Deck 13: Fiscal Policy

Question 1

Government spending must be financed by some combination of

A) taxing
B) borrowing
C) creating money
D) taxing and borrowing
E) taxing, borrowing, and creating money

Answer 1

taxing, borrowing, and creating money

Question 2

Figure 13.1

Refer to Figure 13.1. Assume that the economy is in equilibrium at point B. If government spending increases, causing AD₂ to shift to AD₃, the absolute change in real GDP would be

A) the same as the change resulting from an equal decrease in government spending from equilibrium point B.
B) greater than the change resulting from an equal decrease in government spending from equilibrium point B.
C) less than the change resulting from an equal decrease in government spending from equilibrium point B.
D) zero.
E) greater than if the economy had been in equilibrium at point A.

Answer 2

less than the change resulting from an equal decrease in government spending from equilibrium point B.

Question 3

Fiscal policy affects which two components of aggregate demand either directly or indirectly?

A) Government spending and consumption
B) Net exports and saving
C) Investment and net exports
D) Consumption and investment
E) Taxes and consumption

Answer 3

Government spending and consumption

Question 4

Suppose the equilibrium level of income exceeds the full employment level of income and there is high inflation. The government thus decides to implement a fiscal policy that will act to reduce national output and prices. This can be accomplished by

A) increasing government spending so that aggregate expenditures are increased.
B) raising taxes and government spending by the same amount so that aggregate supply is decreased and aggregate demand is increased.
C) decreasing government spending so that aggregate demand is reduced.
D) lowering average tax rates so that aggregate supply is increased.
E) increasing transfer payments so that aggregate expenditures decline.

Question 5

Figure 13.1

Refer to Figure 13.1. If the economy is in equilibrium at point C, then, other things being equal, an increase in government spending will

A) decrease the price level.
B) lower real GDP and leave the price level unchanged.
C) lower real GDP and increase the price level.
D) increase the price level and leave real GDP unchanged.
E) have no effect on real GDP or the price level.

Question 6

Fiscal policy refers to

A) the use of fines to penalize unfair business practices.
B) the purchase and sale of U.S. government securities to regulate the money supply.
C) the adjustment of the GDP for inflation.
D) a policy action by Congress to overrule unpopular budget cuts by the president.
E) the use of government spending and taxation to influence the level of economic growth and inflation.

Question 7

Which of the following is not a means to finance government spending?

A) Government subsidies
B) Personal income taxes
C) Money creation
D) Government debt
E) Capital gains taxes

Question 8

When the price level increases, the effect of an increase in government spending on real GDP is

A) negative.
B) understated.
C) close to infinity.
D) overstated.
E) an accurate indicator of the actual change in equilibrium income.

Question 9

Figure 13.1

Refer to Figure 13.1. A decrease in government spending would be most effective in reducing the price level if the economy is in equilibrium

A) when real GDP is less than Y₁.
B) when real GDP equals Y₁.
C) when real GDP is between Y₁ and Y₂.
D) when real GDP equals Y₂.
E) when real GDP equals Y₃.

Question 10

If the price level ____ as real GDP increases, the multiplier effects of any given change in aggregate demand are ____ than they would be if the price level remains constant.

A) decreases; smaller
B) rises; smaller
C) does not change; smaller
D) rises; larger
E) does not change; larger

Question 11

According to the Employment Act of 1946, the U.S. government is required to

A) correct negative externalities.
B) restrict the size of the U.S. budget deficit.
C) provide jobs to maintain full employment.
D) promote economic growth and stable prices.
E) place responsibility for achieving economic stability on the private sector.

Question 12

If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things being equal, an increase in government spending will

A) raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
B) lower real GDP by an amount equal to the spending increase and reduce inflation.
C) raise the price level and leave real GDP unchanged.
D) raise both real GDP and the price level by a multiple of the initial spending increase.
E) have no effect on real GDP or the price level because all private investment will be crowded out.

Question 13

Which of the following statements about taxation is true?

A) A tax cut would affect aggregate demand directly.
B) A tax cut would raise income and expenditures.
C) Cutting taxes by $20 is the same as increasing government spending by $20.
D) A change in taxes would not affect consumption.
E) An increase in taxes by $50 acts to lower aggregate demand by $50.

Question 14

Taxes affect aggregate demand

A) indirectly by changing consumption.
B) indirectly by changing investment spending.
C) indirectly by changing net exports.
D) directly by changing disposable income.
E) directly through government spending.

