Deck 11: Fiscal Policy

Question 1

Which of the following statements is correct?

A)Government purchases and taxes both increase real output.
B)Government purchases and taxes both decrease real output.
C)Government purchases increase, but taxes decrease, real output.
D)Government purchases decrease, but taxes increase, real output.
E)Neither government purchases nor taxes affect real output.

Answer 1

C

Question 2

When equilibrium occurs at point a,the economy is exhibiting a(n):

A)recessionary gap of ab, which calls for expansionary fiscal policy
B)recessionary gap of ab, which calls for contractionary fiscal policy
C)inflationary gap of ab, which calls for expansionary fiscal policy
D)inflationary gap of ab, which calls for contractionary fiscal policy
E)state in which there is no recessionary gap or inflationary gap

Answer 2

A

Question 3

Automatic stabilizers operate in which of the following ways?

A)An annually balanced budget will automatically tend to offset the destabilizing effects created by provincial and territorial governments and, thereby, stabilizes the economy.
B)With given tax rates and government spending policies, a rise in GDP will tend to produce a budget surplus, while a decline will tend to result in a deficit.
C)Parliament will automatically change the tax structure and spending programs to correct upswings and downturns in business activity.
D)Government purchases and tax receipts automatically balance over the course of the business cycle, though they may be out of balance in any single year.
E)Tax rates are automatically increased during recessions and decreased during inflationary periods

Answer 3

B

Question 4

In a certain year,an economy's potential output is $280 billion,while its equilibrium real output is expected to be $300 billion.Under these conditions,the government should:

A)increase tax rates and reduce government purchases
B)discourage personal saving by reducing the interest rate on government bonds
C)increase government purchases
D)encourage private investment by reducing corporate income taxes
E)increase amounts spent on government transfer payments

Question 5

If Parliament adjusted our tax system so that the rate of taxation increased,the:

A)economy would become more inflation-prone
B)economy would tend to become less stable
C)stability of the economy would be unaffected
D)economy would tend to become more stable
E)the distribution of income would become more unequal

Question 6

Which of the following statements best describes automatic stabilizers as they function in Canada?

A)The size of the spending multiplier varies inversely with the level of GDP.
B)Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises.
C)Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP.
D)Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
E)The size of the spending multiplier varies directly with the level of GDP.

Question 7

Assume that the economy is operating below its potential output.Under these conditions,government fiscal policy should be directed toward a(n):

A)decrease in both government purchases and taxes
B)decrease in government purchases and/or tax increases
C)increase in government purchases and/or tax cuts
D)increase in both government purchases and taxes
E)change in neither government purchases nor taxes

Question 8

Fiscal policy refers to the:

A)manipulation of government purchases and taxes for the purpose of stabilizing real output, employment, and the price level
B)manipulation of government purchases and taxes for the purpose of achieving greater equality in the distribution of income
C)altering of the interest rate to change aggregate demand
D)fact that equal increases in government purchases and taxation will be contractionary
E)changing regulations that govern how businesses operate

Question 9

Fiscal policy that increases the budget deficit has the same impact upon equilibrium output as does a(n):

A)contractionary monetary policy
B)increase in saving
C)decrease in investment
D)increase in imports
E)decrease in imports

Question 10

The multiplier effect means that:

A)consumption is typically several times larger than withdrawals
B)an increase in consumption can result in a larger increase in government purchases
C)an increase in spending can cause aggregate demand to change by a larger amount
D)a small decline in MPC can cause aggregate demand to rise by several times that amount
E)an increase in consumption leads to a larger increase in investment

Question 11

The spending multiplier is calculated using the formula:

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

Question 12

Assume that the economy is in the midst of a severe recession.Which of the following policies would be appropriate?

