Deck 12: Spending Others Money: Fiscal Policy, Deficits, and National Debt

Question 1

The size of the multiplier effect of government spending is larger when

A) saving is higher.
B) export spending is higher.
C) income taxes are lower.
D) investment spending is lower.
E) investment spending is higher.

Answer 1

income taxes are lower.

Question 2

If leakages out of the circular flow are 33 percent of additional income, what is the size of the multiplier effect?

A) 2
B) 2.5
C) 3
D) 4
E) 5

Answer 2

3

Question 3

The simple formula for calculating the size of the multiplier effect is

A) 1 + (% of leakages from additional income).
B) 1 - (% of leakages from additional income).
C) 1 / (% of leakages from additional income).
D) 1 × (% of leakages from additional income).
E) none of the above.

Answer 3

1 / (% of leakages from additional income).

Question 4

The size of the multiplier effect of government spending is smaller when

A) import spending is lower.
B) import spending is higher.
C) saving is lower.
D) export spending is higher.
E) income taxes are lower.

Question 5

Which government fiscal policy is a positive demand shock?

A) increasing taxes
B) decreasing transfer payments
C) decreasing government spending
D) increasing government spending
E) none of the above

Question 6

Which is a leakage out of the circular flow?

A) exports
B) business investment spending
C) transfer payments
D) personal savings
E) consumer spending

Question 7

If leakages out of the circular flow are 40 percent of additional income, what is the size of the multiplier effect?

A) 2
B) 2.5
C) 3
D) 4
E) 5

Question 8

If leakages out of the circular flow are 50 percent of additional income, what is the size of the multiplier effect?

A) 2
B) 2.5
C) 3
D) 4
E) 5

Question 9

The size of the multiplier effect of government spending is larger when

A) saving is lower.
B) export spending is higher.
C) income taxes are higher.
D) investment spending is lower.
E) import spending is higher.

Question 10

What decreases the size of the multiplier effect?

A) more leakages from the circular flow
B) fewer leakages from the circular flow
C) more injections into the circular flow
D) fewer injections into the circular flow
E) more politicians in Ottawa

Question 11

What increases the size of the multiplier effect?

A) more leakages from the circular flow
B) fewer leakages from the circular flow
C) more injections into the circular flow
D) fewer injections into the circular flow
E) fewer politicians in Ottawa

Question 12

Which is a leakage out of the circular flow?

A) exports
B) business investment spending
C) transfer payments
D) harmonized sales tax (HST)
E) consumer spending

Question 13

Which is an injection into the circular flow?

A) exports
B) income taxes
C) import spending
D) savings
E) consumer spending

Question 14

If leakages out of the circular flow are 25 percent of additional income, what is the size of the multiplier effect?

A) 2
B) 2.5
C) 3
D) 4
E) 5

Question 15

The size of the multiplier effect of government spending is smaller when

A) import spending is lower.
B) income taxes are higher.
C) saving is lower.
D) export spending is higher.
E) investment spending is higher.

Question 16

An example of fiscal policy is changing

A) the interest rate.
B) the money supply.
C) the tax rate.
D) the exchange rate.
E) all of the above.

Question 17

The goals of fiscal policy do not include

A) low inflation.
B) steady growth.
C) stable prices.
D) full employment.
E) political freedom.

Question 18

What decreases the size of the multiplier effect?

A) Consumers buy more imports.
B) Consumers save less and spend more.
C) Income tax rates decrease.
D) Businesses export more.
E) Businesses invest more.

Question 19

Which is an injection into the circular flow?

A) transfer payments
B) income taxes
C) import spending
D) savings
E) harmonized sales tax (HST)

Question 20

What decreases the size of the multiplier effect?

A) Consumers buy fewer imports.
B) Consumers save less and spend more.
C) Income tax rates decrease.
D) Consumers save more and spend less.
E) Businesses invest more.

Question 21

Which government fiscal policy is a negative demand shock?

A) increasing taxes
B) decreasing transfer payments
C) decreasing government spending
D) all of the above
E) none of the above

Question 22

Which government fiscal policy is a positive supply shock?

A) increasing taxes
B) decreasing transfer payments
C) decreasing government spending
D) increasing government spending
E) none of the above

Question 23

The size of the multiplier effect is larger when

A) leakages are smaller.
B) leakages are larger.
C) the economy is close to potential GDP.
D) interest rates are higher.
E) injections are smaller.

Question 24

The "Yes - Markets Self-Adjust" camp agrees with all of the following statements except which one?

A) Government spending is determined by political influence rather than need.
B) Private individuals should make smart choices about how to spend their money.
C) Reduced government spending is preferred to tax cuts for slowing the economy.
D) Tax cuts are less effective than government spending for speeding up the economy because savings can cause transmission breakdowns.
E) Government should keep its hands off of the economy wherever possible.

