the multiplier calculated?

A)(1 - MPC) / 1
B)1 / (change in MPC)
C)1 / (1 - MPC)
D)1 / MPC

Question 34

If investment decreases by $20 billion and the MPC is 0.8,what will the resulting decrease in the consumption component of AD be?

A)$16 billion
B)$4 billion
C)$100 billion
D)$80 billion

Question 35

If the MPC is 0.8,what increase in government purchases would be called for to achieve a $50 billion increase in AD?

A)$10 billion
B)$40 billion
C)$50 billion
D)$62.5 billion

Question 36

For which group of citizens is a sales or excise tax often considered to be unfair?

A)No one in particular, because it is a proportional tax that treats everyone the same.
B)Upper-income people, because they have more income.
C)Lower-income groups, who pay a greater percentage of their income toward the tax than do the wealthy.
D)The middle class, because they comprise the largest demographic group in society.

Question 37

How do income and/or expenditures explain the multiplier effect?

A)the fact that income by one person are expenditures to another
B)the fact that income by one person is income to another
C)the fact that expenditures by one person are expenditures to another
D)the fact that expenditures by one person is income to another

Question 38

If government increases its purchases by $20 billion and the MPC is 0.9,what will the resulting increase in the consumption component of AD be?

A)$2 billion
B)$18 billion
C)$180 billion
D)$200 billion

Question 39

Which of the following is an example of a progressive tax?

A)an automobile emissions tax
B)the federal income tax
C)the harmonized sales tax
D)a gasoline tax

Question 40

What are the main components of spending that can cause changes in aggregate demand?

A)consumption, investment, government purchases, and net exports
B)investment, savings, replacement of depreciated equipment, and spending
C)consumption, savings, government purchases, and exports
D)consumption, investment, government purchases, and imports

Question 41

What will be the impact on AD and the budget surplus if there is initially a federal budget surplus and government purchases rise while taxes fall?

A)AD decreases and the budget surplus increases.
B)AD increases and the budget surplus decreases.
C)AD decreases and the budget surplus decreases.
D)AD increases and the budget surplus increases.

Question 42

If the government decides to spend an extra $5 billion on health care that they would otherwise have spent on road construction and the MPC is 0.75,what is the effect on AD?

A)It has no effect.
B)It increases by $5 billion.
C)It increases by $15 billion.
D)It increases by $20 billion.

Question 43

If MPC is 0.75,what size effect would a $40 billion decrease in government purchases have on the "first round" of induced added consumption?

A)$30 billion
B)$40 billion
C)$120 billion
D)$160 billion

Question 44

Which of the following circumstances will shift AD to the right,other things being equal?

A)when the government budget surplus decreases because transfer payments fell
B)when the government budget surplus increases because taxes rose
C)when the government budget surplus decreases because government purchases rose
D)when the government budget surplus increases because government purchases rose

Question 45

Suppose the federal government buys $10 million worth of automobiles.If the MPC is 0.80,what will be the impact on aggregate demand,other things being equal?

A)Aggregate demand will increase $8 million.
B)Aggregate demand will increase $10 million.
C)Aggregate demand will increase $12.5 million.
D)Aggregate demand will increase $50 million.

Question 46

What will be the impact on AD and the budget deficit if there is initially a federal budget deficit and government purchases and taxes both rise?

A)AD increases and the budget deficit decreases.
B)There is an indeterminate effect on both AD and the budget deficit.
C)AD decreases and the budget deficit increases.
D)AD increases and the budget deficit increases.

Question 47

Starting at $30 billion less than full employment,if MPC is 2/3,what impact would an increase in government purchases of $10 billion have on AD?

A)It would decrease AD by $15 billion.
B)It would decrease AD by $30 billion.
C)It would increase AD by $15 billion.
D)It would increase AD by $30 billion.

Question 48

If $10 billion of spending by the government results in a $40 billion increase in aggregate demand,what is the multiplier?

A)0.25
B)1
C)4
D)3

Question 49

What will be the impact on AD and budget deficit if there is initially a federal budget deficit,and government purchases and transfer payments both rise?

A)AD increases and the budget deficit decreases.
B)AD decreases and the budget deficit decreases.
C)AD decreases and the budget deficit increases.
D)AD increases and the budget deficit increases.

