Deck 11: Fiscal Policy, Deficits, Surpluses, and Debt

Question 1

Fiscal policy refers to the:

A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.
C) altering of the interest rate to change aggregate demand.
D) fact that equal increases in government spending and taxation will be contractionary.

Answer 1

manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

Question 2

An economy is experiencing a high rate of inflation. The government wants to reduce GDP by $36 billion to reduce inflationary pressure. The MPC is .75. By how much should the government raise taxes to achieve its objective?

A) $6 billion
B) $9 billion
C) $12 billion
D) $16 billion

Answer 2

$12 billion

Question 3

In an economy, the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .75, then it could:

A) reduce taxes by $12 billion.
B) reduce taxes by $16 billion.
C) reduce government spending by $12 billion.
D) increase government spending by $18 billion.

Answer 3

reduce taxes by $16 billion.

Question 4

An expansionary fiscal policy is shown as a:

A) rightward shift in the economy's aggregate demand curve.
B) movement along an existing aggregate demand curve.
C) leftward shift in the economy's aggregate supply curve.
D) leftward shift in the economy's aggregate demand curve.

Question 5

A tax reduction of a specific amount will be more expansionary, the:

A) smaller is the economy's MPC.
B) larger is the economy's MPC.
C) smaller is the economy's multiplier.
D) less the economy's built-in stability.

Question 6

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

A) increasing government spending by $25 billion.
B) increasing government spending by $80 billion.
C) decreasing taxes by $25 billion.
D) decreasing taxes by $100 billion.

Question 7

"Discretionary" fiscal policy is so named because it:

A) is undertaken at the option of the nation's central bank.
B) occurs automatically as the nation's level of GDP changes.
C) involves specific changes in T and G undertaken expressly for stabilization purposes at the option of Parliament.
D) none of the above.

Question 8

Expansionary fiscal policy is so named because it:

A) involves an expansion of the nation's money supply.
B) necessarily expands the size of government.
C) is aimed at achieving greater price stability.
D) is designed to expand real GDP.

Question 9

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .9, then it could:

A) decrease taxes by $6 billion.
B) decrease taxes by $12 billion.
C) increase government spending by $6 billion.
D) increase government spending by $12 billion.

Question 10

Which of the following represents the most expansionary fiscal policy?

A) a $10 billion tax cut
B) a $10 billion increase in government spending
C) a $10 billion tax increase
D) a $10 billion decrease in government spending

Question 11

Fiscal policy is carried out primarily by:

A) the federal government.
B) provincial and local governments working together.
C) provincial governments alone.
D) local governments alone.

Question 12

If the government wishes to increase the level of real GDP, it might reduce:

A) taxes.
B) transfer payments.
C) the size of the budget deficit.
D) its purchases of goods and services.

Question 13

Assume the economy is in the midst of a severe recession. Which of the following policies would be consistent with discretionary fiscal policy?

A) a Parliamentary proposal to incur a federal surplus to be used for the retirement of public debt
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

Question 14

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the:

A) smaller is the economy's MPS.
B) larger is the economy's MPS.
C) smaller is the economy's MPC.
D) larger is the unemployment rate.

Question 15

An appropriate fiscal policy for a severe recession is:

A) a decrease in government spending.
B) a decrease in tax rates.
C) appreciation of the dollar.
D) an increase in interest rates.

Question 16

Discretionary fiscal policy refers to:

A) any change in government spending or taxes which destabilizes the economy.
B) the authority which Parliament has to change personal income tax rates.
C) changes in taxes and government expenditures made by Parliament to stabilize the economy.
D) the changes in taxes and transfers which occur as GDP changes.

Question 17

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is .4, then it could increase government spending by:

A) $10 billion.
B) $20 billion.
C) $31.25 billion.
D) $40.50 billion.

Question 18

Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP. It could:

A) reduce taxes by $160 billion.
B) increase government spending by $80 billion.
C) reduce taxes by $40 billion.
D) increase government spending by $40 billion.

Question 19

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

A) leftward shift in the aggregate demand curve.
B) rightward shift in the aggregate demand curve.
C) leftward shift in the aggregate supply curve.
D) change in the price level.

Question 20

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion at each price level by:

A) increasing government spending by $4 billion.
B) increasing government spending by $40 billion.
C) decreasing taxes by $4 billion.
D) increasing taxes by $4 billion.