Question 25

The fiscal policy to counter an inflationary gap is a(n)

A) positive aggregate supply shock.
B) negative aggregate supply shock.
C) positive aggregate demand shock.
D) negative aggregate demand shock.
E) expansionary fiscal policy.

Question 26

The "No - Markets Fail Often" camp agrees with all of the following statements except which one?

A) Tax cuts are less effective than government spending for speeding up the economy because savings can cause transmission breakdowns.
B) Market failures create a need for hands-on government.
C) Democratically elected politicians are the right people to make choices about how to spend taxpayers' money.
D) Government spending is determined by political influence rather than need.
E) Tax increases are preferred to reduced government spending for slowing down the economy.

Question 27

When real GDP exceeds potential GDP, fiscal policy will

A) increase transfer payments.
B) cut taxes.
C) increase government spending.
D) increase taxes.
E) invest in public universities.

Question 28

Which government fiscal policy is a positive demand shock?

A) increasing taxes
B) decreasing transfer payments
C) decreasing government spending
D) all of the above
E) none of the above

Question 29

Fiscal policy is

A) the use of government spending and taxes to achieve macroeconomic outcomes.
B) any policy by the Bank of Canada.
C) budgeting policy by consumer households.
D) any policy by the government or Bank of Canada to control inflation.
E) risky due to long lags between changes in interest rates and the impact on real GDP.

Question 30

Which event has a multiplier effect and increases aggregate demand?

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

Question 31

The fiscal policy to counter a recessionary gap is a

A) positive aggregate supply shock.
B) negative aggregate supply shock.
C) positive aggregate demand shock.
D) negative aggregate demand shock.
E) contractionary fiscal policy.

Question 32

During a recessionary gap, government fiscal policy will

A) seek re-election.
B) decrease spending.
C) increase taxes.
D) decrease transfer payments.
E) increase spending.

Question 33

The "No - Markets Fail Often" camp favours ________ to accelerate the economy and ________ to slow down the economy.

A) increased government spending; tax cuts
B) tax cuts; tax increases
C) increased government spending; decreased government spending
D) tax cuts; decreased government spending
E) increased government spending; tax increases

Question 34

The estimated size of the multiplier effect for government spending is

A) almost zero if real GDP equals potential GDP.
B) smaller if real GDP is close to potential GDP.
C) larger if real GDP is far below potential GDP.
D) zero if real GDP is far above potential GDP
E) all of the above.

Question 35

The "Yes - Markets Self-Adjust" camp favours ________ to accelerate the economy and ________ to slow down the economy.

A) tax cuts; decreased government spending
B) increased government spending; decreased government spending
C) tax cuts; tax increases
D) increased government spending; tax increases
E) tax cuts; increased government spending

Question 36

Which government fiscal policy is a negative supply shock?

A) decreasing taxes
B) decreasing transfer payments
C) decreasing government spending
D) increasing government spending
E) none of the above

Question 37

Which government fiscal policy is a negative demand shock?

A) increasing taxes
B) increasing transfer payments
C) decreasing taxes
D) increasing government spending
E) none of the above

Question 38

Which statement illustrates the idea of the multiplier?

A) The new stadium will generate $100 million in spinoff spending.
B) Higher expected profits are leading to higher investment spending by business, and will lead to higher consumer spending.
C) The loss of government jobs will hurt the local retail industry.
D) Taking the grain elevator out of our small town will destroy 200 jobs.
E) All of the above.

Question 39

Which government fiscal policy is a positive demand shock?

A) decreasing taxes
B) increasing transfer payments
C) increasing government spending
D) all of the above
E) none of the above

Question 40

Which government fiscal policy is a negative demand shock?

A) decreasing taxes
B) increasing transfer payments
C) increasing government spending
D) all of the above
E) none of the above

Question 41

During a recessionary gap, government fiscal policy injects money into the economy.

Question 42

Tax increases decrease the size of the multiplier.

Question 43

Tax cuts are a fiscal policy to counter an inflationary gap by causing a negative demand shock.

Question 44

Export spending is a leakage.

Question 45

Leakages are spending that leaks out of the circular flow through government spending, business investment spending, and exports.

Question 46

The effect on real GDP of a $10 million tax cut is less than the effect of a $10 million increase in government spending because

A) consumers take some of the extra money from the tax cut and buy exports.
B) some people do not pay their taxes.
C) changes in government spending do not directly affect consumption.
D) tax rates are the same regardless of income levels.
E) consumers take some of the extra money from the tax cut and use it to save and buy imports.

Question 47

The size of the multiplier effect for tax and transfer changes is not as big as for government spending.

Question 48

Business investment spending is an injection.

Question 49

Fiscal policy works through aggregate supply.

Question 50

The size of the multiplier effect for government spending is not as big as for tax and transfer changes.

Question 51

Tax cuts are a fiscal policy to counter a recessionary gap by causing a positive demand shock.