Question 15

Government spending equals the sum of these three components:

A) taxes, changes in federal reserves, and changes in net exports.
B) taxes, change in government debt, and change in government-issued money.
C) taxes, public expenditures, and private deductible expenditures.
D) public expenditures, private related deductions, and change in government debt.
E) public education, welfare, and social security expenditures.

Question 16

If the government wants to close a GDP gap, it should

A) raise government spending, thereby shifting the aggregate demand curve to the left.
B) lower taxes, thereby shifting the aggregate demand curve to the right.
C) lower government spending, thereby shifting the aggregate supply curve to the left.
D) raise taxes, thereby shifting the aggregate supply curve to the right.
E) raise both government spending and taxes by the same amount, thereby shifting the aggregate demand curve to the left.

Question 17

To close a GDP gap, government should

A) raise taxes and decrease government spending
B) decrease taxes and increase government spending
C) raise taxes and increase government spending
D) decrease taxes and decrease government spending
E) It cannot be determined without knowing more details, as every situation is different.

Question 18

The effect of an increase in government spending on real GDP is reduced if the

A) smaller the crowding-out effect.
B) larger the rate of inflation.
C) smaller the percentage of government spending financed by tax increases.
D) flatter the aggregate supply curve.
E) larger the government budget surplus.

Question 19

The misery index is defined as

A) potential GDP minus real GDP.
B) the sum of the unemployment rate and the inflation rate.
C) the difference between potential GDP and actual GDP.
D) the unemployment rate minus the inflation rate.
E) the inflation rate minus the unemployment rate.

Question 20

Which of the following statements is false?

A) An increase in government spending raises the equilibrium level of income by a multiple of the original spending increase.
B) Government spending is part of fiscal policy.
C) A decline in government spending has a contractionary effect on the economy.
D) Increasing government spending is a means to close a recessionary gap.
E) An increase in government spending shifts the aggregate demand curve downward by a fraction of the rise in government spending.

Question 21

When taxes go down, then output increases, causing the aggregate supply curve to shift to the right. Conversely, when taxes go up, then output decreases, causing the aggregate supply curve to shift to the left. This relationship is emphasized by

A) politicians
B) all economists.
C) Keynesian economists.
D) supply-side economists.
E) Milton Friedman.

Question 22

Once Congress receives the president's budget, the ____ studies it and committees modify it before funds are appropriated.

A) Congressional Budget Office
B) Congressional Committee on Presidential Affairs
C) Congressional Committee for Mutual Understanding
D) Office of Management and Budget
E) Accounting and Balancing Office

Question 23

The fiscal year for the U.S. government begins on

A) October 1 and ends on the following September 30.
B) January 1 and ends on December 31 of the same year.
C) April 16 and ends on the following April 15.
D) September 1 and ends the following August 31.
E) July 1 and ends on the following June 30.

Question 24

When federal expenditures grow faster than tax revenues, the government will experience a(n)

A) declining budget deficit.
B) declining national debt.
C) increasing budget surplus.
D) increasing budget deficit.
E) balanced budget.

Question 25

Expansionary fiscal policy can crowd out private-sector spending. This means all of the following except:

A) private-sector spending will decrease.
B) interest rates will increase.
C) the price of bonds will decrease.
D) consumption spending will remain the same.
E) investment spending will decrease.

Question 26

For the executive branch of government to approve their planned budgets, the different government agencies submit their budget requests to the OMB, or

A) Office of Merchant and Business.
B) Organization of Marketing and Business.
C) Organization of Management and Business.
D) Office of Management and Budget.
E) Organization of Merchant and Business.

Question 27

If the government increases spending by $100 billion but increases taxes by the same amount to balance the budget, what is the effect?

A) Equilibrium real GDP increases.
B) Equilibrium real GDP decreases by $200 billion.
C) Equilibrium real GDP is unchanged.
D) Equilibrium real GDP decreases by $100 billion.
E) The price level decreases.

Question 28

Figure 13.2

Refer to Figure 13.2. If you were a member of Congress who wanted to increase the amount of taxes collected, what would you recommend if the current tax rate was 80 percent?

A) Increase the tax rate to 100 percent.
B) Decrease the tax rate to 30 percent.
C) Decrease the tax rate to 70 percent.
D) Increase the tax rate to 90 percent.
E) Decrease the tax rate to 0 percent.

Question 29

The federal budget deficit as a percentage of GDP reached its peak

A) in the 1980s.
B) during the Vietnam War.
C) during the Great Depression.
D) in the 1940s.
E) during World War I.