Question 21

Which set of fiscal policies would tend to offset each other?

A) a decrease in government spending and taxes
B) a decrease in government spending and no change in taxes
C) an increase in government spending and a decrease in taxes
D) a decrease in government spending and an increase in taxes

Question 22

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy can be illustrated by a:

A) leftward shift in the aggregate demand curve.
B) rightward shift in the aggregate demand curve.
C) rightward shift in the aggregate supply curve.
D) movement along an existing aggregate supply curve.

Question 23

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3) government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with the goal of achieving price level stability?

A) increase government spending and taxes
B) decrease government spending and taxes
C) decrease government spending and increase taxes
D) increase government spending and decrease taxes

Question 24

In an economy, the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPS is .25, then it could:

A) increase taxes by $16 billion.
B) increase taxes by $24 billion.
C) decrease government spending by $10 billion.
D) decrease government spending by $16 billion.

Question 25

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion.
If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

A) increase government spending and taxes
B) decrease government spending and taxes
C) decrease government spending and increase taxes
D) increase government spending and decrease taxes

Question 26

In a certain year the aggregate demand at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:

A) encourage personal saving by increasing the interest rate on government bonds.
B) decrease government expenditures.
C) reduce tax rates and increase government spending.
D) discourage private investment by increasing corporate income taxes.

Question 27

A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the:

A) smaller is the economy's MPC.
B) flatter is the economy's aggregate supply curve.
C) smaller is the economy's MPS.
D) less the economy's built-in stability.

Question 28

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will:

A) shift the AD curve to the right.
B) increase the equilibrium GDP.
C) not affect the AD curve.
D) shift the AD curve to the left.

Question 29

In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPC is .75, then it could increase taxes by:

A) $6 billion.
B) $8 billion.
C) $10 billion.
D) $12 billion.

Question 30

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

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

Question 31

Countercyclical discretionary fiscal policy calls for:

A) surpluses during recessions and deficits during periods of demand-pull inflation.
B) deficits during recessions and surpluses during periods of demand-pull inflation.
C) surpluses during both recessions and periods of demand-pull inflation.
D) deficits during both recessions and periods of demand-pull inflation.

Question 32

Which of the following represents the most contractionary fiscal policy?

A) a $30 billion tax cut
B) a $30 billion increase in government spending
C) a $30 billion tax increase
D) a $30 billion decrease in government spending

Question 33

Discretionary fiscal policy will stabilize the economy most when:

A) deficits are incurred during recessions and surpluses during inflations.
B) the budget is balanced each year.
C) deficits are incurred during inflations and surpluses during recessions.
D) budget surpluses are continuously incurred.

Question 34

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion at each price level by:

A) reducing government expenditures by $125 billion.
B) reducing government expenditures by $20 billion.
C) increasing taxes by $50 billion.
D) increasing taxes by $250 billion.

Question 35

Which combination of fiscal policy actions would most likely be offsetting?

A) increase in taxes and government spending
B) decrease in taxes and increase in government spending
C) increase in taxes, but make no change in government spending
D) decrease in taxes, but make no change in government spending

Question 36

Which are contractionary fiscal policies?

A) increased taxation and increased government spending
B) increased taxation and decreased government spending
C) decreased taxation and no change in government spending
D) no change in taxation and increased government spending

Question 37

A contractionary fiscal policy is shown as a:

A) rightward shift in the economy's aggregate demand curve.
B) rightward shift in the economy's aggregate supply curve.
C) movement along an existing aggregate demand curve.
D) leftward shift in the economy's aggregate demand curve.

Question 38

Within the aggregate demand and aggregate supply framework, fiscal policy that emphasizes activist government policies to stabilize the economy would view cutting personal income taxes as primarily a shift:

A) right in the aggregate demand curve.
B) left in the aggregate demand curve.
C) right in the aggregate supply curve.
D) left in the aggregate supply curve.

Question 39

Contractionary fiscal policy is so named because it:

A) involves a contraction of the nation's money supply.
B) necessarily reduces the size of government.
C) is aimed at reducing aggregate demand and thus achieving price stability.
D) is expressly designed to contract real GDP.