Question 50

Which of the following circumstances will shift AD to the right,other things being equal?

A)when the government budget deficit increases because transfer payments fell
B)when the government budget deficit increases because taxes rose
C)when the government budget deficit increases because GST revenue rose
D)when the government budget deficit increases because government purchases rose

Question 51

Starting at $30 billion less than full employment,if MPC is 2/3,what impact would a decrease in government purchases of $10 billion have on AD?

A)It would increase AD by $15 billion.
B)It would decrease AD by $30 billion.
C)It would decrease AD by $15 billion.
D)It would increase AD by $30 billion.

Question 52

What effect would a combination of an increase in investment and a decrease in imports have on AD?

A)It would have an indeterminate effect on AD.
B)It would decrease AD.
C)It would leave AD unchanged.
D)It would increase AD.

Question 53

What is the impact on disposable income and consumption when taxes are increased?

A)Disposable income increases, leading to a decrease in consumption.
B)Disposable income decreases, leading to a decrease in consumption.
C)Disposable income decreases, leading to an increase in consumption.
D)Disposable income increases, leading to an increase in consumption.

Question 54

What might the government do to offset the effect of a steep fall in net exports on the economy?

A)increase government purchases
B)increase taxes
C)decrease transfer payments
D)decrease government purchases

Question 55

In the short run,what impact can an expansionary fiscal policy have on the price level?

A)It can cause a rise in the price level.
B)It can cause a rise or a reduction in the price level, depending on the state of the economy.
C)It can cause the price level to remain constant. .
D)It can cause a reduction in the price level.

Question 56

Under what circumstances will the multiplier be smaller,other things being equal?

A)the larger the fraction of each dollar of disposable income spent on consumption
B)the larger the fraction of each dollar of disposable income that is spent on imports
C)the smaller the fraction of each dollar of disposable income that goes to saving
D)the smaller the fraction of each dollar earned that goes to taxes

Question 57

Which of the following circumstances will shift AD to the left,other things being equal?

A)when the government budget surplus increases because government purchases rose
B)when the government budget surplus increases because transfer payments rose
C)when the government budget surplus decreases because taxes rose
D)when the government budget surplus decreases because government purchases rose

Question 58

In the short run,what would a decrease in net taxes (taxes minus transfer payments)do?

A)decrease any budget deficit or increase any budget surplus
B)reduce unemployment
C)reduce consumption purchases
D)reduce the price level

Question 59

Which of the following best describes the impact of the MPC on AD?

A)the greater the MPC, the greater the change in government purchases required to achieve a given change in AD
B)the greater the MPC, the smaller the fraction of an increase in AD due to an increase in government purchases that is consumption
C)the smaller the MPC, the greater the fraction of an increase in AD due to an increase in government purchases that is consumption
D)the smaller the MPC, the greater the change in government purchases required to achieve a given change in AD

Question 60

Suppose the federal government buys $20 million worth of computers.If the MPC is 0.60,what will be the impact on aggregate demand,other things being equal?

A)Aggregate demand will increase $12 million.
B)Aggregate demand will increase $13.33 million.
C)Aggregate demand will increase $20 million.
D)Aggregate demand will increase $50 million.

Question 61

Under which of the following circumstances does an increase in a government budget deficit have a larger effect on AD?

A)the more sensitive investment is to a change in interest rates
B)the more money demand shifts as a result
C)the less money demand shifts as a result
D)the smaller the government expenditures exceed tax revenue

Question 62

Which of the following describes how the amount of taxes collected by the government is impacted by the state of the economy?

A)When the economy enters a boom tax, receipts automatically fall.
B)When the economy goes into a recession tax, receipts automatically rise.
C)When the economy goes into a depression, tax receipts automatically rise.
D)When the economy goes into a recession tax, receipts automatically fall.

Question 63

Figure 10-2

Refer to Figure 10-2.If the economy is currently at full-employment equilibrium and there is a decrease in the value of the Canadian dollar,what will the short run equilibrium be?

A)E3
B)E2
C)E1
D)E0

Question 64

In the long run,what effect will an increase in taxes have?