Question 30

Crowding out refers to a(n)

A) increase in the consumption of domestic goods and services at the expense of imports.
B) increase in the consumption of imports at the expense of domestic goods and services.
C) decrease in exports because of higher government spending.
D) decrease in consumption or investment spending caused by increased government spending.
E) decrease in government spending caused by higher private-sector spending.

Question 31

Budget deficits tend to grow during recessions because real GDP growth is

A) positive, which increases tax receipts in relation to government expenditures.
B) negative, which reduces tax receipts in relation to government expenditures.
C) zero, which causes neither tax receipts nor government expenditures to grow.
D) negative, which reduces transfer payments in relation to tax receipts.
E) positive, which reduces both tax receipts and transfer payments.

Question 32

An automatic stabilizer is a(n)

A) change in government spending aimed at achieving a policy goal.
B) element of fiscal policy that automatically changes in value as real GDP changes.
C) element of monetary policy that automatically changes in value as real GDP changes.
D) deliberate change in taxation aimed at increasing real GDP.
E) decrease in tax rates as the economy moves into a recession.

Question 33

Fiscal policy in the United States is the result of a(n)

A) decree by the president.
B) act of Congress.
C) joint budget resolution by federal agencies.
D) yearly budget process involving both the president and Congress.
E) five-year budget plan overseen by the Office of Management and Budget.

Question 34

Discretionary fiscal policy is defined as the

A) deliberate change in tax laws and government spending to change equilibrium income.
B) deliberate manipulation of the money supply to expand the economy.
C) arbitrary fluctuation in tax laws and budget requirements.
D) automatic change in certain fiscal instruments when real GDP changes.
E) policy action taken by Congress to reduce the federal budget deficit.

Question 35

An increase in government spending of $100 that results in a decrease of private investment by $100 is an example of

A) a balanced-budget change in fiscal policy.
B) discretionary monetary policy and will increase equilibrium income by $100.
C) the crowding-out effect and will leave equilibrium income unchanged.
D) the circular flow model and will reduce equilibrium income by $100.
E) the crowding-out effect and will increase equilibrium income by $100.

Question 36

Economists define two components of fiscal policy:

A) obligatory fiscal policy and automatic fiscal actions.
B) discretionary fiscal policy and reflexive fiscal policy.
C) discretionary fiscal policy and automatic stabilizers.
D) automatic stabilizers and reflexive fiscal policy.
E) obligatory and reflexive fiscal policies.

Question 37

If fewer businesses offered new bonds to raise investment funds because government borrowing had increased interest rates, this would be an example of

A) supply-side economics.
B) overestimating the tax multiplier.
C) crowding out.
D) an increase in consumption.
E) the balanced-budget multiplier.

Question 38

The ratio of U.S. government spending as a percentage of GDP over time shows all of the following except:

A) before the Great Depression, federal spending was about 3% of GDP.
B) by the end of the Great Depression, federal spending was about 10% of GDP.
C) the ratio was highest during World War II, when federal spending was 45% of GDP.
D) today federal spending is about 25% of GDP.
E) None - all of these are true.

Question 39

Before the Depression, the federal government was involved mostly in:

A) social security and Medicare.
B) imports and exports.
C) the war on terror.
D) national defense and foreign policy.
E) education and social security.

Question 40

If crowding out exists, the expansionary effect of government spending will be

A) smaller than intended.
B) negative.
C) infinite.
D) larger than intended.
E) unchanged.

Question 41

Which of the following does not qualify as an automatic stabilizer?

A) Proportional income taxes
B) Food stamps
C) Welfare payments
D) Progressive income taxes
E) Unemployment compensation

Question 42

All the following are potential costs of the U.S. national debt except

A) lower inflation in the future.
B) higher interest rates that discourage private investment.
C) a higher international trade deficit.
D) foreign-held debt that must be repaid.
E) reduced domestic wealth in the future.

Question 43

In 2011, the U.S. national debt was approximately

A) $15 trillion.
B) $323 billion.
C) $3 trillion.
D) $384 million.
E) zero.

Question 44

Total unemployment compensation increases during recessions with no change in benefit rates, which is an example of

A) balanced-budget policy.
B) the crowding-out effect.
C) automatic stabilizers.
D) discretionary fiscal policy.
E) regressive taxation.

Question 45

Which of the following constitutes a transfer payment?

A) Income taxes
B) Corporate salaries
C) Fiscal spending
D) Dividend payments
E) Welfare benefits

Question 46

In 1965, foreign holdings of the U.S. national debt amounted to about ____ of the outstanding debt; today this figure has risen to about ____.