Question 40

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation. It could:

A) increase taxes by $10 billion.
B) reduce government spending by $40 billion.
C) reduce government spending by $5 billion.
D) increase taxes by $20 billion.

Question 41

The effectiveness of the built-in or automatic stabilizers is limited because:

A) the stabilizers produce budget surpluses during recessions.
B) transfer payments and subsidies increase during inflation and decrease during recessions.
C) the offset which the stabilizers provide to a change in private spending is less than the change in private spending.
D) the stabilizers raise the general price level regardless of the phase of the business cycle.

Question 42

Built-in stabilizers:

A) intensify the business cycle.
B) reduce the size of the multiplier.
C) increase the government's deficit during a recession.
D) are a part of discretionary fiscal policy.

Question 43

Which of the following statements is correct?

A) Built-in stability only partially offsets fluctuations in economic activity.
B) Built-in stability works in halting inflation, but it cannot alleviate unemployment.
C) Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.
D) Built-in stability overcorrects for fluctuations in economic activity; for example, it may change a small expansion into a recession.

Question 44

If the economy is to have automatic stabilizers, when real GDP rises,:

A) tax revenues should fall.
B) tax revenues should rise.
C) government spending should rise.
D) government spending should fall.

Question 45

Which of the following best describes the built-in stabilizers as they function in Canada?

A) The size of the balanced-budget 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.

Question 46

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion at each price level by:

A) reducing government expenditures by $12 billion.
B) reducing government expenditures by $60 billion.
C) increasing taxes by $15 billion.
D) increasing taxes by $20 billion.

Question 47

Refer to the diagram below wherein T is tax revenues and G is government expenditures. All figures are in billions. In this economy:

A) tax revenues and government spending both vary directly with GDP.
B) tax revenues vary directly with GDP, but government spending is independent of GDP.
C) tax revenues and government spending both vary inversely with GDP.
D) government spending varies directly with GDP, but tax revenues are independent of GDP.

Question 48

Assume that aggregate demand in the economy is excessive, causing an inflationary gap. Which of the following would be most in accord with appropriate government fiscal policy?

A) an increase in federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new post office buildings
D) an increase in soil conservation subsidies to farmers

Question 49

The more progressive the tax system, the:

A) less is the built-in stability for the economy.
B) greater is the built-in stability for the economy.
C) less is the effect of crowding-out on the economy.
D) greater is the severity of business fluctuations on the economy.

Question 50

An appropriate fiscal policy for severe demand-pull inflation is:

A) an increase in government spending.
B) depreciation of the dollar.
C) a reduction in interest rates.
D) a tax rate increase.

Question 51

If government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this would be called a(n):

A) discretionary fiscal policy.
B) expansionary fiscal policy.
C) political business cycle.
D) nondiscretionary fiscal policy.

Question 52

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:

A) increase tax rates and reduce government spending.
B) discourage personal saving by reducing the interest rate on government bonds.
C) increase government expenditures.
D) encourage private investment by reducing corporate income taxes.

Question 53

A major advantage of the built-in or automatic stabilizers is that they:

A) simultaneously stabilize the economy and reduce the absolute size of the public debt.
B) automatically produce surpluses during recessions and deficits during inflations.
C) require no discretionary budgetary policy.
D) guarantee that the federal budget will be balanced over the course of the business cycle.

Question 54

Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?

A) increase taxes and government spending
B) decrease taxes and government spending
C) increase taxes and decrease government spending
D) decrease taxes and increase government spending

Question 55

"Built-in stability" means that:

A) an annually balanced budget will automatically offset the pro-cyclical tendencies created by state and local finance and thereby stabilizes the economy.
B) with given tax rates and expenditures policies a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline will result in a deficit or a lower budget surplus.
C) Parliament will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

Question 56

When government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this is an example of:

A) impounding.
B) built-in stability.
C) money creation.
D) the full-employment budget.

Question 57

Actions by the Federal government that decrease the progressiveness of the tax system:

A) decrease the amount of government spending.
B) increase the effects of automatic stabilizers.
C) decrease the effects of automatic stabilizers.
D) increase the amount of taxation.

Question 58

An economist who advocates discretionary fiscal policy would recommend:

A) tax cuts during recession and reductions in government spending during inflation.
B) tax increases during recession and tax cuts during inflation.
C) tax cuts during recession and tax increases during inflation.
D) increases in government spending during recession and tax increases during inflation.