A)a proposal to run a federal surplus
B)a reduction in agricultural subsidies and veterans' benefits
C)a postponement of a highway construction program
D)a reduction in federal tax rates on personal and corporate income
E)an increase in the federal Goods and Services Tax (GST)

Question 13

The marginal propensity to consume and the marginal propensity to withdraw are related as follows:

A)MPC - MPW = 1
B)MPC/MPW = 1
C)MPW/MPC = 1
D)MPW - MPC = 1
E)MPC + MPW = 1

Question 14

The marginal propensity to consume is defined as:

A)the ratio of change in consumption on both domestic and foreign items to the change in income
B)the change in consumption on domestic and foreign items multiplied by the change in income
C)the ratio of the change in consumption on domestic items to the change in income
D)the change in consumption on domestic items multiplied by the change in income
E)average consumption as a proportion of income

Question 15

When equilibrium occurs at point d,the economy is exhibiting a(n):

A)recessionary gap of cd, which calls for expansionary fiscal policy
B)recessionary gap of cd, which calls for contractionary fiscal policy
C)inflationary gap of cd, which calls for expansionary fiscal policy
D)inflationary gap of cd, which calls for contractionary fiscal policy
E)state in which there is no recessionary gap or inflationary gap

Question 16

A major advantage of automatic stabilizers is that they:

A)simultaneously stabilize the economy and tend to reduce the absolute size of the public debt
B)automatically produce surpluses during recessions and deficits during inflation
C)require no legislative action by Parliament to be made effective
D)guarantee that the federal budget will be balanced over the course of the business cycle
E)guarantee that the federal budget will be balanced each year

Question 17

An economy faces an inflationary gap.Which of the following is the appropriate government fiscal policy?

A)an increase in the federal Goods and Services Tax (GST)
B)an increase in the size of income tax exemptions for each dependent
C)the passage of legislation providing for the construction of 8000 new post office buildings
D)an increase in soil conservation subsidies to farmers
E)a reduction in the interest rate on bonds

Question 18

Economists are in general agreement that fiscal policy will stabilize the economy most when:

A)deficits are incurred during recessions and surpluses are incurred during booms
B)the budget is balanced each year
C)deficits are incurred during booms and surpluses are incurred during recessions
D)budget deficits are continually incurred
E)budget surpluses are continually incurred

Question 19

The effect of a contractionary fiscal policy upon the equilibrium level of real output is substantially the same as a(n):

A)decrease in saving
B)increase in exports
C)increase in consumption
D)increase in investment
E)increase in saving

Question 20

Fiscal policy refers to:

A)changes in government purchases or taxes that have the effect of destabilizing the economy
B)the authority that the Prime Minister has to change personal income tax rates
C)changes in taxes and government purchases made by legislation for the purpose of stabilizing the economy
D)the changes in taxes and transfers that occur as output changes
E)changes in the money supply and interest rates by the Bank of Canada

Question 21

In an economy with an MPW of 0.67,taxes are decreased,causing an initial $10 billion change in the consumption of domestic items.As a result,aggregate demand eventually shifts:

A)rightward by $10 billion
B)leftward by $10 billion
C)rightward by $30 billion
D)leftward by $15 billion
E)rightward by $15 billion

Question 22

The benefits of fiscal policy include its:

A)political visibility
B)short decision lag
C)short impact lag
D)short recognition lag
E)potential regional focus

Question 23

If the federal government attempts to eliminate a budget deficit during a depression,these efforts will:

A)shift the investment demand curve to the right
B)raise exports
C)contribute to inflation
D)reduce the severity of the depression
E)intensify the depression

Question 24

The change in government purchases which shifts aggregate demand,when multiplied by the spending multiplier,is shown by:

A)ab
B)de
C)ef
D)df
E)cd

Question 25

As a result of the shift in aggregate demand,equilibrium real output changes from:

A)ce to cf
B)cf to ab
C)cd to ab
D)cd to cf
E)ce to cd

Question 26

The practical significance of the spending multiplier is that it:

A)brings about an equality of injections and withdrawals
B)keeps inflation within tolerable limits
C)magnifies initial changes in spending into larger changes in real output
D)helps to stabilize the economy
E)minimizes the unemployment rate

Question 27

A decrease in taxes of a given amount will have a smaller impact upon the aggregate demand curve than will a rise in government purchases of the same amount because:

A)the MPC is smaller in the private sector than it is in the public sector
B)increases in government purchases always tend to reduce private investment
C)aggregate demand is not affected by tax cuts
D)some of the tax cut will not be spent
E)exports rise with an increase in government purchases

Question 28

Which of the following would be the most contractionary?