A) 1%; 10%
B) 1%; 20%
C) 5%; 20%
D) 5%; 30%
E) 5%; 50%

Question 47

Which of the following statements is false with regard to U.S. national debt?

A) In 2011, the debt was 102% of GDP.
B) During World War II, the debt was greater than GDP for five years.
C) The total debt more than doubled between 1980 and 1986.
D) In 1994, the debt as a percentage of GDP was approximately 70 percent.
E) None - all of these are true.

Question 48

If the government sells U.S. Treasury bonds to finance its budget deficit, one would expect

A) interest rates to rise.
B) domestic investment to rise.
C) tax rates to fall.
D) inflation to rise.
E) interest rates to fall.

Question 49

A major benefit of automatic stabilizers is that they

A) guarantee a balanced budget over the course of the business cycle.
B) have the tendency to reduce the national debt.
C) help increase recessionary gaps in the economy.
D) moderate the effect of fluctuations in the business cycle.
E) require legislative review by Congress before they can be implemented.

Question 50

A U.S. federal budget deficit that raises real interest rates would most likely

A) lead to a depreciation of the U.S. dollar on the foreign exchange market.
B) encourage foreign investment in U.S. securities.
C) lead to an increase in exports.
D) lead to an appreciation of other currencies relative to the U.S. dollar.
E) discourage imports of foreign goods.

Question 51

Which of the following statements is false?

A) Increased government borrowing raises interest rates.
B) Higher interest rates can depress investment.
C) Lower investment means fewer capital goods in the future.
D) Government deficits can have no effect on international trade.
E) Government deficits can lower the level of output in the economy.

Question 52

To maintain a given equilibrium, which of the following would not offset an increase in the fiscal deficit?

A) An increase in savings
B) An increase in imports
C) A decrease in exports
D) An increase in consumption
E) A decrease in investment

Question 53

Crowding out takes place when the government budget deficit

A) reduces saving.
B) increases net exports.
C) reduces domestic investment.
D) increases transfer payments.
E) increases tax rates.

Question 54

Interest payments on the national debt

A) account for over 50 percent of government expenditures.
B) have been falling since the 1970s.
C) have been rising since the 1950s.
D) have been reduced to zero by the Gramm-Rudman-Hollings Act.
E) are twice the size of the federal budget deficit.

Question 55

The national debt is the

A) current budget deficit.
B) product of past budget deficits.
C) product of past budget deficits plus the interest outstanding.
D) current budget deficit plus the interest outstanding.
E) stock of government bonds outstanding.

Question 56

The federal deficit is potentially bad due to all of the following except:

A) crowding out of investment.
B) larger trade deficits with the rest of the world.
C) greater interest costs of the debt.
D) greater unemployment.
E) None - all of these might result from federal deficit spending.

Question 57

A progressive tax is not a(n)

A) automatic stabilizer.
B) tax that is a flat dollar amount regardless of income.
C) tax whose rate rises as income rises.
D) tax that helps offset the effect of lower income on spending.
E) tax that changes automatically as income changes.

Question 58

If all U.S. government bonds are held by U.S. citizens, then

A) the bondholders earn no interest income.
B) there is no tax liability for funding the debt.
C) there is no net change in national wealth when the national debt changes.
D) the tax liability for funding the debt is not offset by the interest earnings of bondholders.
E) government bonds are worthless.

Question 59

The growth of the federal budget deficit is linked to all of the following except

A) international trade patterns.
B) the size of the national debt.
C) the unemployment rate.
D) the GDP gap.
E) the business cycle.

Question 60

Foreign holdings of U.S. national debt

A) have pushed U.S. interest rates higher than they would be without such foreign investment.
B) will eventually cause the U.S. economy to be controlled by foreigners.
C) are responsible for the decline in U.S. economic growth.
D) have accelerated the crowding-out effect of domestic investment.
E) have supported the expansion of productive capacity in the United States.

Question 61

Taxes on international trade are very important in developing countries because

A) developing countries import a lot of goods.
B) developing countries export a lot of goods.
C) developing countries both export and import a lot of goods.
D) they are easy to collect as goods must pass through customs inspection.
E) they are the only type of taxes collected.

Question 62

Which of the following constitutes a direct tax?

A) Personal income taxes
B) Sales taxes
C) Excise taxes
D) Trade tariffs
E) Value-added taxes

Question 63

A major source of tax revenue for developing countries is

A) personal income taxes.
B) social security taxes.
C) property taxes.
D) international trade taxes.
E) excise taxes.

Question 64

The misery index is defined as the inflation rate minus the unemployment rate.

