Deck 28: Fiscal Policy and the Business Cycle

Question 1

Changes in government spending and taxation that are aimed at influencing inflation and unemployment rates are called _____ policy.

A) neutrality
B) cyclical
C) monetary
D) fiscal

Answer 1

D

Question 2

Fiscal policy occurs when the government changes:

A) the money supply to influence government purchases and taxes.
B) taxes or government spending to influence inflation and unemployment.
C) regulations to make it harder or easier for companies to produce and sell products.
D) banking to make it easier or harder to save and invest.

Answer 2

B

Question 3

Another name for expansionary fiscal policy is:

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

Answer 3

C

Question 4

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

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 5

(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:

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 6

An increase in _____ would be a fiscal stimulus.

A) open market operations
B) money supply
C) government purchases
D) taxes

Question 7

The goal of expansionary fiscal policy is to:

A) increase aggregate demand to increase employment.
B) decrease aggregate demand to decrease inflation.
C) increase aggregate supply to decrease inflation.
D) decrease aggregate supply to increase employment.

Question 8

Which of the following fiscal policies would shift the aggregate demand curve to the left?

A) Taxes are decreased.
B) Government purchases are decreased.
C) The Federal Reserve raises the discount rate.
D) The Federal Reserve purchases bonds on the open market.

Question 9

Which of the following fiscal policies would shift the aggregate demand curve to the right?

A) Taxes are decreased.
B) Government purchases are decreased.
C) The Federal Reserve raises the discount rate.
D) The Federal Reserve sells bonds on the open market.

Question 10

Contractionary fiscal policy tends to be used _____ expansionary fiscal policy.

A) more often than
B) less often than
C) equally as often as
D) more often to address unemployment than

Question 11

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?

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 12

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

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

Question 13

A country wants to reduce its unemployment rate. How would fiscal policy traditionally be used to resolve unemployment?

A) Reduce government purchases.
B) Reduce taxes.
C) Increase the federal funds rate.
D) Sell bonds in the open market.

Question 14

If a countercyclical policy approach is used, a decrease in taxes might be used to reduce:

A) unemployment.
B) inflation.
C) the size of the private sector in the economy.
D) national output.

Question 15

Which of the following policy options would both be expansionary fiscal policy?

A) Increase taxes, and increase government purchases.
B) Increase taxes, and decrease government purchases.
C) Decrease taxes, and increase government purchases.
D) Decrease taxes, and decrease government purchases.

Question 16

Which of the following is the correct sequence of events by which fiscal policy impacts unemployment?

A) An increase in government spending causes an increase in aggregate demand, which leads to higher output with more jobs.
B) An increase in government spending causes an increase in short-run aggregate supply, which leads to higher output and more jobs.
C) A decrease in government spending causes an increase in short-run aggregate supply, which leads to higher output and more jobs.
D) An increase in taxes causes a decrease in aggregate demand, which leads to lower output and more jobs.

Question 17

According to economic theory, how does fiscal policy affect the output and price level in an economy?

A) The policy shifts the aggregate demand curve, which leads to new short-run equilibrium output and price levels.
B) The policy shifts the long-run aggregate supply curve, which leads to a new long-run equilibrium.
C) The policy shifts the short-run aggregate supply curve, which leads to new short-run equilibrium output and price levels.
D) The policy shifts the short-run aggregate supply curve, which leads to a new short-run equilibrium price level with no impact on output.

Question 18

Expansionary fiscal policy affects a country's budget balance by moving the budget toward a:

A) balance of zero.
B) surplus or bigger surplus.
C) deficit or smaller surplus.
D) bigger surplus or smaller deficit.

Question 19

Contractionary fiscal policy during a recession affects a country's budget balance by moving the budget:

A) toward a balance of zero.
B) toward a bigger deficit or a bigger surplus.
C) into a bigger deficit or smaller surplus.
D) into a bigger surplus or a smaller deficit.

Question 20

The total amount that a national government owes is the _____, and the amount by which a government's annual spending exceeds is annual tax revenue is its:

A) budget balance, debt burden.
B) budget deficit; national debt.
C) debt balance; budget burden.
D) national debt; budget deficit.

