Deck 7: Fiscal Policy

Question 1

Refer to the graph above to answer this question.What do both ab and fg represent?

A)An inflationary gap.
B)A recessionary gap.
C)A budget surplus.
D)A budget deficit.

Answer 1

A budget deficit.

Question 2

What has been the main purpose of fiscal policy,as used by most governments,since WWII?

A)To achieve the goal of full employment.
B)To achieve the goal of stable prices.
C)To achieve the twin goals of full employment and a viable balance of payments.
D)To achieve the twin goals of stable prices and a viable balance of payments.
E)To achieve the twin goals of full employment and stable prices.

Answer 2

To achieve the twin goals of full employment and stable prices.

Question 3

What is counter-cyclical fiscal policy?

A)Government taxation policy aimed at a balanced budget.
B)Government spending and taxation policy aimed at a balanced budget.
C)Deliberate adjustments in the level of government spending and taxation in order to close recessionary or inflationary gaps.
D)Deliberate adjustments in the level of government spending and taxation in order to ensure equilibrium GDP.

Answer 3

Deliberate adjustments in the level of government spending and taxation in order to close recessionary or inflationary gaps.

Question 4

Suppose that the government's total tax receipts are $130,government spending on goods and services is $100 and transfer payments are $40.What are net tax revenues?

A)-$10.
B)+$30.
C)+$70.
D)+$90.

Question 5

All of the following,except one,are outlays categories in the federal government's budget plan.Which is the exception?

A)Transfers to persons.
B)International debt charges.
C)Public debt charges.
D)Spending grants to other levels of government.
E)Direct program spending.

Question 6

Refer to the graph above to answer this question.What do both de and ij represent?

A)An inflationary gap.
B)A recessionary gap.
C)A budget surplus.
D)A budget deficit.

Question 7

Refer to the graph to answer this question.Which of the following is verified by the graph?

A)That a budget surplus exists if government spending is G₁ and real GDP is Y₁.
B)That a budget deficit exists if government spending is G₂ and real GDP is Y₁.
C)The reduction in government spending from G₁ to G₂ would produce real GDP equilibrium at Y₁.
D)If government spending was reduced from G₁ to G₂ the budget surplus at Y2 would disappear if real GDP remained at Y₃.
E)That the budget is balanced if government spending is G₁ and real GDP is Y₃.

Question 8

What is government spending on goods and services in excess of net tax revenue called?

A)Monetizing the debt.
B)A budget deficit.
C)A budget surplus.
D)Pro-cyclical fiscal policy.

Question 9

What is the national debt?

A)The sum of the federal government's budget deficits less surpluses.
B)The total amount borrowed domestically by all levels of government.
C)The total amount borrowed domestically and internationally by all levels of government.
D)The amount owed by the federal government to the World Bank.

Question 10

Refer to the graph above to answer this question.Which of the following is true?

A)A balanced budget would occur at income level Y1.
B)A balanced budget would occur at income level Y2.
C)A balanced budget could occur at income levels Y1,Y2 or Y3.
D)The existence of a balanced budget cannot be determined because no information on tax revenues is given.

Question 11

Refer to the graph above to answer this question.What does this graph indicate?

A)That government spending is autonomous of real GDP and that net tax revenue is a function of real GDP.
B)That government spending is a function of real GDP and that net tax revenue is autonomous of real GDP.
C)That budget surpluses are possible only at lower levels of real GDP.
D)That budget deficits are possible only at higher levels of real GDP.
E)That a balanced budget can occur at any level of real GDP except Y2.

Question 12

Suppose that the government's total tax receipts are $130,government spending on goods and services is $100 and transfer payments are $40.What is the government's budget surplus or deficit?

A)A surplus of $30.
B)A surplus of $10.
C)A deficit of $30.
D)A deficit of $10.

Question 13

What is a balanced budget?

A)It is the equality of tax revenues and government spending on goods and services.
B)It is the equality of net tax revenues and government spending on goods and services
C)It is the absence of government debt.
D)It is a budget where the government spends over many categories in a balanced fashion.