Question 65

Personal income taxes are more important in industrial countries than in developing countries because

A) people are more willing to pay income tax in industrial countries.
B) taxes on businesses in industrial countries are difficult to collect.
C) developing countries have no system for collecting income taxes.
D) personal income taxes are hard to collect in agricultural countries.
E) the governments of developing countries rely solely on foreign aid for revenue.

Question 66

Which of the following would not be considered an indirect tax?

A) A value-added tax
B) A tax on exported wheat
C) A tax on imported automobiles
D) A tax on a computer manufacturer
E) A sales tax on cigarettes

Question 67

If Bill earns $100,000 a year and pays $20,000 in taxes, under a progressive tax, Mike, who earns $120,000 should pay

A) less than $20,000 in taxes
B) $20,000 in taxes
C) more than $20,000 in taxes.
D) $24,000 in taxes.
E) More than $24,000 in taxes.

Question 68

Which of the following is most likely to be a regressive tax?

A) U.S. personal income taxes
B) U.S. corporate income taxes
C) Sales taxes
D) Personal property taxes
E) Luxury taxes

Question 69

Assume that an economy has automatic stabilizers in place that include a progressive tax structure and a transfer payment system. In a period of high economic growth and high inflation, we would expect

A) tax revenues to fall and unemployment compensation to rise.
B) average tax rates and welfare payments to decline.
C) the national debt to become larger.
D) average tax rates and government revenues to rise.
E) government spending on social security benefits to rise.

Question 70

Under a progressive tax system,

A) the average tax rate increases with increases in real GDP.
B) the average tax rate remains constant with changes in real GDP.
C) the average tax rate falls with increases in real GDP.
D) government tax receipts increase when the economy is in a recession.
E) government tax receipts decrease when the economy is expanding.

Question 71

The U.S. federal government to obtains most of its revenue from

A) sales taxes.
B) personal income taxes.
C) value-added taxes.
D) tariffs on foreign imports.
E) excise taxes.

Question 72

If Bill earns $40,000 a year and pays $10,000 in taxes, and Mike earns $70,000 a year and pays $21,000 in taxes, we can conclude that this tax system is

A) regressive.
B) progressive.
C) proportional.
D) flat.
E) marginal.

Question 73

When we compare fiscal policies over time and across countries, we find that government spending as a fraction of GDP

A) is much larger in the United States than in western Europe.
B) has followed similar growth patterns in all industrial nations.
C) is a function of fluctuations in the business cycle.
D) has fallen in all industrial countries since the 1970s.
E) is a poor reflection of a country's economic progress.

Question 74

Fiscal policy is an important tool used by the government to attain the path of economic growth.

Question 75

A value-added tax is a(n)

A) indirect tax collected at each stage of production.
B) social security tax.
C) direct tax on individuals and firms.
D) income tax.
E) property tax.

Question 76

Which of the following statements is false?

A) VATs are attractive because people who evade income taxes will not escape the VAT.
B) A VAT is a regressive tax
C) Some countries rely entirely on a VAT for government revenue.
D) Many countries adopted VATs in the 1990s.
E) A VAT is an indirect tax imposed at each state of production.

Question 77

Which of the following statements is false?

A) industrial countries all have progressive federal income tax systems.
B) Fiscal policy and the role of government in the economy can be very different across countries.
C) Government has played an increasingly larger role in the major industrial countries over time.
D) In the 1990s, government spending began to grow faster than revenues, creating larger debts for national governments.
E) In some developing countries, government spending is a smaller percentage of GDP today than it was 20 years ago.

Question 78

What is the main reason that public-sector investment spending plays a larger role in developing countries than in industrial countries?

A) Most governments in developing countries are Communist.
B) Businesses of developing countries invest all their money abroad.
C) Hyperinflation prevents any private investment in developing countries.
D) There is a larger percentage of state-owned enterprises in developing countries.
E) Most developing countries suffer from large government deficits, which cause complete crowding out of private investment.

Question 79

Important differences between the typical developed country and the typical developing country include all of the following except:

A) developing countries have not shown the uniform growth in government spending found in industrial countries
B) state-owned enterprises account for a smaller percentage of economic activity in developing countries than they do in developed countries.
C) in general, developing countries rely more on government than the private sector to build schools, roads and hospitals, than do developed countries.
D) government plays a larger role in investment spending in the developed country.
E) most developing countries spend a small percentage of their budget on social services.

Question 80

When the government intentionally uses taxes and government spending as a means to influence the level of output, employment, and general prices in the economy, it is engaging in fiscal policy.