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Chapter 16   Fiscal Policy 1) Fiscal policy refers to changes in  state and local taxes and purchases that are intended to achieve macroeconomic policy objectives

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Chapter 16   Fiscal Policy

1) Fiscal policy refers to changes in 

1. state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
2. federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
3. federal taxes and purchases that are intended to fund the war on terrorism.
4. the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

 

 

2) Which of the following would be classified as fiscal policy?

1. The federal government passes tax cuts to encourage firms to reduce air pollution.
2. The Federal Reserve cuts interest rates to stimulate the economy.
3. A state government cuts taxes to help the economy of the state.
4. The federal government cuts taxes to stimulate the economy.
5. States increase taxes to fund education.

 

 

3) Which of the following would be considered an active fiscal policy? A) The Fed increases the money supply.

2. Tax incentives are offered to encourage the purchase of fuel efficient cars.
3. Spending on the war in Afghanistan is increased to promote homeland security.
4. A tax cut is designed to stimulate spending passed during a recession.

 

 

4) Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

1. automatic stabilizers; discretionary fiscal policy
2. discretionary fiscal policy; automatic stabilizers
3. automatic stabilizers; monetary policy
4. discretionary fiscal policy; conscious fiscal policy

 

 

5) Automatic stabilizers refer to 

1. the money supply and interest rates that automatically increase or decrease along with the business cycle.
2. government spending and taxes that automatically increase or decrease along with the business cycle.
3. changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
4. changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.   

 

6) The three categories of federal government expenditures, in addition to government purchases, are

1. interest on the national debt, grants to state and local governments, and transfer payments.
2. interest on the national debt, defense spending, and transfer payments.
3. defense spending, budgets of federal agencies, and transfer payments.
4. defense spending, Social Security, and Medicare.

 

 

7) Which of the following is a government expenditure, but is not a government purchase? A) The federal government buys a Humvee.

2. The federal government pays the salary of an FBI agent.
3. The federal government pays out an unemployment insurance claim.
4. The Federal government pays to support research on Aids.

 

 

8) Congress and the president carry out fiscal policy through changes in A) interest rates and the money supply.

2. taxes and the interest rate.
3. government purchases and the money supply.
4. government purchases and taxes.

 

 

9) Expansionary fiscal policy involves

1. increasing government purchases or decreasing taxes.
2. increasing taxes or decreasing government purchases.
3. increasing the money supply and decreasing interest rates.
4. decreasing the money supply and increasing interest rates. Figure 16-1

 

 

 

 

 

10) Refer to Figure 16-1.  Suppose the economy is in short-run equilibrium below potential

GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium.  Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B.

2. B to C.
3. C to B.
4. B to A.
5. A to E.

 

 

11) Refer to Figure 16-1.  Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the static ADAS model in the figure above.

1. D to C
2. C to B
3. A to E
4. B to A E) E to A

 

 

12) An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases

2. increases; decreases
3. decreases; increases
4. decreases; decreases

 

 

13) To combat a recession with discretionary fiscal policy, Congress and the president should A) decrease government spending to balance the budget.

2. decrease taxes to increase consumer disposable income.
3. lower interest rates and increase investment by increasing the money supply.
4. raise taxes on interest and dividends, but not on personal income.

 

 

14) If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply?  An increase in

1. the money supply and a decrease in interest rates.
2. government purchases.
3. oil prices.
4. taxes.

 

 

 

Figure 16-2

 

 

 

 

15) Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

A) a decrease in income taxes                                    B) a decrease in interest rates

C) a decrease in government purchases  D) an increase in the money supply

 

Figure 16-3  

 

 

 

 

16) Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

1. an increase in government purchases
2. an increase in interest rates
3. an increase in income taxes
4. an open market purchase of Treasury bills  

Figure 16-2

 

 

 

 

17) Refer to Figure 16-2.  In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely

1. decrease government spending.
2. increase government spending.
3. increase oil prices.
4. increase taxes.
5. lower interest rates.

 

 

18) Refer to Figure 16-2.  In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B

1. the unemployment rate is very low.
2. firms are operating below capacity.
3. the economy is above full employment.
4. income and profits are rising.
5. there is pressure on wages and prices to rise.

 

 

19) From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then Congress and the president would most likely A) decrease the required reserve ratio.

2. decrease government spending.
3. decrease oil prices.
4. decrease tax rates.  

 

Figure 16-3

 

 

 

 

20) Refer to Figure 16-3.  In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely

1. increase the money supply and decrease the interest rate.
2. increase taxes.
3. increase government spending.
4. increase oil prices.
5. raise interest rates.

 

 

Table 16-1

 

Year	Potential Real GDP	Real GDP	Price Level
2013	$14.0 trillion	$14.0 trillion	150
2014	14.5 trillion	14.2 trillion	152

 

21) Refer to Table 16-1. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2014, they should 

A) decrease income taxes.                               B) decrease government purchases.

C) decrease the money supply.  D) increase the level of interest rates.

 

22) Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect.

A) multiplier                                                    B) expenditure 

C) consumption                                               D) aggregate demand

 

23) The aggregate demand curve will shift to the right ________ the initial increase in government purchases.

