Question 1

Refer to the graph shown.Suppose the government borrows $50 million to finance an increase in its spending and that as a result, the level of investment is reduced by $50 million.In this case, the aggregate demand curve will: 0 to AD2 but then back to AD1. B) shift from AD0 to AD2 but then out to AD3. C) shift from AD0 to AD2. D) not shift." class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  shift from AD0 to AD2 but then back to AD1.
B)  shift from AD0 to AD2 but then out to AD3.
C)  shift from AD0 to AD2.
D)  not shift.E) A) and D)
F) A) and C)

Question 2

Property taxes are:

Accepted Answer

A)  not an automatic stabilizer because they do not vary with income.
B)  not an automatic stabilizer because they vary with income.
C)  an automatic stabilizer because they do not vary with income.
D)  an automatic stabilizer because they vary with income.E) B) and D)
F) A) and D)

Question 3

Most of the government budget is mandatory spending through programs like Medicare and Social Security, and much of the rest is politically difficult to alter.Because of this:

Accepted Answer

A)  fiscal policy is always undertaken only when there is a national crisis that motivates voters to seek change.
B)  fiscal policy that involves raising taxes is more likely to be implemented than fiscal policy that involves borrowing money.
C)  the amount of spending is unlikely to be implemented as economists suggest.
D)  most spending is geared to perform as an automatic stabilizer, so that Congress is in fact largely irrelevant when it comes to providing a fiscal response to a recession.E) A) and C)
F) B) and C)

Question 4

It is generally true that elected officials find it easier to:

Accepted Answer

A)  cut taxes.
B)  cut government spending.
C)  raise taxes and cut government spending.
D)  raise both taxes and government spending.E) A) and B)
F) B) and D) A

Question 5

Crowding out is the offsetting effect on private expenditures caused by the government's sale of bonds to finance expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 6

If income increases, a budget deficit will:

Accepted Answer

A)  tend to increase.
B)  tend to decrease.
C)  change unpredictably.
D)  not change.E) A) and D)
F) B) and D)

Question 7

The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary sound finance.

Accepted Answer

A) True 
 B)False  False

Question 8

Crowding out would most likely occur when:

Accepted Answer

A)  workers lose jobs as a result of anti-inflationary fiscal policies.
B)  the federal government engages in bond sales to finance its budget deficit.
C)  Congress enacts budget cuts to balance the budget.
D)  tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.E) A) and D)
F) B) and D)

Question 9

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent.If the actual unemployment rate is 11 percent, then most economists would agree that:

Accepted Answer

A)  both expansionary and contractionary policies are appropriate.
B)  expansionary monetary and fiscal policies are appropriate.
C)  contractionary monetary and fiscal policies are appropriate.
D)  neither expansionary nor contractionary policies are appropriate.E) None of the above
F) All of the above

Question 10

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift AD closer to potential output, an economist with a typical functional finance view who acknowledges partial crowding out would conclude that the AD:

Accepted Answer

A)  shifts to the right due to higher government spending.
B)  shifts to the left due to higher government spending.
C)  does not shift since the higher government spending is offset by higher private consumption.
D)  does not shift since the higher government spending is offset by lower private consumption.E) A) and D)
F) A) and B)

Question 11

Which of the following is an automatic stabilizer?

Accepted Answer

A)  Military expenditures
B)  Social Security benefits
C)  Unemployment compensation
D)  Property taxesE) B) and D)
F) All of the above

Question 12

Which of the following policies would reduce the procyclical nature of fiscal policy at the state level?

Accepted Answer

A)  The establishment of "rainy day funds"
B)  The introduction of price controls
C)  The institution of balanced budget requirements
D)  The elimination of automatic stabilizersE) B) and C)
F) C) and D)

Question 13

Using fiscal policy to stabilize the economy is difficult because:

Accepted Answer

A)  potential income is known.
B)  the effects of policy changes is known with certainty.
C)  there are time lags involved in the use of fiscal policy.
D)  the size of the government debt doesn't matter.E) B) and D)
F) A) and C) C

Question 14

If state governments began using a five-year rolling-average budgeting procedure as opposed to the current practice of no rolling average, which would the likely result be?

