Question 1

The Federal budget deficit is calculated each year by:

Accepted Answer

A) subtracting government spending from government revenues. 
B) subtracting consumption and investment from government spending. 
C) adding up consumption, investment, government purchases, and net exports. 
D) adding up the difference between government revenues and spending over the years of the nation's existence.

Question 2

The net export effect works through international trade to:

Accepted Answer

A) increase the effectiveness of expansionary and contractionary fiscal policy. 
B) decrease the effectiveness of expansionary and contractionary fiscal policy. 
C) decrease the effectiveness of expansionary fiscal policy and increase the effectiveness of contractionary fiscal policy. 
D) increase the effectiveness of expansionary fiscal policy and decrease the effectiveness of contractionary fiscal policy.

Question 3

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:

Accepted Answer

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 4

The crowding-out effect suggests that:

Accepted Answer

A) increases in consumption are always at the expense of saving. 
B) increases in government spending will close a recessionary gap. 
C) increases in government spending may raise the interest rate and thereby reduce investment. 
D) high taxes reduce both consumption and saving.

Question 5

Payment of interest on the public debt will:

Accepted Answer

A) increase our current domestic standard of living. 
B) not have any effect on the distribution of income. 
C) probably decrease the income inequality. 
D) probably increase the income inequality.

Question 6

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:

Accepted Answer

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 7

(1) The composite index of leading indicators turns downward for three consecutive months; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Parliament; (4) The tax cut is passed by Parliament; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.Refer to the above information.The operational lag of fiscal policy is reflected in events:

Accepted Answer

A) 1 and 2. 
B) 2 and 3. 
C) 3 and 4. 
D) 4 and 5.

Question 8

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?

Accepted Answer

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 9

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:

Accepted Answer

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

Question 10

If the government increases its spending during recession to assist the economy, the funds for such expenditures must come from some source.Which of the following sources would be the most expansionary?

Accepted Answer

A) additional taxes on personal incomes 
B) creating new money 
C) borrowing from the public 
D) additional taxes upon corporate profits

Question 11

The current popular view about the fiscal policy is that:

Accepted Answer

A) it can "fine tune" the economy, but it cannot "push the economy" in a particular direction. 
B) it can both "fine tune" the economy and, "push the economy" in a particular direction. 
C) it can "push the economy" in a particular direction, but it cannot "fine tune" the economy. 
D) it can neither "fine tune" nor "push the economy" in a particular direction.

Question 12

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

Accepted Answer

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 13

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

Accepted Answer

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 14

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

Accepted Answer

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 15

A contractionary fiscal policy in Canada which reduces domestic interest rates is most likely to:

Accepted Answer

A) depreciate the international value of the dollar and increase Canadian net exports. 
B) depreciate the international value of the dollar and decrease Canadian net exports. 
C) appreciate the international value of the dollar and increase Canadian net exports. 
D) appreciate the international value of the dollar and decrease Canadian net exports.

Question 16

How is the public debt calculated?

Accepted Answer

A) by adding up consumption, investment, government purchases, and net exports and then cumulating the annual totals over the years of the nation 
B) by subtracting consumption and investment from government spending each year and then cumulating the annual totals over the years of the nation 
C) by subtracting current government spending from current government tax revenues 
D) by adding up the difference between annual government tax revenues and annual government spending and cumulating the differences over the years of the nation

Question 17

Crowding out is a decrease in private investment caused by:

Accepted Answer

A) a contractionary fiscal policy. 
B) an expansionary fiscal policy. 
C) a full-employment budget deficit. 
D) the political business cycle.

Question 18

If fiscal policy leads to higher interest rates, the dollar may appreciate and net exports fall.

Accepted Answer

A) True 
 B)False

Question 19

If the policy makers implement a tax cut as a discretionary fiscal policy to combat a recessionary gap, it may fail to achieve its objective if:

Accepted Answer

A) the households think of it as a permanent policy. 
B) the households think of it as a temporary policy. 
C) the households think of it as a 10 year program. 
D) the households think of it as a loss of revenue for the government.

Question 20

Refer to the above diagram where T is tax revenues and G is government expenditures.All figures are in billions of dollars.If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the cyclical deficit is:

Accepted Answer

A) $40 billion. 
B) $20 billion. 
C) zero. 
D) $60 billion.

Exam 13: Part B: Fiscal Policy, Deficits, Surpluses, and Debt