A)a $20 billion increase in taxes
B)$20 billion increases in both government purchases and taxes
C)$20 billion decreases in both government purchases and taxes
D)a $20 billion decrease in government purchases
E)a $20 billion decrease in taxes

Question 29

If the MPC is 0.4,the initial impact of an increase of $10 billion in government purchases will be to cause a(n):

A)$4 billion rise in the economy's output
B)$10 billion rise in the economy's output
C)extra $6 billion in withdrawals
D)extra $10 billion in withdrawals
E)extra $4 billion in injections

Question 30

Which of the following would be the most expansionary?

A)a $20 billion reduction in taxes
B)$20 billion increases in both government purchases and taxes
C)$20 billion decreases in both government purchases and taxes
D)a $20 billion increase in government purchases
E)a $20 billion increase in taxes

Question 31

An increase in taxes will have a greater effect on equilibrium output:

A)if the tax revenues are redistributed through transfer payments
B)the larger the MPW
C)the smaller the MPC
D)the larger the MPC
E)if the aggregate supply curve is vertical

Question 32

An increase in government purchases may:

A)decrease real output
B)shift the aggregate supply curve rightward
C)shift the aggregate demand curve leftward
D)reduce the equilibrium price level
E)increase real output and employment

Question 33

Before the shift of the aggregate demand curve from AD₀ to AD₁,the economy is facing a(n):

A)recessionary gap of ef
B)recessionary gap of de
C)inflationary gap of cd
D)inflationary gap of de
E)state where there is no recessionary gap or inflationary gap

Question 34

If government purchases are reduced by $1 billion and the economy's MPC is 0.4,then the aggregate demand curve eventually shifts:

A)leftward by $0.4 billion
B)leftward by $1 billion
C)rightward by $1.67 billion
D)rightward by $1 billion
E)leftward by $1.67 billion

Question 35

A reduction in taxes may:

A)increase saving
B)increase real output
C)reduce unemployment
D)increase consumption
E)increase saving, consumption and output, as well as reduce unemployment

Question 36

A $1 increase in government spending on goods and services will have a greater impact upon equilibrium GDP than will a $1 decline in taxes because:

A)government spending is more employment-intensive than is either consumption or investment spending
B)government spending increases the money supply and a tax reduction does not
C)a portion of a tax cut is withdrawn
D)taxes vary directly with income
E)taxes vary inversely with income

Question 37

The numerical value of the spending multiplier is smaller the:

A)larger the marginal propensity to consume
B)larger the marginal propensity to withdraw
C)greater the change in the price level that follows a spending change
D)greater the change in the interest rate in the economy
E)greater the change in government purchases in the economy

Question 38

Which of the following statements best describes the effect of an increase in aggregate demand?

A)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a fall in the equilibrium price level.
B)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a rise in the equilibrium price level.
C)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a fall in the equilibrium price level.
D)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a rise in the equilibrium price level.
E)The change in equilibrium real output is the same as the change in government purchases times the spending multiplier.

Question 39

The effect of an increase in personal tax rates is to:

A)decrease the dollar amounts of consumption and saving at each level of real output and to reduce the size of the spending multiplier
B)decrease the dollar amounts of consumption and saving at each level of real output, but not to change the size of the spending multiplier
C)decrease the dollar amounts of consumption and saving at each level of real output and increase the size of the spending multiplier
D)increase the dollar amounts of consumption and saving at each level of real output and to increase the size of the spending multiplier
E)increase the dollar amounts of consumption and saving at each level of real output, but not to change the size of the spending multiplier

Question 40

If government purchases increase by $20 billion and aggregate demand shifts rightward by $30 billion as a result,we can conclude that:

A)the spending multiplier is 2.00
B)the MPC for this economy is 0.33
C)unemployment is rising
D)the MPW for this economy is 0.33
E)the spending multiplier is 3.00

