Question 1

Briefly discuss the different paths that expansionary fiscal policy can follow and the level of crowding out associated with each one.

Accepted Answer

The three paths that expansionary fiscal...

Question 2

When the U.S. government sells bonds, bond prices:

Accepted Answer

A)   increase and the bond interest rates increase.
B)   increase and bond interest rates decrease.
C)   decrease and bond interest rates increase.
D)   decrease and bond interest rates decrease.

Question 3

In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the:

Accepted Answer

A)   recognition lag.
B)   legislative lag.
C)   implementation lag.
D)   effectiveness lag.

Question 4

What explains why Argentina had a greater than 100% crowding out during the 1999 to 2002 period?

Accepted Answer

A)   The government accidentally contracted expenditure instead of expanding it.
B)   uncertainty and pessimism
C)   implementation lags
D)   recognition lags

Question 5

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy 
-(Figure: Aggregate Demand and Fiscal Policy)  Refer to the figure. For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession?

Accepted Answer

A)   Wages will become flexible and spending growth will recover to increase aggregate demand, moving the economy to point X.
B)   Wages will remain sticky and aggregate demand will fall farther, moving the economy to point Y.
C)   Aggregate demand will rise above the LRAS curve, moving the economy to point W.
D)   The economy will remain in a recession at point Z.

Question 6

When consumers receive tax rebates and use them to pay down debt rather than to increase spending:

Accepted Answer

A)   the resulting fiscal stimulus will be much larger than the initial tax rebate.
B)   the resulting fiscal stimulus will be much smaller than the initial tax rebate.
C)   the resulting fiscal stimulus will be the same size as the initial tax rebate.
D)   it is impossible to say whether the resulting fiscal stimulus will be larger or smaller.

Question 7

An increase in government spending can reduce real GDP growth if:

Accepted Answer

A)   most government spending is used to reduce the national debt.
B)   decreases in private spending more than offset the increase in government spending.
C)   taxes do not increase enough to finance the increase in government spending.
D)   the credibility of the government is too high.

Question 8

When consumers are very reluctant to spend in a recessionary environment, the government's MOST effective strategy is to:

Accepted Answer

A)   increase spending through bond financing.
B)   decrease income taxes.
C)   decrease corporate taxes.
D)   do nothing; the economy will self-correct in the short run.

Question 9

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Accepted Answer

A)   Consumers overspent the rebate and fell into debt.
B)   Consumers used much of the rebate to pay off existing debt.
C)   Consumers spent the money on frivolous items that did not have a multiplier effect.
D)   Consumers decided to save all of their rebate money.

Question 10

In working to correct a recession with fiscal policy, the government can:

Accepted Answer

A)   wait for wages and prices to become more flexible.
B)   increase the money supply.
C)   increase its expenditures and/or decrease taxes to shift the LRAS curve.
D)   raise its expenditures and/or lower taxes to increase aggregate demand.

Question 11

As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they live. What is the economic term for this effect?

Accepted Answer

A)   hastening
B)   multiplier
C)   duplicator
D)   spending

Question 12

Fiscal policy can offset a positive shock to aggregate demand by raising:

Accepted Answer

A)   the discount rate.
B)   the growth rate of the money supply.
C)   taxes.
D)   government spending.

Question 13

In 2008, the Bush administration issued tax rebate checks to taxpayers totaling $78 billion. The majority of households spent a larger percentage of these checks than they saved, thus leading to a big boost in overall growth in spending and output.

Accepted Answer

A) True 
 B)False

Question 14

When an economy experiences a negative real shock, fiscal policy:

Accepted Answer

A)   using tax cuts is appropriate.
B)   using increased government expenditures is appropriate.
C)   is generally not appropriate.
D)   is never used by politicians.

Question 15

Which is the MOST effective fiscal policy for influencing the economy?

Accepted Answer

A)   a temporary tax rebate
B)   a permanent tax cut
C)   a tax hike with no response of consumption to an income change
D)   tax hike that is matched by a government spending cut

Question 16

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy 
-(Figure: Aggregate Demand and Fiscal Policy)  Refer to the figure. In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to:

Accepted Answer

A)   5%.
B)   7%.
C)   15%.
D)   10%.

Question 17

The multiplier effect is the increase in AD when private spending augments the effect of expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 18

Fiscal policies that help an economy in a recession without deliberate actions by policymakers are called:

Accepted Answer

A)   consumption smoothers.
B)   Ricardian equalizers.
C)   automatic stabilizers.
D)   multiplier effects.

Question 19

When consumers spend all of their tax rebate checks, what takes place in the economy?

Accepted Answer

A)   Aggregate demand shifts to the right.
B)   Aggregate demand shifts to the left.
C)   The LRAS curve shifts left.
D)   Inflation decreases.

Question 20

Fiscal policy involves:

Accepted Answer

A)   government borrowing to finance the national debt.
B)   government taxes and spending that affect the income distribution among people.
C)   government taxes, spending, and borrowing that affect business fluctuations.
D)   the change of the money supply that affects business fluctuations.

Exam 18: Fiscal Policy

When consumers spend all of their tax rebate checks, what takes place in the economy?

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As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they live. What is the economic term for this effect?

Correct AnswerverifiedShow Answer

Fiscal policies that help an economy in a recession without deliberate actions by policymakers are called:

Correct AnswerverifiedShow Answer

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy -(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to:

Correct AnswerverifiedShow Answer

An increase in government spending can reduce real GDP growth if:

Correct AnswerverifiedShow Answer

Fiscal policy can offset a positive shock to aggregate demand by raising:

Correct AnswerverifiedShow Answer

When an economy experiences a negative real shock, fiscal policy:

Correct AnswerverifiedShow Answer

In working to correct a recession with fiscal policy, the government can:

Correct AnswerverifiedShow Answer

In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the:

Correct AnswerverifiedShow Answer

When the U.S. government sells bonds, bond prices:

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What explains why Argentina had a greater than 100% crowding out during the 1999 to 2002 period?

Correct AnswerverifiedShow Answer

Fiscal policy involves:

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The multiplier effect is the increase in AD when private spending augments the effect of expansionary fiscal policy.

Correct AnswerverifiedShow Answer

When consumers receive tax rebates and use them to pay down debt rather than to increase spending:

Correct AnswerverifiedShow Answer

When consumers are very reluctant to spend in a recessionary environment, the government's MOST effective strategy is to:

Correct AnswerverifiedShow Answer

Briefly discuss the different paths that expansionary fiscal policy can follow and the level of crowding out associated with each one.

Correct AnswerverifiedThe three paths that expansionary fiscal...View AnswerShow Answer

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

Correct AnswerverifiedShow Answer

Use the following to answer questions: Figure: Aggregate Demand and Fiscal Policy -(Figure: Aggregate Demand and Fiscal Policy) Refer to the figure. For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession?

Correct AnswerverifiedShow Answer

In 2008, the Bush administration issued tax rebate checks to taxpayers totaling $78 billion. The majority of households spent a larger percentage of these checks than they saved, thus leading to a big boost in overall growth in spending and output.

Correct AnswerverifiedShow Answer

Which is the MOST effective fiscal policy for influencing the economy?

Correct AnswerverifiedShow Answer

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The three paths that expansionary fiscal...
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