Question 59

Due to automatic stabilizers, when income rises, government transfer spending:

A) increases and tax revenues decrease.
B) decreases and tax revenues increase.
C) and tax revenues decrease.
D) and tax revenues increase.

Question 60

With a regressive tax system, as the level of income increases in an economy, the average tax rate will:

A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease.

Question 61

The degree of built-in stability in the above economy could be increased by:

A) reducing government purchases so that the purchases line shifts downward but parallel to its present position.
B) changing the tax system so that the tax line is shifted downward but parallel to its present position.
C) changing the tax system so that the tax line has a greater slope.
D) altering the government expenditures line so that it has a positive slope.

Question 62

With a progressive tax system, as the level of income increases in an economy, the average tax rate will:

A) decrease.
B) increase.
C) remain the same.
D) either decrease, increase, or remain the same.

Question 63

Refer to the above diagram wherein T is tax revenues and G is government expenditures. All figures are in billions. The equilibrium level of GDP in this economy:

A) is $400.
B) is greater than $400.
C) is less than $400.
D) cannot be determined from the information given.

Question 64

Refer to the above diagram wherein T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the notion of:

A) regressive tax system.
B) built-in stability.
C) a balanced-budget.
D) discretionary fiscal policy.

Question 65

Refer to the above data. The 10 percent proportional tax on income would:

A) reduce the MPC from .6 to .54.
B) not affect the size of the MPC.
C) reduce the MPC from .6 to .5.
D) increase the MPC from .6 to .64.

Question 66

Which of the following is an example of an automatic stabilizer? As real GDP decreases, income tax revenues:

A) increase and transfer payments decrease.
B) decrease and transfer payments increase.
C) and transfer payments decrease.
D) and transfer payments increase.

Question 67

Refer to the above data. A 10 percent proportional tax on income would:

A) affect neither the size of the multiplier nor the stability of the economy.
B) increase the size of the multiplier and make the economy more stable.
C) increase the size of the multiplier and make the economy less stable.
D) reduce the size of the multiplier and make the economy more stable.

Question 68

Refer to the above diagram. Which tax system has the least built-in stability?

A) T₄
B) T₃
C) T₂
D) T₁

Question 69

Which is regarded as an automatic stabilizer in the economy?

A) interest rates
B) exchange rates
C) the inflation rate
D) the progressive income tax

Question 70

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system:

A) is regressive.
B) is proportional.
C) is progressive.
D) may be either proportional or progressive.

Question 71

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax:

A) enhances the economy's built-in stability.
B) reduces the economy's built-in stability.
C) neither increases nor decreases built-in stability.
D) increases the MPC and therefore increases the size of the multiplier.

Question 72

Refer to the above diagram wherein T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400:

A) there will be a budget deficit.
B) there will be a budget surplus.
C) the budget will be balanced.
D) the macroeconomy will be in equilibrium.

Question 73

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be:

A) Column A
B) Column B
C) Column C
D) Column D

Question 74

Refer to the above diagram. Which tax system has the most built-in stability?

A) T₄
B) T₃
C) T₂
D) T₁

Question 75

Refer to the above diagram wherein T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:

A) at all levels of GDP.
B) at any level of GDP above $400.
C) at any level of GDP below $400.
D) only when GDP is stable.

Question 76

Refer to the above diagram wherein T is tax revenues and G is government expenditures. All figures are in billions. The tax system of this economy is such that:

A) it is regressive.
B) it is progressive.
C) tax revenues equal 50 percent of GDP.
D) it tends to destabilize the economy.

Question 77

Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is:

A) .8 before taxes and .6 after taxes.
B) .8 both before and after taxes.
C) .6 before taxes and .8 after taxes.
D) .8 before taxes and .4 after taxes.

Question 78

In the above diagram, tax revenues vary:

A) directly with the level of GDP.
B) inversely with the level of GDP.
C) directly with the level of government spending.
D) inversely with the level of government spending.

Question 79

Refer to the above data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:

A) Column A
B) Column B
C) Column C
D) Column D

Question 80

Due to automatic stabilizers, when income decreases, government transfer spending:

A) increases and tax revenues decrease.
B) decreases and tax revenues increase.
C) and tax revenues decrease.
D) and tax revenues increase.