Question 41

Functional finance:

A)is designed to increase the MPC in the interest of greater macroeconomic stability
B)leads to annually balanced budgets
C)treats the government budget primarily as a means of stabilizing the economy
D)is defended by those economists who are most sceptical of fiscal policy's effectiveness
E)leads to cyclically balanced budgets

Question 42

The drawbacks of fiscal policy include its:

A)potential regional focus
B)direct impact on spending
C)political invisibility
D)relatively long lags
E)equal effect on all regions of the country

Question 43

In 2010,debt for all levels of government in Canada as a percentage of GDP was:

A)higher than the comparable percentages for the United States and the United Kingdom
B)higher than the comparable percentages for Japan and Italy
C)lower than the comparable percentages for the United States and the United Kingdom
D)lower than the comparable percentages for Japan and Italy
E)about the same as for Australia and Sweden

Question 44

In the late 2000s and early 2010s,Canada's public debt:

A)remained relatively constant in dollar terms, but declined as a percentage of Canadian GDP
B)fell in dollar terms and as a percentage of nominal GDP
C)rose in dollar terms but fell as a percentage of nominal GDP
D)rose in dollar terms but stayed relatively constant as a percentage of nominal GDP
E)rose in dollar terms and as a percentage of nominal GDP

Question 45

In a given year,the federal government's revenues are $315 billion,its expenditures are $300 billion and Canada's GDP is $1500 billion.As a result there is a budget:

A)surplus equal to 0.1 percent of GDP
B)deficit equal to 0.1 percent of GDP
C)deficit equal to 1 percent of GDP
D)surplus equal to 1 percent of GDP
E)deficit equal to 0.01 percent of GDP

Question 46

According to neoclassical economists before John Maynard Keynes:

A)both the demand and supply of labour depend on the nominal wage rate
B)the forces of demand and supply in the labour market will automatically eradicate involuntary unemployment
C)involuntary unemployment can be a long-run problem
D)while the demand for labour depends on the nominal wage rate, the supply of labour depends on the real wage rate
E)the demand for labour depends on the nominal wage rate but the supply of labour depends on the real wage rate

Question 47

Public debt charges:

A)are a relatively minor expenditure by the federal government
B)are always equal in size to the federal government's budget deficit
C)are the annual interest payments by the federal government on outstanding public debt
D)fell throughout the 1980s and early 1990s due to a reduction in real interest rates
E)fell in the early 2010s due to low real interest rates

Question 48

In Year X,the federal government's expenditures were $180 billion and its revenues were $200 billion.During this year:

A)public debt increased by $20 billion
B)there was a federal deficit of $20 billion
C)there was a federal surplus of $20 billion
D)the federal government was running a balanced budget
E)public debt equalled $20 billion

Question 49

The public debt:

A)refers to the debts of Canadian governments, businesses, and households
B)consists of the total debts of Canadian provincial and territorial governments
C)refers to the collective amount that Canadians owe to foreigners
D)consists of the accumulation of all past federal deficits minus any federal surpluses
E)refers to the portion of total Canadian government debt owed to foreigners

Question 50

If government adhered strictly to an annually balanced budget,then the government's budget would:

A)raise real output during recessions and lower it during booms
B)tend to destabilize the economy
C)have no impact upon real output and employment
D)tend to stabilize the economy
E)always cause inflation

Question 51

Which of the following statements is not correct?

A)Provincial and territorial deficits were lower in the early 2010s than they were in the early 2000s.
B)There is a tendency for the public debt to grow during recessions.
C)The public debt has usually increased during wartime.
D)About a fifth of all Canadian government debt is held by foreigners.
E)Public debt fell between the mid-1990s and mid-2000s.

Question 52

According to John Maynard Keynes:

A)Say's Law is correct, because total withdrawals and injections can be equal at any output
B)because of the workings of demand and supply in the labour market, involuntary unemployment is no more than a short-run problem
C)workers suffer from money illusion
D)interest rates, not output levels, automatically bring about a balance between total injections and withdrawals
E)the demand and supply of labour both depend on real wage rates