Accepted Answer

A)  State financing would become more procyclical
B)  Balanced-budget requirements in state constitutions would be much less procyclical
C)  The need for automatic stabilizers at the federal level would increase
D)  State governments would run a greater risk of running short of funds during recessionsE) All of the above
F) B) and C)

Question 15

Unemployment compensation is:

Accepted Answer

A)  an automatic stabilizer because it rises as income increases, slowing an economic expansion.
B)  an automatic stabilizer because it falls as income increases, slowing an economic expansion.
C)  an automatic stabilizer because it falls as income decreases, slowing an economic contraction.
D)  not an automatic stabilizer.E) C) and D)
F) A) and C)

Question 16

The introduction of "rainy-day funds" by states would:

Accepted Answer

A)  decrease the procyclical nature of current state budgeting procedures.
B)  increase the procyclical nature of current state budgeting procedures.
C)  decrease the counter-cyclical nature of current state budgeting procedures.
D)  increase the counter-cyclical nature of current state budgeting procedures.E) C) and D)
F) B) and C)

Question 17

If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:

Accepted Answer

A)  not shift.
B)  shift out but not as much as it would if crowding out didn't occur.
C)  shift out by the same amount regardless of whether crowding out occurs.
D)  shift out more if crowding out occurs.E) All of the above
F) B) and C)

Question 18

According to the Classical advocates of sound finance, if an economy is in a recession, the government should run:

Accepted Answer

A)  a budget deficit and increase spending, which will increase output.
B)  a budget surplus and decrease spending, which will increase output.
C)  neither a surplus nor a deficit since changes in deficit spending do not affect output.
D)  neither a surplus nor a deficit since changes in spending affect output.E) B) and C)
F) B) and D)

Question 19

If interest rates adjust to equate savings and investment, then an expansionary fiscal policy is:

Accepted Answer

A)  more likely to increase interest rates and less likely to crowd out investment.
B)  more likely to increase interest rates and more likely to crowd out investment.
C)  less likely to increase interest rates and less likely to crowd out investment.
D)  less likely to increase interest rates and more likely to crowd out investment.E) None of the above
F) C) and D)

Question 20

If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses)  to shift AD, an economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD:

Accepted Answer

A)  shifts to the right due to lower government spending.
B)  shifts to the left due to lower government spending.
C)  does not shift since the lower government spending is offset by higher private consumption.
D)  does not shift since the lower government spending is offset by lower private consumption.E) A) and B)
F) All of the above

Exam 32: The Fiscal Policy Dilemma

Refer to the graph shown.Suppose the government borrows $50 million to finance an increase in its spending and that as a result, the level of investment is reduced by $50 million.In this case, the aggregate demand curve will:

Correct AnswerverifiedShow Answer

Property taxes are:

Correct AnswerverifiedShow Answer

Most of the government budget is mandatory spending through programs like Medicare and Social Security, and much of the rest is politically difficult to alter.Because of this:

Correct AnswerverifiedShow Answer

It is generally true that elected officials find it easier to:

Correct AnswerverifiedA

Crowding out is the offsetting effect on private expenditures caused by the government's sale of bonds to finance expansionary fiscal policy.

Correct AnswerverifiedShow Answer

If income increases, a budget deficit will:

Correct AnswerverifiedShow Answer

The 2008-2009 deficit stimulus spending by the federal government is an example of expansionary sound finance.

Correct AnswerverifiedFalse

Crowding out would most likely occur when:

Correct AnswerverifiedShow Answer

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent.If the actual unemployment rate is 11 percent, then most economists would agree that:

Correct AnswerverifiedShow Answer

If an economy is in a recession and the government opts for an expansionary fiscal policy to shift AD closer to potential output, an economist with a typical functional finance view who acknowledges partial crowding out would conclude that the AD:

Correct AnswerverifiedShow Answer

Which of the following is an automatic stabilizer?

Correct AnswerverifiedShow Answer

Which of the following policies would reduce the procyclical nature of fiscal policy at the state level?

Correct AnswerverifiedShow Answer

Using fiscal policy to stabilize the economy is difficult because:

Correct AnswerverifiedC

If state governments began using a five-year rolling-average budgeting procedure as opposed to the current practice of no rolling average, which would the likely result be?

Correct AnswerverifiedShow Answer

Unemployment compensation is:

Correct AnswerverifiedShow Answer

The introduction of "rainy-day funds" by states would:

Correct AnswerverifiedShow Answer

If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:

Correct AnswerverifiedShow Answer

According to the Classical advocates of sound finance, if an economy is in a recession, the government should run:

Correct AnswerverifiedShow Answer

If interest rates adjust to equate savings and investment, then an expansionary fiscal policy is:

Correct AnswerverifiedShow Answer

If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses) to shift AD, an economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
False

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified