Question 1

The Keynesian perspective on the effect of an increase in taxes is that this policy action

Accepted Answer

A)   generates reductions in consumption and in saving.
B)   generates reductions in consumption and an increase in saving to pay for the new taxes.
C)   has no impact on consumption.
D)   increases current consumption and reduces future consumption.E) C) and D)
F) A) and C)

Question 2

-Refer to the above figure. If the current level of real GDP is $13 trillion, then the economy is experiencing

Accepted Answer

A)   an inflationary gap.
B)   a recessionary gap.
C)   a deflationary gap.
D)   a fiscal deficit gap.E) A) and B)
F) All of the above

Question 3

In the traditional Keynesian model, a cut in current taxes

Accepted Answer

A)   increases disposable income but does not affect consumption.
B)   increases both disposable income and consumption.
C)   decreases disposable income but increases consumption.
D)   has no effect on either disposable income or consumption.E) B) and C)
F) A) and B)

Question 4

In the traditional Keynesian model, if the government raises taxes, then

Accepted Answer

A)   both consumption and real Gross Domestic Product (GDP)  will decrease.
B)   both consumption and real Gross Domestic Product (GDP)  will increase.
C)   consumption will increase but Gross Domestic Product (GDP)  will decrease.
D)   consumption will decrease but Gross Domestic Product (GDP)  will increase.E) B) and D)
F) A) and B)

Question 5

When real Gross Domestic Product (GDP)  falls, which of the following will automatically occur?

Accepted Answer

A)   a decrease in all tax rates
B)   a decrease in income tax revenues
C)   a decrease in unemployment compensation expenditures
D)   an increase in income tax revenuesE) B) and C)
F) A) and C)

Question 6

According to supply-side economics, lower tax rates on wages

Accepted Answer

A)   generate higher revenues for the government and increased unemployment.
B)   create incentives to work more, which increases real GDP.
C)   are less productive than lower tax rates on consumers.
D)   have little effect on the economy.E) All of the above
F) A) and D)

Question 7

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

Accepted Answer

A)   no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures.
B)   no effect on aggregate demand because people only look at changes in taxes or government spending in the present.
C)   a positive effect on aggregate demand because people look at changes in taxes or government spending in the present.
D)   an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending.E) A) and C)
F) A) and B)

Question 8

Automatic stabilizers are so-named because

Accepted Answer

A)   they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits.
B)   they occur automatically when real GDP changes.
C)   the policy suggestions of the Council of Economic Advisors are automatically followed.
D)   the policy suggestions of the Office of Management and Budget are automatically followed.E) A) and D)
F) None of the above

Question 9

When the government cuts taxes,

Accepted Answer

A)   the long-run aggregate supply curve shifts to the left.
B)   the short-run aggregate supply curve shifts to the left.
C)   the aggregate demand curve shifts to the left.
D)   the aggregate demand curve shifts to the right.E) A) and D)
F) A) and C)

Question 10

An example of an automatic stabilizer is

Accepted Answer

A)   unemployment compensation.
B)   a newly enacted surtax to slow down an overheated economy.
C)   a constant money supply rule.
D)   a deliberate increase in government spending to fight recession.E) A) and D)
F) A) and C)

Question 11

The traditional Keynesian approach to fiscal policy assumes that

Accepted Answer

A)   the effect of unemployment compensation is to destabilize the economy.
B)   an equal income distribution ensures a stable economy.
C)   consumers spend more when their incomes are higher.
D)   cutting taxes is a more effective way to stimulate the economy than is increasing government spending.E) A) and B)
F) A) and C)

Question 12

If an increase in government spending causes an increase in government borrowing, this could induce

Accepted Answer

A)   an increase in interest rates, which would cause private domestic investment to fall.
B)   an increase in interest rates, which would cause private domestic investment to rise.
C)   an increase in interest rates but no effect on private domestic investment.
D)   a decrease in interest rates, which would cause private domestic investment to rise.E) B) and C)
F) B) and D)

Question 13

Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?

Accepted Answer

Aggregate demand increases as consumptio...

Question 14

What does research tell us about the impact of Ricardian equivalence effects on the economy?

Accepted Answer

A)   There is no evidence of any impact of Ricardian equivalence effects.
B)   Ricardian equivalence effects have a huge impact on aggregate demand.
C)   There is a very small impact on both aggregate demand and aggregate supply.
D)   Ricardian equivalence effects may exist, but the sizes of those effects are unclear.E) B) and C)
F) A) and D)

Question 15

Government-provided unemployment insurance is an example of

Accepted Answer

A)   a discretionary fiscal stabilizer.
B)   an automatic fiscal stabilizer.
C)   a monetary stabilizer.
D)   an automatic monetary stabilizer.E) C) and D)
F) A) and B)

Question 16

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use discretionary fiscal policy to close the existing gap, it should

Accepted Answer

A)   decrease taxes.
B)   increase taxes.
C)   increase the money supply.
D)   decrease government spending.E) All of the above
F) A) and D)

Question 17

Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy.

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> See the above figure. The original equi...

Question 18

One characteristic of automatic stabilizers is that

Accepted Answer

A)   they require no new legislative action by the government 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) B) and C)
F) A) and D)

Question 19

Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely

Accepted Answer

A)   increase government borrowing and increase interest rates.
B)   generate extra tax revenues to cover the extra spending.
C)   reduce interest rates and increase planned investment.
D)   reduce interest rates, increase in planned investment, and increase real GDP.E) C) and D)
F) A) and C)

Question 20

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

Accepted Answer

A)   an increase in real Gross Domestic Product (GDP) .
B)   a direct expenditure offset.
C)   a Ricardian dilemma.
D)   a free market equilibrium.E) A) and B)
F) All of the above

Exam 13: Fiscal Policy

Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?

Correct AnswerverifiedAggregate demand increases as consumptio...View AnswerShow Answer

In the traditional Keynesian model, if the government raises taxes, then

Correct AnswerverifiedShow Answer

An example of an automatic stabilizer is

Correct AnswerverifiedShow Answer

When real Gross Domestic Product (GDP) falls, which of the following will automatically occur?

Correct AnswerverifiedShow Answer

According to supply-side economics, lower tax rates on wages

Correct AnswerverifiedShow Answer

When the government cuts taxes,

Correct AnswerverifiedShow Answer

Government-provided unemployment insurance is an example of

Correct AnswerverifiedShow Answer

What does research tell us about the impact of Ricardian equivalence effects on the economy?

Correct AnswerverifiedShow Answer

According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

Correct AnswerverifiedShow Answer

If an increase in government spending causes an increase in government borrowing, this could induce

Correct AnswerverifiedShow Answer

Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely

Correct AnswerverifiedShow Answer

In the traditional Keynesian model, a cut in current taxes

Correct AnswerverifiedShow Answer

-Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use discretionary fiscal policy to close the existing gap, it should

Correct AnswerverifiedShow Answer

The Keynesian perspective on the effect of an increase in taxes is that this policy action

Correct AnswerverifiedShow Answer

The traditional Keynesian approach to fiscal policy assumes that

Correct AnswerverifiedShow Answer

-Refer to the above figure. If the current level of real GDP is $13 trillion, then the economy is experiencing

Correct AnswerverifiedShow Answer

Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy.

Correct Answerverified See the above figure. The original equi...View AnswerShow Answer

If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in

Correct AnswerverifiedShow Answer

Automatic stabilizers are so-named because

Correct AnswerverifiedShow Answer

One characteristic of automatic stabilizers is that

Correct AnswerverifiedShow Answer

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Aggregate demand increases as consumptio...
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See the above figure. The original equi...
View Answer

Correct Answer
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