Question 14

What determines the state of the government's budget?

A)The level of its spending.
B)Its tax rates.
C)Its tax rates and the exchange rate.
D)Both the level of GDP in the economy as well as tax rates and its own spending.
E)Both the level of GDP in the economy as well as tax rates and the exchange rate.

Question 15

What is fiscal policy?

A)It is the government's approach to its own spending and taxation.
B)It is the use of interest rate policy by the central bank to stabilize an economy.
C)It is the total spending by all levels of government.
D)It is the central bank's approach to interest rate policy.
E)It is employed by governments only when the economy is experiencing a recessionary gap.

Question 16

What is a budget deficit?

A)It is government spending of all types in excess of net tax revenue.
B)It is government spending on goods and services in excess of net tax revenue.
C)It is government spending of all types plus net tax revenues.
D)It is the amount by which federal government spending of all types is below net tax revenues.

Question 17

Refer to the graph above to answer this question.What does this graph indicate?

A)That Y1,Y2 and Y3 could all be equilibrium levels of real GDP.
B)That Y2 is the equilibrium level of real GDP.
C)That government spending and the size of the budget surplus or deficit are unrelated.
D)That net tax revenues depend on tax rates but not on the level of real GDP.
E)That the budget line is unrelated to NTR.

Question 18

Refer to the graph above to answer this question.What does this graph indicate?

A)That net tax revenues,government spending and the government's budget all depend on the level of real GDP.
B)That the state of the government's budget depends on the level of real GDP as well as on tax rates and its own spending.
C)That the level of real GDP depends on the slope of the budget line.
D)That real GDP level Y2 is equilibrium GDP.
E)That real GDP level Y2 is both equilibrium GDP and a balanced budget.

Question 19

Which of the following is a correct statement about the federal government's budget?

A)It has been in a deficit continuously since the 1960s.
B)It has been in a surplus continuously since the 1960s.
C)It has been in a deficit in the last few years after decades of surpluses.
D)It has been in a surplus in the last few years after decades of deficits.

Question 20

What is net tax revenue in excess of government spending on goods and services called?

A)Gross tax revenue.
B)A budget deficit.
C)A budget surplus.
D)Transfer payments.

Question 21

What would be appropriate government action to close an inflationary gap?

A)Use policy to decrease aggregate supply.
B)Use policy to decrease potential GDP.
C)Use counter-cyclical fiscal policy to decrease aggregate demand.
D)Use counter-cyclical fiscal policy to increase aggregate demand.

Question 22

Which of the following would help reduce an inflationary gap?

A)An increase in tax rates.
B)An increase in interest rates.
C)A decrease in exports.
D)A decrease in government spending
E)An increase in consumption

Question 23

If the government used counter-cyclical policy to eliminate an inflationary gap,what should it do?

A)Increase its own spending and tax rates.
B)Decrease its own spending and tax rates.
C)Increase its own spending or decrease tax rates.
D)Decrease its own spending or increase tax rates.
E)Increase its own spending but leave tax rates unchanged.

Question 24

Graphically,what would cause the aggregate demand curve to shift to the right?

A)An increase in taxes.
B)A decrease in government spending on goods and services.
C)An increase in net tax revenues.
D)Counter-cyclical fiscal policy and a recessionary gap.
E)Counter-cyclical fiscal policy and an inflationary gap.

Question 25

Those who advocate counter-cyclical fiscal policy would agree with all but one of the following statements.Which is the exception?

A)Governments should be non-interventionist.
B)Automatic stabilizers are not particularly effective.
C)The economy is not capable of automatic self-adjustment in response the problems of unemployment and inflation.
D)Counter cyclical fiscal policy is a powerful and effective tool.
E)Government budget deficits are a less serious problem than income gaps.

Question 26

Graphically,what happened to the aggregate demand curve during World War II?