Question 21

In recent decades, how has the U.S. national debt typically compared to its annual budget balance?

A) The debt has been much larger than the budget balance.
B) The debt has been much smaller than the budget balance.
C) The debt has tended to be bigger than the budget balance during recessions and smaller during expansions.
D) The debt has tended to be smaller than the budget balance during recessions and bigger during expansions.

Question 22

An increase in a country's budget deficit (or a decrease in its surplus) is associated with the use of:

A) expansionary monetary policy.
B) contractionary monetary policy.
C) expansionary fiscal policy.
D) contractionary fiscal policy.

Question 23

Econia has an evenly balanced budget. Then its government chooses to use an expansionary fiscal policy to combat a recession. What impact would this policy have on Econia's budget balance?

A) It would remain evenly balanced.
B) It would begin to have a surplus.
C) It would begin to have a deficit.
D) The effect is not predictable.

Question 24

One of the implications of ongoing use of expansionary fiscal policy is that it would:

A) allow an unemployment rate of zero to be maintained.
B) lead net exports to be a smaller and smaller portion of overall economic activity.
C) allow the government to prevent crowding out.
D) prevent the government from always maintaining a balanced budget.

Question 25

When expansionary fiscal policy is used, the government's budget will:

A) move toward a deficit.
B) move toward a surplus.
C) be balanced.
D) run a surplus in the short term and a deficit in the long term.

Question 26

Contractionary fiscal policy affects a government's budget by tending to create:

A) deficits in the short run followed by budget surpluses in the long run.
B) a surplus or a smaller deficit.
C) a deficit or a smaller surplus.
D) a budget that is exactly balanced.

Question 27

Ongoing government programs that cause countercyclical changes in taxes and government spending during the business cycle without additional current approvals by the legislature are called:

A) neutral solutions.
B) built-in solutions.
C) integrated stabilizers.
D) automatic stabilizers.

Question 28

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

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

Question 29

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:

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

Question 30

An estimate of what the budget deficit would be if the economy was not in a recession and if automatic stabilizers were not in effect is known as the _____ budget deficit.

A) cyclically adjusted
B) stabilizer adjusted
C) recession-free
D) stabilized

Question 31

Deliberate changes in taxes or government spending that are undertaken to stabilize an economy are called _____ fiscal policy.

A) automatic
B) purpose-laden
C) discretionary
D) stabilizer-focused

Question 32

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

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

Question 33

In response to the Great Recession, the U.S. Congress passed _____ large discretionary fiscal policy laws to stimulate the economy.

A) one
B) two
C) three
D) four

Question 34

One year, the government of Econia chooses to spend an additional $20 million on worker salaries to build new playgrounds. The playground workers spend a significant part of their salaries on consumer goods. The vendors that they buy from then have higher profits and spending power. GDP eventually rises by $28 million, which is $8 million more than the increase in government spending. Economists call this phenomenon the _____ effect.

A) multiplier
B) government spending
C) countercyclical
D) enhanced stabilizer

Question 35

A fiscal multiplier effect occurs when:

A) the change in total spending due to a fiscal policy action has an impact on GDP that is larger than the change in government spending.
B) the change in total spending due to a fiscal policy action is larger than the resulting change in GDP.
C) total government spending rises more rapidly than GDP without specific intervention by policymakers.
D) a change in total spending due to a fiscal policy action is increased each year to have a progressively larger and larger impact on GDP.

Question 36

The multiplier for a change in government purchases is equal to:

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

Question 37

The multiplier for a change in taxes is equal to:

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 38

The fiscal multiplier for government spending is 2.1, and the multiplier for taxes is -1.7. The government increases its purchases by $7 million. After the multiplier effect, GDP will:

A) rise by $14.7 million.
B) rise by $11.9 million.
C) fall by $26.6 million.
D) fall by $2.8 million.

