Question 1

When are monetary and fiscal policies most effective?

Accepted Answer

A)   Both are more effective when they address inflation than unemployment.
B)   Both are more effective when they address unemployment than inflation.
C)   Fiscal is more effective in a liquidity trap, and monetary is more effective otherwise.
D)   Monetary is more effective in a liquidity trap, and fiscal is more effective otherwise. C

Question 2

Which of the following provides an example of "crowding out"?

Accepted Answer

A)   Increases in government purchases cause more government borrowing, which decreases the funds that are available for private investors to borrow in the loanable funds markets.
B)   Increases in the interest rate cause people to spend more.
C)   Increases in the money supply lead to higher spending, which crowds out unemployment.
D)   Decreases in taxes cause the government to borrow more, which reduces interest rates in the loanable funds markets. A

Question 3

What would supply-siders want the government to focus on as it designs macroeconomic policy?

Accepted Answer

A)   Provide countercyclical fiscal policies that minimize unemployment and inflation.
B)   Control short-run aggregate supply through discretionary monetary policies.
C)   Have the government supply more goods and services to the citizens of the country.
D)   Provide incentives for high levels of production and productivity through policies such as low marginal tax rates. D

Question 4

Monetary policy is less effective during:

Accepted Answer

A)   periods of inflation.
B)   a liquidity trap.
C)   periods of unemployment.
D)   a large government budget deficit.

Question 5

(Figure: Expansionary Fiscal Policy 0)  The figure shows expansionary fiscal policy. The economy begins in a recession at point

Accepted Answer

A)   decreases in government spending or lower taxes.
B)   increases in government spending or lower taxes.
C)   increases in government spending or increase taxes.
D)   decreases in government spending or increase taxes.

Question 6

Which of the following is NOT an example of discretionary spending in a government's budget?

Accepted Answer

A)   spending on school construction
B)   spending on government worker salaries
C)   spending on national parks
D)   spending on welfare program benefits

Question 7

The period of time to put a chosen policy into place and allow it to have its multiplied effect on an economy is referred to as the _____ time lag in addressing an economic problem through policy.

Accepted Answer

A)   implementation
B)   impact
C)   recognition
D)   existential

Question 8

During a liquidity trap:

Accepted Answer

A)   monetary and fiscal policies are equally effective.
B)   changes in taxes do not impact aggregate demand.
C)   changes in government spending do not impact aggregate demand.
D)   monetary policy is less effective.

Question 9

Which one of the following is NOT a reason that fiscal policy may fail to obtain its desired outcome?

Accepted Answer

A)   crowding out
B)   monetary offset
C)   leakages
D)   multiplier effect

Question 10

Another name for expansionary fiscal policy is:

Accepted Answer

A)   easy spending policy.
B)   loose fiscal policy.
C)   fiscal stimulus.
D)   cyclical growth stimulus.

Question 11

The multiplier for a change in taxes is equal to:

Accepted Answer

A)   Change in T / Change in GDP.
B)   Change in T × Change in GDP.
C)   Change in T × Change in government spending.
D)   Change in GDP / Change in T.

Question 12

(Figure: Expansionary Fiscal Policy A)  The figure shows expansionary fiscal policy. The economy begins in a recession at point R. An expansionary fiscal policy entails some combination of increases in government spending or lower taxes. This:

Accepted Answer

A)   increases aggregate demand and new taxes are established at point 2.
B)   decreases aggregate demand and a new equilibrium is established at point 2.
C)   increases aggregate demand and a new equilibrium is established at point 2.
D)   decreases aggregate demand and new taxes are established at point 2.

Question 13

Ongoing government programs and policies that are designed to adjust to changing economic conditions in a way that is countercyclical and do not require additional authorization from the legislature are called:

Accepted Answer

A)   countercyclical systems.
B)   automatic stabilizers.
C)   systematic adjustment programs.
D)   built-in adjustment systems.

Question 14

The Laffer curve implies that tax rates affect:

Accepted Answer

A)   government spending.
B)   the tax base.
C)   the money supply.
D)   neutrality.

Question 15

Which of the following is NOT an automatic stabilizer program in the United States?

Accepted Answer

A)   unemployment compensation
B)   progressive income taxes
C)   school construction
D)   housing subsidies

Question 16

The period of time during which data is collected and analyzed to determine whether an economic stability problem exists is referred to as the _____ time lag in addressing an economic problem through policy.

Accepted Answer

A)   implementation
B)   impact
C)   recognition
D)   existential

Question 17

On an aggregate supply and aggregate demand graph, if the short-run equilibrium is below full employment, which of the following fiscal policies could be used to move the economy to full employment?

Accepted Answer

A)   Decrease government spending to shift the short-run aggregate supply curve to the right.
B)   Increase government spending to shift the short-run aggregate supply curve to the left.
C)   Increase taxes to shift the aggregate demand curve to the left.
D)   Decrease taxes to shift the aggregate demand curve to the right.

Question 18

Which of the following is an example of a countercyclical policy?

Accepted Answer

A)   Government purchases are increased during a period of high unemployment.
B)   Taxes are increased during a period of high unemployment.
C)   Interest rates are increased during a period of high unemployment.
D)   The money supply is decreased during a period of high unemployment.

Question 19

Automatic stabilizers are policies that:

Accepted Answer

A)   respond to fluctuations in the economy without requiring elected government leaders to take any new actions.
B)   require employers to maintain employment levels regardless of economic conditions.
C)   keep government spending and taxes at a consistent, stable level to stabilize the economy.
D)   raise the taxes during recessions and lower them during inflation.

Question 20

(Figure: Moving an Economy Out of a Recession 0) The figure shows moving an economy out of a recession. Demand-side fiscal stimulus causes the aggregate demand curve to shift to the _____, causing _____ inflation and _____ output.

Accepted Answer

A)   right; higher; higher
B)   right; lower; higher
C)   right; lower; lower
D)   left; lower; higher

Exam 28: Fiscal Policy and the Business Cycle