1. by less than
2. by more than
3. by the same amount as 
4. sometimes by more than and other times by less than

 

 

Figure 16-4

 

 

 

 

24) Refer to Figure 16-4.  In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.

A) would be equal to                                      B) would be greater than

C) would be less than    D) may be greater than or less than  

 

25) The government purchases multiplier equals the change in ________ divided by the change in ________.

1. government purchases; equilibrium real GDP
2. equilibrium real GDP; government purchases
3. government purchases; consumption spending
4. consumption spending; government purchases

 

 

26) The tax multiplier equals the change in ________ divided by the change in ________.

1. taxes; equilibrium real GDP
2. equilibrium real GDP; taxes
3. taxes; consumption spending
4. consumption spending; taxes

 

 

 

27) If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change

in GDP, holding everything else constant?  (Assume the price level stays constant.)

1. a $300 billion decrease in GDP
2. a $300 billion increase in GDP
3. a $30 billion increase in GDP
4. a $133.33 billion decrease in GDP
5. a $133.33 billion increase in GDP

 

 

28) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.

1. increase; increase
2. decrease; increase
3. increase; decrease
4. decrease; decrease
5. increase; not change

 

 

29) Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.  To move the economy back to potential GDP, Congress should A) lower taxes by an amount less than $500 billion.

2. raise government purchases by $500 billion.
3. raise government purchases by more than $500 billion.
4. lower taxes by $500 billion.
5. lower government purchases by $500 billion.

 

 

30) Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced.  What will happen to real equilibrium GDP? A) Real equilibrium GDP will fall.

2. Real equilibrium GDP will rise.
3. There will be no change in real equilibrium GDP.
4. Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.  

 

31) If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP.

1. $7.25 trillion
2. $1 trillion
3. $500 billion
4. $250 billion

 

 

 

 

32) If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP.

1. $250 billion
2. $400 billion
3. $640 billion
4. None of the above are correct.  Taxes should be increased in this case.

 

 

33) It is ________ difficult to effectively time fiscal policy than monetary policy because ________.

1. more; fiscal policy can be quickly decided and changed
2. more; fiscal policy takes longer to implement
3. less; monetary policy takes longer to decide and change
4. less; monetary policy takes longer to implement

 

 

34) Crowding out refers to a decline in ________ as a result of an increase in ________.

1. tax revenues; unemployment
2. government purchases; tax rates
3. government purchases; private expenditures
4. private expenditures; government purchases

 

 

35) If government spending and the price level increase, then

1. the interest rate increases, consumption declines, and investment spending declines.
2. the interest rate decreases, consumption declines, and investment spending declines.
3. the interest rate increases, consumption increases, and investment spending increases.
4. the interest rate decreases, consumption increases, and investment spending increases.

36) If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to  A) be at potential GDP.

2. be above potential GDP.
3. be below potential GDP.
4. There is insufficient information given here to draw a conclusion.  

37) Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run.

1. partial crowding out; partial crowding out
2. partial crowding out; complete crowding out C) complete crowding out; complete crowding out

D) complete crowding out; partial crowding out

 

 

38) In the long run, most economists agree that a permanent increase in government spending leads to  

1. no decrease in private spending.
2. a decrease in private spending by less than the amount that government spending increased.
3. a decrease in private spending by the same amount that government spending increased.
4. a decrease in private spending by more than the amount that government spending increased.  

 

39) If the federal government's expenditures are less than its tax revenues, then A) a budget surplus results.

2. a budget deficit results.
3. the budget is balanced.
4. No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.

 

 

40) A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________.

1. increase; rise; falls
2. increase; fall; rises C) decrease; rise; falls

D) decrease; fall; rises  

41) The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession.

2. in an expansion.
3. at potential GDP.
4. at potential tax revenue.

 

 

42) The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle 

1. destabilize the economy.
2. stabilize the economy.
3. decrease potential GDP.
4. increase potential GDP. 

 

 

43) If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy A) must be at potential real GDP.

2. must be below potential real GDP.
3. must be above potential real GDP.
4. could be below or above potential real GDP.

 

44) Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n): 

1. expansionary fiscal policy.
2. contractionary fiscal policy.
3. neutral fiscal policy.
4. high-interest-rate policy. 

 

 

45) 

 

 

 

Refer to the data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect:

A) inflation.                                                     B) an expansionary fiscal policy.

C) a recession.                                                D) a contractionary fiscal policy. 

 

46) 

 

 

 

Refer to the data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect:

A) inflation.                                                     B) an expansionary fiscal policy.

C) a tax increase.                                             D) a contractionary fiscal policy. 

 

47) 

 

 

 

Refer to the table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n):

A) recession.                                                     B) expansionary fiscal policy.

C) tax decrease.                                                D) contractionary fiscal policy. 

 

 

48) Which of the following is a reason why we should consider the federal national debt a problem?

1. The federal government is in danger of defaulting on its debt.
2. If the debt drives up interest rates, crowding out will occur.
3. If the debt was incurred to finance improvements in infrastructure, crowding out will occur.
4. If the debt was incurred to finance research and development, crowding out will occur.  

 

49) The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus.

1. increases; increases
2. decreases; increases
3. increases; decreases
4. decreases; decreases