A)It did not shift,but the capacity of the economy increased thus shifting the aggregate supply curve to the left.
B)It did not shift since the economy was already at capacity.
C)It shifted to the right leading to a big increase in real GDP but to no change in the price level.
D)It shifted to the right thus causing an inflationary gap.
E)It shifted to the left since a big portion of expenditures was diverted to military spending.

Question 27

All of the following,except one,is a criticism of using counter-cyclical fiscal policy during a recession.Which is the exception?

A)Its effectiveness is subject to serious time lags.
B)It tends to be inflationary.
C)It can cause serious budget deficits.
D)It reinforces the business cycle.

Question 28

How would you graphically illustrate counter-cyclical fiscal policy used to eliminate an inflationary gap?

A)A shift in the AS curve only.
B)A shift in the AS and the potential GDP curves.
C)A leftward shift in the AD curve.
D)A rightward shift in the AD curve.

Question 29

Refer to the graph above to answer this question.If this economy is experiencing a recessionary gap,which of the following could be correct?

A)Real GDP is Y₁ and there is a budget deficit.
B)Real GDP is Y₁ and there is a budget surplus.
C)Real GDP is Y₂ and there is a balanced budget.
D)Real GDP is Y₁ and there is a balanced budget.

Question 30

Graphically,which of the following will be the result of counter-cyclical fiscal policy?

A)Only the AS curve will shift.
B)Both the AS and the potential GDP curves will shift.
C)There will be a movement along the AS curve.
D)There will be a movement along both the AS and potential GDP curves.

Question 31

Which of the following would help eliminate a recessionary gap?

A)An increase in consumer spending.
B)An increase in investment.
C)An increase in exports.
D)An increase in government spending
E)All of the above.

Question 32

How can an inflationary gap be closed?

A)By an increase in aggregate demand.
B)By an increase in government spending.
C)By an increase in the price level.
D)By an increase in taxes.
E)By a decrease in aggregate supply.

Question 33

What would be appropriate government action to close a recessionary gap?

A)Use policy to decrease aggregate supply.
B)Use policy to decrease potential GDP.
C)Use counter-cyclical fiscal policy to decrease aggregate demand.
D)Use counter-cyclical fiscal policy to increase aggregate demand.

Question 34

Which of the following is not a likely outcome of counter-cyclical fiscal policy?

A)It will reduce aggregate demand if used to eliminate an inflationary gap.
B)It will increase interest rates if used to eliminate an inflationary gap.
C)It will likely raise the exchange rate if used to eliminate an inflationary gap.
D)It can always be directed at a specific region of the country.
E)It will likely reduce unemployment if used to eliminate an inflationary gap.

Question 35

What is true regarding counter-cyclical fiscal policy?

A)It reinforces the business cycle.
B)It aims to balance the economy not the budget.
C)It has been described as "enhancing the prevailing winds."
D)It has no connection with the business cycle.
E)It can eliminate the business cycle.

Question 36

Assume that the economy is in a recession and has a balanced budget.If the government increases its spending to reduce unemployment,what will happen to GDP and the government's budget?

A)GDP will rise and the budget will be in a deficit.
B)GDP will fall and the budget will be in a deficit.
C)GDP will rise and the budget will be in a surplus.
D)GDP will fall and the budget will be in a surplus.

Question 37

All of the following,except one,would result from expansionary fiscal policy.Which is the exception?

A)Increased GDP.
B)Increased price level.
C)Decreased unemployment.
D)Decreased budget deficit.

Question 38

What is involved in counter-cyclical fiscal policy?

A)Higher government spending if used to eliminate an inflationary gap.
B)Higher government spending if used to eliminate a recessionary gap.
C)Higher taxes if used to eliminate a recessionary gap.
D)Lower taxes if used to eliminate an inflationary gap.
E)Government spending but not taxes.

Question 39

What will counter-cyclical fiscal policy do?

A)Raise GDP and prices if used to eliminate a recessionary gap.
B)Raise GDP and lower prices if used to eliminate a recessionary gap.
C)Lower GDP and prices if used to eliminate a recessionary gap.
D)Raise GDP,but leave prices unchanged if used to eliminate a recessionary gap.