A)increase unemployment
B)increase SRAS
C)decrease the price level
D)decrease real output

Question 65

Figure 10-2

Refer to Figure 10-2.If the economy is currently at full-employment equilibrium and there is an increase in the value of the Canadian dollar,what will the short-run equilibrium be?

A)E3
B)E2
C)E1
D)E0

Question 66

Other things being equal,what effect will an expansionary fiscal policy tend to have?

A)It will decrease investment.
B)It will decrease consumption.
C)It will increase interest rates.
D)It will increase net exports.

Question 67

Figure 10-2

Refer to Figure 10-2.If the economy is currently at a full-employment equilibrium and there is an increase in tax revenue,what will the short-run equilibrium be?

A)E3
B)E2
C)E1
D)E0

Question 68

What impact will a contractionary fiscal policy,other things being equal,tend to have?

A)It will decrease net exports.
B)It will increase interest rates.
C)It will increase disposable income.
D)It will decrease investment.

Question 69

During a boom expansionary economy,public assistance payments and unemployment compensation payments automatically decrease,while income taxes automatically increase.Which of the following best describes the effect of these changes on aggregate demand?

A)Aggregate demand will be less than it was before the expansion.
B)Aggregate demand will be less than it would be without these automatic stabilizers.
C)Aggregate demand will be the same as it was before the expansion.
D)Aggregate demand will be more than it would be without these automatic stabilizers.

Question 70

Which if the following is the most important automatic stabilizer?

A)the unemployment compensation system
B)open market operations
C)the welfare system
D)the tax system

Question 71

What will be the impact on AD and the budget surplus if there is initially a federal budget surplus and taxes rise,while transfer payments fall?

A)AD increases and the budget surplus increases.
B)AD decreases and the budget surplus increases.
C)AD increases and the budget surplus decreases.
D)AD decreases and the budget surplus decreases.

Question 72

What will be the impact on AD and the budget deficit if there is initially a federal budget deficit and taxes rise,while transfer payments fall?

A)AD increases and the budget deficit increases.
B)AD decreases and the budget deficit increases.
C)AD increases and the budget deficit decreases.
D)AD decreases and the budget deficit decreases.

Question 73

Figure 10-2

Refer to Figure 10-2.If the economy is below full-employment real GDP,what will the new long-run equilibrium be if the government employs an expansionary fiscal policy?

A)E1 and RGDP₁
B)E2 and RGDP₁
C)E0 and RGDPNR
D)E2 and RGDPNR

Question 74

Figure 10-2

Refer to Figure 10-2.If the economy is above full-employment real GDP and a contractionary fiscal policy decreases aggregate demand from AD₁ to AD₀,what will the new short-run equilibrium be?

A)E0 and RGDPNR
B)E2 and RGDP₁
C)E1 and RGDP₁
D)E2 and RGDPNR

Question 75

What is the primary benefit of the automatic stabilizers?

A)They require legislative action, so there is a lag in the tool's response to fluctuations in the business cycle, and there is time to identify the spillover effects.
B)They act to keep the economy at the full employment output level.
C)They provide public assistance through legislative decision making.
D)They require no new legislative action, so there is no legislative lag before these tools respond to fluctuations in the business cycle.

Question 76

In the long run,what effect will a decrease in government purchases have?

A)decrease real output
B)shift LRAS to the left
C)increase unemployment
D)decrease the price level

Question 77

How did Canada's Economic Action Plan (2009)effect the AD/AS model?

A)It shifted the AS to the left.
B)It shifted the AD to the right.
C)It shifted the AD to the left.
D)It shifted the AS to the right.

Question 78

When the economy is at or near full employment,economists generally agree that the multiplier is close to what number?

A)0
B)3
C)7
D)10

Question 79

In a short run,which of the following would a decrease in transfer payments NOT do?

A)reduce unemployment
B)decrease any budget deficit or increase any budget surplus
C)reduce the price level
D)reduce consumption purchases

Question 80

During a recession,total welfare payments and employment insurance payments automatically increase,while income taxes automatically decrease.Which of the following best describes the effect of these changes on aggregate demand?

A)Aggregate demand will be the same as it was before the recession.
B)Aggregate demand will be greater than it was before the recession.
C)Aggregate demand will be more than it would be without these automatic stabilizers.
D)Aggregate demand will be less than it would be without these automatic stabilizers.