Question 39

The fiscal multiplier for government spending is 2.1, and the multiplier for taxes is -1.7. The government increases its taxes by $7 million. After the multiplier effect, GDP will:

A) rise by $14.7 million.
B) fall by $11.9 million.
C) rise by $26.6 million.
D) fall by $2.8 million.

Question 40

Estimates of the multiplier effect indicate that the multiplier is:

A) equal to 3.1.
B) is a negative number.
C) is between .1 and 2.5, depending on the situation, with most estimates less than 2.
D) is less than 3 when the economy is growing and greater than 3 when the economy is contracting.

Question 41

The multiplier effect of fiscal policy means that a change in government spending:

A) has a larger impact on output than the size of the change in spending.
B) leads to a change in the money supply that is a multiple of the spending change.
C) has a bigger impact on the budget balance than the size of the spending change.
D) has more impact on the number of jobs than on GDP.

Question 42

(Figure: Fiscal Stimulus) The figure shows fiscal stimulus with the multiplier effect. Increased government spending directly boosts aggregate demand, shifting the aggregate demand curve. The extra income earned producing government services then leads to _____ consumption, which further increases aggregate demand when the multiplier is _____.

A) lower; less than one
B) higher; less than one
C) lower; greater than one
D) higher; greater than one

Question 43

A leakage occurs in an economy when:

A) part of business revenue does not end up as income in the circular flow.
B) transfer payments grow during recessions in an economy.
C) the government ends up spending more on fiscal policy than it intended to spend.
D) part of income is not spent on the country's output but is used for savings, taxes, or imports.

Question 44

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

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.

Question 45

When used in connection with fiscal policy, the term "crowding out" refers to:

A) the ways that the policy effectively crowds out inflation and unemployment from the economy.
B) a decrease in government spending, which ends up "crowding out" or decreasing aggregate demand.
C) tradeoffs among different types of spending in the economy, which results in more government spending having a smaller impact on total spending.
D) the growth of output as an economy makes full use of its idle resources.

Question 46

Which of the following terms is used to describe an expansionary fiscal policy that has little impact on an economy because the necessary increase in government borrowing leads to a decrease in investment spending?

A) backlash offset
B) fiscal reversion
C) crowding out
D) multiplier effect

Question 47

According to the permanent income theory, households spend money based on:

A) a belief that their household income will never change.
B) a belief that there will always be income although it may vary some.
C) an expectation that the government will provide transfer payments if income ever stops.
D) their expected income over their lifetime and not based on current income.

Question 48

Which of the following provides an example of decisions that are consistent with the permanent income theory?

A) New retirees do not know that their retirement pensions provide a fixed income for life.
B) An increase in government spending during a recession causes a bigger deficit that year but is not a long-run increase in spending.
C) A one-year tax rebate increases disposable income, but households save most of the rebate.
D) Landlords set rent as a percentage of each renter's income.

Question 49

The idea that households spend each year based on their expected long-run income rather than their current income is known as the:

A) permanent income theory.
B) level spending effect.
C) New Keynesian contradiction.
D) crowding out effect.

Question 50

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

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

Question 51

A monetary offset of an expansionary fiscal policy occurs when:

A) there is a concurrent rise in unemployment.
B) contractionary monetary policy is implemented concurrently.
C) the money supply is raised to pay for the policy.
D) an increase in government purchases is paid for by extra borrowing.

Question 52

During 2013, the U.S. government used contractionary fiscal policy to reduce its budget deficit, and the Federal Reserve expanded the money supply. Economists refer to this type of policy combination as a:

A) counter-countercyclical policy.
B) neutralizing policy.
C) monetary offset.
D) neutralizing offset.

Question 53

Countercyclical policy will:

A) offset the size of the annual government budget deficits with increased income.
B) stabilize the size of the annual government budget deficits.
C) increase the size of the ups and downs in the business cycle.
D) reduce the size of the ups and downs in the business cycle.

Question 54

Which of the following is a procyclical policy?

A) Tax cuts are made during an economic expansion.
B) Tax cuts are made during a recession.
C) Government purchases are increased during a recession.
D) Government purchases are decreased during an expansion.

Question 55

Which of the following is a countercyclical policy?

