Question 1

If the government adopts a fiscal policy that is:

Accepted Answer

A)  expansionary, then net exports are likely to expand and reinforce the effects of the fiscal policy.
B)  contractionary, then net exports are likely to decline and partially offset the effects of the fiscal policy.
C)  contractionary, then net exports are likely to rise and reinforce the effects of the fiscal policy.
D)  expansionary, then net exports are likely to decline and partially offset the effects of the fiscal policy.E) All of the above
F) C) and D)

Question 2

A major advantage of the built-in or automatic stabilizers is that they:

Accepted Answer

A)  simultaneously stabilize the economy and reduce the absolute size of the public debt.
B)  automatically produce surpluses during recessions and deficits during inflations.
C)  require no discretionary budgetary policy.
D)  guarantee that the federal budget will be balanced over the course of the business cycle.E) A) and B)
F) B) and C)

Question 3

When the economy is at full employment:

Accepted Answer

A)  one cannot generalize in comparing the actual and the full-employment budgets.
B)  the full-employment budget will show a surplus and the actual budget will show a deficit.
C)  the actual budget will show a surplus and the full-employment budget will show a deficit.
D)  the actual and the full-employment budgets will be equal.E) A) and C)
F) A) and B)

Question 4

An increase in taxes and a decrease in government spending would be characteristic of a contractionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 5

Refer to the above diagram.Which tax system has the most built-in stability?

Accepted Answer

A)  T4
B)  T3
C)  T2
D)  T1E) A) and D)
F) C) and D)

Question 6

Refer to the diagram below.Which tax system will generate the largest cyclical deficits?

Accepted Answer

A)  T4
B)  T3
C)  T2
D)  T1E) A) and D)
F) None of the above

Question 7

Refer to the above data.The 10 percent proportional tax on income would:

Accepted Answer

A)  reduce the MPC from .6 to .54.
B)  not affect the size of the MPC.
C)  reduce the MPC from .6 to .5.
D)  increase the MPC from .6 to .64.E) B) and C)
F) A) and D)

Question 8

An appropriate fiscal policy for a severe recession is:

Accepted Answer

A)  a decrease in government spending.
B)  a decrease in tax rates.
C)  appreciation of the dollar.
D)  an increase in interest rates.E) C) and D)
F) A) and B)

Question 9

d1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect? A) an improvement in profit expectations by businesses B) a decrease in saving C) a decline in the interest rate D) an increase in the marginal propensity to consume" class="answers-bank-image d-inline" rel="preload" > Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

Accepted Answer

A)  an improvement in profit expectations by businesses
B)  a decrease in saving
C)  a decline in the interest rate
D)  an increase in the marginal propensity to consumeE) None of the above
F) B) and D)

Question 10

Which of the following statements is correct?

Accepted Answer

A)  Built-in stability only partially offsets fluctuations in economic activity.
B)  Built-in stability works in halting inflation, but it cannot alleviate unemployment.
C)  Built-in stability can be relied on to eliminate completely any fluctuation in economic activity.
D)  Built-in stability overcorrects for fluctuations in economic activity; for example, it may change a small expansion into a recession.E) C) and D)
F) A) and D)

Question 11

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion at each price level by:

Accepted Answer

A)  reducing government expenditures by $12 billion.
B)  reducing government expenditures by $60 billion.
C)  increasing taxes by $15 billion.
D)  increasing taxes by $20 billion.E) A) and C)
F) None of the above

Question 12

Automatic stabilizers will reduce tax revenues during recessions and increase tax revenues during periods of strong economic growth.

Accepted Answer

A) True 
 B)False

Question 13

Which is regarded as an automatic stabilizer in the economy?

Accepted Answer

A)  interest rates
B)  exchange rates
C)  the inflation rate
D)  the progressive income taxE) A) and C)
F) None of the above

Question 14

If the government wishes to increase the level of real GDP, it might reduce:

Accepted Answer

A)  taxes.
B)  transfer payments.
C)  the size of the budget deficit.
D)  its purchases of goods and services.E) B) and C)
F) None of the above

Question 15

Who among the following owned the largest percentage of Canada's public debt in 2016, using Figure 13-7?

Accepted Answer

A)  Public and chartered banks
B)  Nonresidents
C)  The Bank of Canada
D)  ChinaE) All of the above
F) B) and D)

Question 16

If the full-employment surplus as a percentage of GDP is zero in one year, and 2 percent of GDP the next year, it can be concluded that:

Accepted Answer

A)  fiscal policy is expansionary.
B)  fiscal policy is contractionary.
C)  the federal government is borrowing money.
D)  the federal government is lending money.E) A) and B)
F) A) and C)

Question 17

Built-in stability means that:

Accepted Answer

A)  an annually balanced budget will automatically offset the pro-cyclical tendencies created by state and local finance and thereby stabilizes the economy.
B)  with given tax rates and expenditures policies a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline will result in a deficit or a lower budget surplus.
C)  Parliament will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity.
D)  government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.E) C) and D)
F) A) and B)

Question 18

An economist who advocates discretionary fiscal policy would recommend:

Accepted Answer

A)  tax cuts during recession and reductions in government spending during inflation.
B)  tax increases during recession and tax cuts during inflation.
C)  tax cuts during recession and tax increases during inflation.
D)  increases in government spending during recession and tax increases during inflation.E) A) and C)
F) B) and D)

Question 19

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Accepted Answer

A)  increasing government spending by $25 billion.
B)  increasing government spending by $80 billion.
C)  decreasing taxes by $25 billion.
D)  decreasing taxes by $100 billion.E) A) and B)
F) B) and C)

Question 20

Assume the government incurs a budget deficit which is financed by borrowing.As a result, interest rates rise and the volume of private investment spending declines.This illustrates:

Accepted Answer

A)  the equation-of-exchange effect.
B)  the paradox of thrift.
C)  the crowding-out effect.
D)  the money-fund effect.E) B) and C)
F) A) and B)

Exam 13: B: Fiscal Policy, Deficits, Surpluses, and Debt

Automatic stabilizers will reduce tax revenues during recessions and increase tax revenues during periods of strong economic growth.

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If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion at each price level by:

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When the economy is at full employment:

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Built-in stability means that:

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Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

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Who among the following owned the largest percentage of Canada's public debt in 2016, using Figure 13-7?

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An increase in taxes and a decrease in government spending would be characteristic of a contractionary fiscal policy.

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If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

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Refer to the above data.The 10 percent proportional tax on income would:

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Which is regarded as an automatic stabilizer in the economy?

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If the government wishes to increase the level of real GDP, it might reduce:

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An economist who advocates discretionary fiscal policy would recommend:

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An appropriate fiscal policy for a severe recession is:

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A major advantage of the built-in or automatic stabilizers is that they:

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Assume the government incurs a budget deficit which is financed by borrowing.As a result, interest rates rise and the volume of private investment spending declines.This illustrates:

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If the government adopts a fiscal policy that is:

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Refer to the above diagram.Which tax system has the most built-in stability?

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If the full-employment surplus as a percentage of GDP is zero in one year, and 2 percent of GDP the next year, it can be concluded that:

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Which of the following statements is correct?

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Refer to the diagram below.Which tax system will generate the largest cyclical deficits?

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Refer to the above diagram.Initially assume that the investment demand curve is I_d1.Which of the following effects of a budget deficit might shift the investment demand curve from I_d1 to I_d2, wholly offsetting any crowding-out effect?

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