Question 40

When a recessionary gap exists,what should the government do to address the situation?

A)Increase its own spending and tax rates.
B)Decrease its own spending and tax rates.
C)Increase its own spending or decrease tax rates.
D)Decrease its own spending or increase tax rates.
E)Decrease its own spending but leave tax rates unchanged.

Question 41

Refer to the graph above to answer this question.The shift in the budget line from BL₁ to BL₂ could be caused by which of the following?

A)An increase in tax rates.
B)A decrease in tax rates.
C)A decrease in government spending.
D)Technological change.
E)A higher exchange rate.

Question 42

Which of the following statements best illustrates a cyclically balanced-budget fiscal policy?

A)The budget should be balanced each budget year.
B)The budget should always balance.
C)The life of the business cycle is the appropriate time period to attempt to balance the budget.
D)Fiscal policy really has nothing to do with the budget.
E)A balanced budget is the only appropriate fiscal policy.

Question 43

Those who advocate a balanced budget fiscal policy would agree with all but one of the following statements.Which is the exception?

A)Governments should be non-interventionist.
B)Automatic stabilizers are an effective way of avoiding extreme levels of unemployment or inflation.
C)The economy is capable of automatic self-adjustment in response the problems of unemployment and inflation.
D)Counter cyclical fiscal policy is a powerful and effective tool.
E)Government budget deficits are a serious problem.

Question 44

Which of the following is a potential problem with a cyclically balanced-budget fiscal policy?

A)Governments can raise and lower spending levels at will.
B)The life of the business cycle is often too short.
C)Governments never cut taxes.
D)Governments find it easier to cut spending in periods of an inflationary gap than raise spending in periods of a recessionary gap.
E)Governments find it easier to raise spending in periods of a recessionary gap than cut spending in periods of an inflationary gap.

Question 45

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.What is the value of equilibrium income?

A)$583.33
B)$675
C)$700
D)$720
E)$780

Question 46

Which of the following is not part of a cyclically-balanced-budget fiscal policy?

A)Budget deficits in periods of a recessionary gap.
B)Budget surpluses in periods of an inflationary gap.
C)A balanced budget over the life of the business cycle.
D)Budget deficits during expansionary phases.

Question 47

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.What is the value of the government's budget at equilibrium income?

A)In deficit by $40
B)In surplus by $40
C)In deficit by $190
D)In deficit by $20
E)In surplus by $20

Question 48

All of the following,except one,are examples of automatic stabilizers.Which is the exception?

A)Progressive income taxes.
B)Expenditures on education which automatically rise when the number of school-aged children increases.
C)Welfare payments which increase when the economy suffers a recession.
D)Employment insurance which decreases when the economy is doing well.

Question 49

Assume that the economy is in a recession and the government is experiencing a budget deficit.What happens if balanced-budget fiscal policy is used to eliminate the deficit?

A)Unemployment will fall.
B)GDP will rise.
C)NTR will remain unchanged.
D)The deficit could be eliminated if GDP rose.
E)Government spending will fall.

Question 50

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.If government increased both its spending and taxes by $60,what would be the new equilibrium income?

A)$1,210
B)$1,050
C)$823.33
D)$1,070
E)$1,090

Question 51

What is the effect of a decrease in both government spending and taxes by the same amount?

A)GDP will fall but unemployment will rise.
B)GDP will rise and unemployment will fall.
C)Both GDP and unemployment will fall.
D)Both GDP and unemployment will rise.
E)There will be no effect on GDP or unemployment.

Question 52

A balanced-budget philosophy would be pro-cyclical in all the following cases except one.Which one is the exception?

A)A recessionary gap and a budget deficit.
B)An inflationary gap and a budget deficit.
C)An inflationary gap and a budget surplus.
D)High unemployment and a budget deficit.

Question 53

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.Suppose the economy is presently in equilibrium.If the government increases its spending by the amount of its current surplus/deficit,what will be the result?

