Question 1

The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when

Accepted Answer

A)   marginal tax rates are high.
B)   marginal tax rates are low.
C)   the inflation rate is low and relatively stable.
D)   This is a trick question: the consumption of tax-deductible goods is not affected by marginal tax rates.

Question 2

Fiscal policy moved toward expansion during the 1980s but toward restriction during the 1990s. How did these differences affect the economy?

Accepted Answer

A)   The expansionary fiscal policy of the 1980s led to strong growth while the restrictive policy of the 1990s led to stagnation.
B)   The expansionary fiscal policy of the 1980s led to weaker growth than the restrictive policy of the 1990s.
C)   The expansionary fiscal policy of the 1980s generated more rapid growth than the restrictive policy of the 1990s.
D)   There is little evidence that the differences in fiscal policy between the two decades exerted much impact on either aggregate demand or real output.

Question 3

According to the critics of Keynesian economics, the rapid increase in government spending and large budget deficits in response to the recession of 2008-2009 would

Accepted Answer

A)   slow the recovery process and result in weak long-term growth of real GDP.
B)   speed the recovery process and provide the foundation for strong long-term growth of real GDP.
C)   stimulate a more rapid recovery, but cause the economy to fall back into a recession in the near future.
D)   slow the recovery process, but provide a foundation for rapid long-term growth of real GDP.

Question 4

If the government cuts the tax rate, workers get to keep

Accepted Answer

A)   less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)   less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)   more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)   more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Question 5

The crowding-out effect refers to the possibility that an

Accepted Answer

A)   increase in the money supply will result in a decline in taxes.
B)   increase in consumption spending will crowd out government spending.
C)   increase in private savings will crowd out the taxable income of households.
D)   increase in government borrowing will result in higher interest rates, which will crowd out private investment and consumption.

Question 6

Which of the following is true?

Accepted Answer

A)   Modern forecasting methods make it relatively easy to time fiscal policy changes in a manner that will help stabilize the economy.
B)   Legislative action is necessary if automatic stabilizers are going to smooth the ups and downs of the business cycle.
C)   Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve.
D)   Both the crowding-out and new classical theories indicate that expansionary fiscal policy will exert a powerful impact on aggregate demand.

Question 7

Use the figure below to answer the following question(s) .
Figure 12-1
 
-Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a?

Accepted Answer

A)   a balanced budget
B)   restrictive fiscal policy
C)   expansionary fiscal policy
D)   continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment)

Question 8

If decreased government borrowing drives down real interest rates in the United States,

Accepted Answer

A)   private investment will tend to decline.
B)   the dollar will depreciate leading to an increase in net exports.
C)   an inflow of capital will cause the dollar to depreciate.
D)   All of the above are true.

Question 9

The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of

Accepted Answer

A)   expansionary fiscal policy.
B)   the crowding-out effect.
C)   restrictive fiscal policy.
D)   the paradox of thrift.

Question 10

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Accepted Answer

A)   decrease consumption spending.
B)   increase consumption spending.
C)   decrease investment spending.
D)   increase export sales.

Question 11

According to the Keynesian view, the proper response to a severe recession would be

Accepted Answer

A)   an increase in taxes in order to reduce the budget deficit.
B)   an increase in government spending financed by borrowing.
C)   a shift toward a restrictive monetary policy to reduce aggregate demand.
D)   reliance on automatic stabilizers to direct the economy toward full employment.

Question 12

The political incentive structure tends to

Accepted Answer

A)   encourage a balanced budget regardless of economic conditions.
B)   discourage budget deficits during recessions.
C)   encourage budget surpluses during both recessions and expansions.
D)   encourage budget deficits during both recessions and expansions.

Question 13

According to the paradox of thrift, if many families decided to save an additional $200 a month, this would lead to

Accepted Answer

A)   an increase in both saving and output.
B)   an increase in loanable funds and a reduction in interest rates, leading to an expansion in investment.
C)   a reduction in total output and little or no increase in total saving.
D)   an increase in total saving and no change in total output.

Question 14

Increases in government expenditures and large budget deficits are projected for 2010-2019. If the economic recovery is weak and growth is sluggish during this decade, this will be

Accepted Answer

A)   supportive of the Keynesian view, but inconsistent with the crowding-out, new classical, and supply-side theories.
B)   inconsistent with the Keynesian view, but supportive of the crowding-out, new classical, and supply-side theories.
C)   inconsistent with both Keynesian and non-Keynesian theories.
D)   supportive of both Keynesian and non-Keynesian theories.

Question 15

Which of the following is part of the synthesis view of fiscal policy?

Accepted Answer

A)   Automatic stabilizers offset some of the fluctuations in aggregate demand without any government action.
B)   Fiscal policy is much less potent than the early Keynesian view implied.
C)   The effectiveness of discretionary fiscal policy as a stabilization tool is highly questionable given the difficulties in proper timing.
D)   All of the above are correct.
E)   None of the above is correct.

Question 16

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

Accepted Answer

A)   the multiplier effect
B)   the crowding-out effect
C)   expansionary monetary policy
D)   None of the above is correct.

Question 17

According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?

Accepted Answer

A)   Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery.
B)   Repayment of the debt can always be shifted to the future, making it possible to keep tax rates low and thereby strengthen the recovery.
C)   Higher interest payments will increase future government spending, and thereby promote a stronger the recovery.
D)   The increase in government spending will exert a multiplier effect on the economy, leading to a stronger recovery.

Question 18

The new classical model implies that the effect of government increasing expenditures by debt financing

Accepted Answer

A)   has the same effect as if it was financed by raising current taxes.
B)   is highly expansionary on aggregate demand and the economy.
C)   will result in higher real interest rates.
D)   will result in lower personal savings.

Question 19

Which of the following is true?

Accepted Answer

A)   The expansionary fiscal policy of the 1980s stimulated aggregate demand and led to high rates of inflation during the latter half of the decade.
B)   The restrictive fiscal policy of the 1990s led to sluggish economic growth during the decade.
C)   Even though fiscal policy was highly expansionary during the 1980s, the inflation rate fell and remained at relatively low levels.
D)   Even though fiscal policy was restrictive during the 1990s, the real growth rate of the economy was strong.
E)   Both c and d are true.

Question 20

"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

Accepted Answer

A)   the Keynesian model and the new classical model, but not the crowding-out model
B)   the Keynesian model and the crowding-out model, but not the new classical model
C)   the Keynesian model, but not the crowding-out and new classical models
D)   all three models

Exam 12: Fiscal Policy, Incentives, and Secondary Effects

The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of

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According to the paradox of thrift, if many families decided to save an additional $200 a month, this would lead to

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"Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement?

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The political incentive structure tends to

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If the government cuts the tax rate, workers get to keep

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The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when

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According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?

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Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

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The new classical model implies that the effect of government increasing expenditures by debt financing

Correct AnswerverifiedShow Answer

Increases in government expenditures and large budget deficits are projected for 2010-2019. If the economic recovery is weak and growth is sluggish during this decade, this will be

Correct AnswerverifiedShow Answer

If decreased government borrowing drives down real interest rates in the United States,

Correct AnswerverifiedShow Answer

According to the critics of Keynesian economics, the rapid increase in government spending and large budget deficits in response to the recession of 2008-2009 would

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

The crowding-out effect refers to the possibility that an

Correct AnswerverifiedShow Answer

Use the figure below to answer the following question(s) . Figure 12-1 -Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a?

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Which of the following is true?

Correct AnswerverifiedShow Answer

According to the Keynesian view, the proper response to a severe recession would be

Correct AnswerverifiedShow Answer

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

Correct AnswerverifiedShow Answer

Which of the following is part of the synthesis view of fiscal policy?

Correct AnswerverifiedShow Answer

Fiscal policy moved toward expansion during the 1980s but toward restriction during the 1990s. How did these differences affect the economy?

Correct AnswerverifiedShow Answer

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