Question 52

During an inflationary gap, it is a good strategy to inject spending into the economy.

Question 53

Economists who favour a hands-off approach prefer tax cuts over government spending to accelerate the economy.

Question 54

The effects of fiscal policy work through aggregate supply.

Question 55

Leakages are spending that leaks out of the circular flow through taxes, savings, and imports.

Question 56

A fiscal policy to counter a recessionary gap is

A) increasing interest payments on the national debt.
B) increasing taxes.
C) decreasing transfer payments.
D) increasing transfer payments.
E) decreasing government spending on products.

Question 57

Injections are spending in the circular flow that start with consumers.

Question 58

The size of the multiplier effect for tax and transfer changes ________ the size of the multiplier effect for government spending.

A) is smaller than
B) is larger than
C) is equal to
D) could be smaller, larger, or equal to
E) cannot be compared to

Question 59

Import spending is a leakage.

Question 60

The word fiscal comes from a Latin word meaning the public treasury.

Question 61

If leakages out of the circular flow are 25 percent of additional income, the size of the multiplier effect is 4.

Question 62

If aggregate demand does not change, aggregate supply policies for economic growth

A) create an inflationary gap.
B) create a recessionary gap.
C) increase potential GDP.
D) raise the price level.
E) fail to produce economic growth.

Question 63

Economists who favour a hands-on approach prefer government spending increases over tax cuts to stimulate the economy.

Question 64

J.M. Keynes would recommend government spending increases during a recessionary gap.

Question 65

Supply-side policies that promote savings for growth can work because consumers who save more

A) increase the supply of loanable funds.
B) spend less on imported goods and reduce leakages.
C) pay less in HST/GST consumption taxes.
D) are better prepared for retirement.
E) are happier.

Question 66

Government spending on post-secondary education

A) increases the quality of labour inputs.
B) increases the quantity of labour inputs.
C) decreases the quality of labour inputs.
D) decreases the quantity of labour inputs.
E) increases diversity in the workplace.

Question 67

If aggregate demand does not change, aggregate supply policies for economic growth

A) increase real GDP, increase potential GDP, and raise the price level.
B) increase real GDP, increase potential GDP, and lower the price level.
C) increase real GDP, do not change potential GDP, and decrease the price level.
D) increase real GDP, do not change potential GDP, and do not change the price level.
E) fail to produce economic growth.

Question 68

Which fiscal policy does not target aggregate supply?

A) tax incentives to stimulate savings
B) shifting taxes from income to consumption
C) shifting taxes from consumption to income
D) support for research and development
E) subsidizing education and training

Question 69

If leakages out of the circular flow are 25 percent of additional income, the size of the multiplier effect is 2.

Question 70

The "Yes - Markets Self-Adjust" and "No - Markets Fail Often" camps agree on a government role supporting basic research because

A) knowledge creation has positive externalities.
B) this encourages consumers to save more.
C) this leads to price stability.
D) people in school cannot be unemployed.
E) economists will benefit from the research.

Question 71

Supply-siders support lower tax rates because they believe that

A) tax revenues will rise.
B) incentives to save will increase.
C) more consumers will do research and development.
D) governments will spend more.
E) taxes have positive externalities.

Question 72

Fiscal policies for economic growth shift

A) short-run aggregate supply (SAS) rightward but long-run aggregate supply (LAS) does not change.
B) long-run aggregate supply (LAS) rightward but short-run aggregate supply (SAS) does not change.
C) both short-run aggregate supply (SAS) and long-run aggregate supply (LAS) rightward.
D) aggregate demand (AD) rightward.
E) long-run aggregate supply (LAS) rightward but short-run aggregate supply (SAS) leftward.

Question 73

Supply-siders believe people will respond to lower income tax rates by

A) working more hours, increasing total tax revenues.
B) working more hours, with constant total tax revenues.
C) working fewer hours, decreasing total tax revenues.
D) working fewer hours, increasing total tax revenues.
E) stopping work and stop paying taxes.

Question 74

If leakages out of the circular flow are 50 percent of additional income, the size of the multiplier effect is 2.

Question 75

Fiscal policies for economic growth

A) increase potential GDP.
B) shift long-run aggregate supply (LAS) rightward.
C) result in a falling price level.
D) increase the quantity and quality of inputs.
E) do all of the above.

Question 76

If leakages out of the circular flow are 40 percent of additional income, the size of the multiplier effect is 4.

Question 77

If leakages out of the circular flow are 40 percent of additional income, the size of the multiplier effect is 2.5.

Question 78

"Yes - Markets Self-Adjust" camp economists recommend government spending increases during a recessionary gap.

Question 79

When identifying inputs that expanding the circular flow and increases aggregate supply, economists do not include

A) government.
B) capital.
C) land.
D) resources.
E) entrepreneurship.

Question 80

If leakages out of the circular flow are 50 percent of additional income, the size of the multiplier effect is 4.