Question 1

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,

Accepted Answer

A)   an increase in tax rates increases tax revenues.
B)   a reduction in tax rates reduces tax revenues.
C)   a reduction in tax rates increases tax revenues.
D)   any variation in tax rates has no effect on tax revenues.E) All of the above
F) None of the above

Question 2

In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result,

Accepted Answer

A)   the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag.
B)   the full effect of the fiscal policy change would not be felt until after March 2011 because of the recognition time lag.
C)   the full effect of the fiscal policy change would be felt by March 2011 because people anticipated the spending and changed their behavior accordingly.
D)   the full effect of the fiscal policy change would be felt when the last of the funds were spent by the government.E) A) and B)
F) A) and C)

Question 3

Explain how indirect crowding out can offset expansionary fiscal policy.

Accepted Answer

If the government increases spending, it...

Question 4

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to  . In the end, the aggregate demand curve is still  . A possible reason for this is that

Accepted Answer

A)   the economy is already at full employment.
B)   the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving.
C)   people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
D)   some of the increased government spending is not counted in GDP.E) C) and D)
F) A) and B)

Question 5

The Laffer curve indicates which of the following?

Accepted Answer

A)   There is an ideal interest rate that will maximize investment spending.
B)   There is an ideal amount of government spending that will lead to full national employment.
C)   There is an ideal tax-revenue-maximizing tax rate for government taxes.
D)   There is an ideal tariff rate that will maximize exports and minimize imports.E) A) and B)
F) A) and C)

Question 6

Which of the following is an example of a discretionary fiscal policy action?

Accepted Answer

A)   increasing government spending to deal with a recession
B)   a decrease in tax revenues as taxpayers' incomes decrease
C)   increasing the minimum wage rate
D)   raising regulations in the health care industryE) A) and C)
F) A) and B)

Question 7

If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will

Accepted Answer

A)   generate higher prices in the short run, but will induce aggregate supply to increase in the long run.
B)   generate an increase in real GDP and higher prices in both the short run and the long run.
C)   generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase.
D)   generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more.E) All of the above
F) C) and D)

Question 8

Explain the Ricardian equivalence theorem.

Accepted Answer

The Ricardian equivalence theorem is the...

Question 9

One characteristic of built-in or automatic stabilizers is that

Accepted Answer

A)   they require no new legislative action by Congress to have an effect.
B)   they automatically produce surpluses during recessions and deficits during inflation.
C)   they have no effect on the distribution of income.
D)   they reduce the size of the public debt during times of recession.E) All of the above
F) A) and B)

Question 10

In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT

Accepted Answer

A)   an increase in aggregate demand.
B)   a higher price level.
C)   an increase in consumption.
D)   higher real GDP.E) B) and C)
F) None of the above

Question 11

What are the various time lags that affect discretionary fiscal policy, and what are their effects?

Accepted Answer

The recognition lag refers to the time i...

Question 12

The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

Accepted Answer

A)   increase real Gross Domestic Product (GDP)  in both the short and long run.
B)   decrease real Gross Domestic Product (GDP)  in both the short and long run.
C)   decrease real Gross Domestic Product (GDP)  in the short run, but increase it in the long run.
D)   have no effect on aggregate demand.E) All of the above
F) C) and D)

Question 13

According to the Laffer curve, increases in the tax rate will lead to a(n)

Accepted Answer

A)   steady decrease in tax revenues.
B)   steady increase in tax revenues.
C)   initial decrease in tax revenues and then an increase in tax revenues.
D)   initial increase in tax revenues and then a decrease in tax revenues.E) None of the above
F) All of the above

Question 14

When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to

Accepted Answer

A)   increase taxes.
B)   decrease taxes.
C)   increase government spending.
D)   decrease the discount rate.E) A) and B)
F) A) and C)

Question 15

The government might engage in expansionary fiscal policy if it wanted to

Accepted Answer

A)   reduce the price level.
B)   reduce real GDP.
C)   shift the aggregate demand curve to the left.
D)   reduce the level of unemployment.E) A) and D)
F) A) and C)

Question 16

The Ricardian equivalence theorem states that

Accepted Answer

A)   an increase in government spending by the federal government leads to offsetting reductions in state government spending.
B)   an increase in government spending financed by higher taxes has no effect on aggregate demand.
C)   spending on national defense is a direct expenditure offset.
D)   government spending financed by taxes is equivalent to government spending financed by borrowing.E) A) and D)
F) All of the above

Question 17

The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is

Accepted Answer

A)   supply-side economics.
B)   demand-side economics.
C)   the Ricardian equivalence theorem.
D)   consistent with crowding out.E) B) and C)
F) None of the above

Question 18

Supply-side economists argue that changes in tax rates cause changes in

Accepted Answer

A)   the full-employment level of output.
B)   labor supply.
C)   saving.
D)   all of the above.E) B) and C)
F) All of the above

Question 19

How might fiscal policy be used to correct a recessionary gap?

Accepted Answer

A)   The exchange rate would be adjusted to encourage imports.
B)   The exchange rate would be adjusted to discourage imports.
C)   Government spending would be adjusted to increase aggregate demand.
D)   Business operations would be regulated by the government to become more efficient.E) All of the above
F) A) and B)

Question 20

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

Accepted Answer

A)   A new cruise missile for the military
B)   Expanding the school lunch program
C)   Constructing more low income housing
D)   Providing textbooks for college studentsE) B) and C)
F) A) and C)

Exam 13: Fiscal Policy

The Ricardian equivalence theorem states that

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The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will

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The Laffer curve indicates which of the following?

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What are the various time lags that affect discretionary fiscal policy, and what are their effects?

Correct AnswerverifiedThe recognition lag refers to the time i...View AnswerShow Answer

Explain the Ricardian equivalence theorem.

Correct AnswerverifiedThe Ricardian equivalence theorem is the...View AnswerShow Answer

The government wants to increase its spending by $1 billion to stimulate the economy and is counting on the government spending multiplier to help. Taking into account direct expenditure offset effects, what is its best spending option?

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Which of the following is an example of a discretionary fiscal policy action?

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One characteristic of built-in or automatic stabilizers is that

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The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is

Correct AnswerverifiedShow Answer

How might fiscal policy be used to correct a recessionary gap?

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Explain how indirect crowding out can offset expansionary fiscal policy.

Correct AnswerverifiedIf the government increases spending, it...View AnswerShow Answer

If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will

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The government might engage in expansionary fiscal policy if it wanted to

Correct AnswerverifiedShow Answer

According to the Laffer curve, increases in the tax rate will lead to a(n)

Correct AnswerverifiedShow Answer

In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT

Correct AnswerverifiedShow Answer

At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,

Correct AnswerverifiedShow Answer

When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to

Correct AnswerverifiedShow Answer

Supply-side economists argue that changes in tax rates cause changes in

Correct AnswerverifiedShow Answer

In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result,

Correct AnswerverifiedShow Answer

-Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to . In the end, the aggregate demand curve is still . A possible reason for this is that

Correct AnswerverifiedShow Answer

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The recognition lag refers to the time i...
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The Ricardian equivalence theorem is the...
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If the government increases spending, it...
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