A) Tax cuts are made during an economic expansion.
B) Tax cuts are made during a recession.
C) Government purchases are decreased during a recession.
D) Government purchases are increased during an expansion.

Question 56

A policy that is designed to move an economy in a direction that is the opposite of its direction in the business cycle is referred to as a _____ policy.

A) corrective
B) counterbalancing
C) pro-stability
D) countercyclical

Question 57

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

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 58

When government leaders choose a policy that moves an economy against the direction that it is naturally going in the business cycle, the leaders are using _____ policy.

A) an active opposition
B) an automatic offset
C) a countercyclical
D) a smoothing

Question 59

The effectiveness of fiscal policy is NOT affected by _____ lag.

A) an implementation
B) a countercyclical
C) an impact
D) a recognition

Question 60

The time period between the first drop in output and the realization that an economy is in a recession is referred to as the _____ lag.

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

Question 61

After policymakers determine that the unemployment rate is higher than desired, they debate for six months to decide which fiscal policy to use before making a policy decision. The time period of debate is referred to as _____ lag.

A) an implementation
B) a countercyclical
C) an impact
D) a recognition

Question 62

Government policymakers increase government spending on school construction. The number of jobs in the economy gradually expands over the next three years. The time period that it takes for the number of jobs to change is referred to as _____ lag.

A) an implementation
B) a countercyclical
C) an impact
D) a recognition

Question 63

One advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers:

A) do not have a long time lag problem.
B) do not affect the government budget balance.
C) have a much stronger impact on economic growth rates.
D) affect both employment and inflation rates rather than just inflation.

Question 64

After policymakers realize that a problem exists but before they make a decision, they explore possibilities during a period called the ______ time lag.

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

Question 65

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.

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

Question 66

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.

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

Question 67

Automatic stabilizers are policies that:

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 68

When an economy is at full-employment, the impact of expansionary fiscal policy is limited by the nation's _____ constraint.

A) budget
B) inflation
C) money
D) resource

Question 69

When an economy is at full employment, expansionary fiscal policies tend to have:

A) little or no impact on national output.
B) maximum impact on national output.
C) little or no impact on inflation.
D) maximum impact on deflation.

Question 70

Monetary policy is less effective during:

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

Question 71

During a liquidity trap, interest rates are _____, and monetary policy is _____ effective than fiscal policy.

A) high; more
B) high; less
C) near zero; more
D) near zero; less

Question 72

When are monetary and fiscal policies most effective?

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.

Question 73

During a liquidity trap:

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 74

Which of the following policies would a supply-sider be most likely to support during stagflation?

A) a countercyclical policy
B) low marginal tax rates that stimulate incentives for earning income
C) a fixed or constant rate of growth for the money supply
D) flexible wages, prices, and interest rates that stabilize economies

Question 75

Supply-siders focus on marginal tax rates because they:

A) recognize an the effect of tax rates on incentives to work, save and invest.
B) want maximum tax revenue to fund the maximum number of government programs.
C) do not believe that a change in government spending will impact the economy due to crowding out.
D) want government to increase as a share of economic activity.

Question 76

(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.

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

Question 77

(Figure: Moving an Economy Out of a Recession A) The figure shows moving an economy out of a recession. Supply-side policies offer policymakers an alternative approach to move out of a recession:

A) without generating inflation by decreasing the short-run aggregate supply.
B) without generating inflation by increasing the short-run aggregate supply.
C) by generating inflation and increasing the long-run aggregate supply.
D) by generating inflation and decreasing the long-run aggregate supply.

Question 78

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

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.

Question 79

Which of the following principles would be accepted by a supply-sider?

A) Aggregate demand determines national output.
B) Monetary policy is the best tool for influencing aggregate supply.
C) Government on national parks spending is the key to resolving recessions.
D) People produce less of whatever is taxed heavily.

Question 80

During a period of stagflation, which of the following policies would a supporter of supply-side policies NOT support?

A) Reduce marginal tax rates.
B) Encourage the development of new technology.
C) Increase government spending.
D) Encourage investments in capital.