A)Increase equilibrium income by $40 and increase the surplus.
B)Increase equilibrium income by $40 and reduce the surplus.
C)Increase equilibrium income by $80 and increase the surplus.
D)Increase equilibrium income by $80 and reduce the surplus.
E)Increase equilibrium income by $40 and balance the budget.

Question 54

A cyclically-balanced budget philosophy involves all,except one,of the following.Which is the exception?

A)It aims to balance the budget over the life of the business cycle.
B)It requires that governments spend more at times and less at other times.
C)It calls for budget deficits when there is recession and budget surpluses when there is an inflationary gap.
D)It implies that a government balances its budget in each year.

Question 55

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.If government decreased both its spending and taxes by $45,how would equilibrium GDP change?

A)It would increase by $60.
B)It would decrease by $60.
C)It would increase by $30.
D)It would decrease by $30.

Question 56

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.At equilibrium GDP,what is the value of the budget surplus/deficit?

A)-130
B)20
C)+20
D)0

Question 57

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.At equilibrium GDP,what is the value of Xn?

A)+2
B)+5
C)-2
D)-5

Question 58

Suppose that the economy is experiencing both an inflationary gap and a budget surplus.Which of the following is true?

A)Attempts to balance the budget would be pro-cyclical.
B)Attempts to balance the budget would be counter-cyclical.
C)Attempts to balance the budget would eliminate or reduce the size of the gap.
D)Reducing the size of the gap would reduce the surplus.

Question 59

Below is some data for a hypothetical economy:

Refer to the information above to answer this question.What is the value of equilibrium income?

A)$3,150
B)$1,050
C)$175
D)$547
E)$1,915

Question 60

Refer to the graph above to answer this question.Suppose this economy is initially at Y₁ with budget line BL₁.If counter-cyclical fiscal policy is used which of the following is correct?

A)Aggregate demand would increase from AD₁ to AD₂ and the budget surplus would increase from ab to cd.
B)Aggregate demand would increase from AD₁ to AD₂ and the budget deficit would increase from ab to cd.
C)Aggregate demand would decrease from AD₂ to AD₁ and the budget surplus would increase from cd to ab.
D)Aggregate demand would decrease from AD₂ to AD₁ and the budget surplus would decrease from cd to ab.
E)Aggregate demand would decrease from AD₂ to AD₁ and the budget deficit would decrease from cd to ab.

Question 61

Which of the following would close an inflationary gap?

A)An increase in government spending.
B)A decrease in government spending.
C)A decrease in taxes.
D)An increase in exports.

Question 62

Below is some information about the state of the budget and the economy.
1.A budget deficit and a recessionary gap.
2.A budget deficit and an inflationary gap.
3.A budget surplus and a recessionary gap.
4.A budget surplus and an inflationary gap.
Refer to the information above to answer this question.When would a balanced-budget fiscal policy be counter-cyclical?

A)2 and 3.
B)3 only.
C)4 only.
D)3 and 4.

Question 63

Which of the following statements is an accurate comment on the payment of interest on the public debt?

A)It leads to an increase in our standard of living.
B)It has no effect on the distribution of income.
C)It probably decreases income inequality.
D)It probably increases income inequality.
E)It decreases the value of a country's assets.

Question 64

Which of the following is a legitimate concern over the national debt?

A)The costs of servicing the debt each year comes out of current tax revenues.
B)Some future generation will have to pay it off.
C)It is no longer held externally.
D)It represents a failure of Keynesian economic policy.

Question 65

Below is some information about the state of the budget and the economy.
1.A budget deficit and a recessionary gap.
2.A budget deficit and an inflationary gap.
3.A budget surplus and a recessionary gap.
4.A budget surplus and an inflationary gap.
Refer to the information above to answer this question.When would a counter-cyclical fiscal policy call for a decrease in government spending or a tax increase?

A)1 only.
B)1 and 4.
C)2 only.
D)2 and 4.

Question 66

To what group is the largest portion of the national debt owed?

A)The Canadian public,that is,individuals,businesses,and banks in Canada.
B)Foreign individuals,banks,and businesses.
C)The Bank of Canada.
D)The Government of Canada.

Question 67

What is true about the national debt since the early 1990s?

A)It has grown both absolutely and as a percentage of GDP.
B)It has declined both absolutely and as a percentage of GDP.
C)It has grown absolutely,but has declined as a percentage of GDP.
D)It has grown absolutely,but has remained constant as a percentage of GDP.
E)It has declined absolutely,but has grown as a percentage of GDP.

Question 68

How may the public debt impose a burden upon future generations?

A)By reducing the current level of private capital accumulation.
B)By causing future unemployment.
C)By causing a slowly falling price level.
D)By causing interest rates to be lower than otherwise.

Question 69

All of the following,except one,are reasons why Canada's national debt has grown.Which is the exception?

A)World War II.
B)Building necessary infrastructure such as roads and bridges and the address a recessionary gap.
C)Consistently falling tax revenue.
D)Increased expenditures on income-support programs.

Question 70

What is net tax revenue?

A)It is the total of all taxes collected by the government.
B)It is the total of all taxes collected by government less spending by government on goods and services.
C)It is the total of all taxes collected by government plus transfer payments.
D)It is the total of all taxes collected by government less transfer payments.

Question 71

What was the national debt/GDP ratio in Canada in 2015?

A)10%
B)20%
C)31%
D)100%

Question 72

All of the following,except one,are correct statements.Which is the exception?

A)Provincial and municipal governments in total have realized budget surpluses in some years.
B)The public debt is the accumulation of all the federal government's deficits and surpluses of the past.
C)The public debt refers to the debts of all units of government: federal,provincial and local.
D)The foreign portion of the public debt has been eliminated over the past decade.

Question 73

What will be the effect on the multiplier of a decrease in autonomous taxes?

A)It will decrease.
B)It will increase.
C)There will be no effect on the multiplier.
D)Cannot be determined without more information.

Question 74

What is fiscal policy?

A)It is the government's policy on spending.
B)It is the government's policy on taxation.
C)It is the government's policy on both spending and taxation.
D)It is the central bank's policy on interest rates.

Question 75

In 2015,in Canada,what was the size of the national debt?

A)$200.6 billion
B)$350.8 billion
C)$612.3 billion
D)$873.6 billion

Question 76

In 2015,in Canada,what percentage of the national debt was owned by foreigners?

A)None
B)5%
C)16%
D)26%
E)50%

Question 77

Below is some information about the state of the budget and the economy.
1.A budget deficit and a recessionary gap.
2.A budget deficit and an inflationary gap.
3.A budget surplus and a recessionary gap.
4.A budget surplus and an inflationary gap.
Refer to the information above to answer this question.When would a balanced-budget fiscal policy be pro-cyclical?

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

Question 78

What is the meaning of the phrase: "the national debt is also a national credit"?

A)Only interest payments on the national debt constitute an economic burden.
B)Official figures seriously understate the size of the national debt.
C)What is owed must equal what is owned.
D)The national debt is equal to the physical assets owned by the government.
E)The national debt is a government debt held by the Bank of Canada and both of these are public institutions.

Question 79

Since the end of World War II,what has happened to the public debt?

A)It has remained constant absolutely,but has declined as a percentage of the GDP.
B)It has declined absolutely,but has remained constant as a percentage of the GDP.
C)It has grown absolutely and in terms of real per capita debt.
D)It has grown absolutely but has recently declined in terms of real per capita debt.
E)It has grown absolutely but has remained constant in terms of real per capita debt.

Question 80

Which of the following is a true statement in reference to the national debt?

A)As a percentage of GDP,it has steadily grown since World War II.
B)As a percentage of GDP,it has decreased in recent years.
C)It is almost entirely a result of World War II.
D)It is now large enough for one to question the government's solvency.
E)It is now growing at about $10 billion per year.