Question 1

The crowding-out effect of borrowing to finance the public debt:

Accepted Answer

A)  decreases current spending for private investment.
B)  increases the privately owned stock of real capital.
C)  decreases the economic burden on future generations.
D)  increases incentives to work and save.

Question 2

Actual deficits are:

Accepted Answer

A)  Generally smaller than actual deficits
B)  Generally larger than actual deficits
C)  Identical to actual deficits
D)  Opposite to actual deficits

Question 3

Refer to the above graph.If the economy was initially in equilibrium at point 3 and interest rates increase by 4 percentage points, then the crowding-out effect would be:

Accepted Answer

A)  $10 billion in investment.
B)  $20 billion in investment.
C)  $30 billion in investment.
D)  $35 billion in investment.

Question 4

The most likely way the public debt burdens future generations is by:

Accepted Answer

A)  reducing the current level of investment.
B)  causing future unemployment.
C)  causing a slowly falling price level.
D)  reducing real interest rates.

Question 5

Expansionary fiscal policy is so named because it:

Accepted Answer

A)  involves an expansion of the nation's money supply.
B)  necessarily expands the size of government.
C)  is aimed at achieving greater price stability.
D)  is designed to expand real GDP.

Question 6

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .9, then it could:

Accepted Answer

A)  decrease taxes by $6 billion.
B)  decrease taxes by $12 billion.
C)  increase government spending by $6 billion.
D)  increase government spending by $12 billion.

Question 7

With the expenditures programs and the tax system shown in the above diagram:

Accepted Answer

A)  the public budget will be expansionary at all GDP levels above K, and contractionary at all GDP levels below K.
B)  the public budget will be a destabilizing force at all levels of GDP.
C)  deficits will be realized at income levels below K, and surpluses above K.
D)  deficits will be realized at income levels below H, and surpluses above H.

Question 8

Increased government spending for investments such as highways or harbours financed by increasing the public debt would most likely:

Accepted Answer

A)  crowd out future public investment.
B)  reduce the economy's future productive capacity.
C)  increase the amount of public capital stock in the future.
D)  increase the amount of private capital stock in the future.

Question 9

The following budget information is for a hypothetical economy.All data are in billions of dollars.  Refer to the above data.If year 1 is the first year of this nation's existence and year 5 is the present year, this nation's public debt is:

Accepted Answer

A)  $295 billion.
B)  $100 billion.
C)  $3540 billion.
D)  $230 billion.

Question 10

The key to assessing whether fiscal policy is expansionary is to observe the change in the full-employment budget as a percentage of GDP.

Accepted Answer

A) True 
 B)False

Question 11

One of the timing problems with fiscal policy is an "operational lag" that occurs between the:

Accepted Answer

A)  beginning of a recession and the time that it is recognized that the event is occurring.
B)  time the need for fiscal action is recognized and the time that action is actually taken.
C)  time that fiscal action is taken and the time that action has an impact on output, employment, and the price level.
D)  time that fiscal action has an impact on output, employment, and the price level and the time by which it can be determined if the policy is effective.

Question 12

Which of the following is an example of an automatic stabilizer? As real GDP decreases, income tax revenues:

Accepted Answer

A)  increase and transfer payments decrease.
B)  decrease and transfer payments increase.
C)  and transfer payments decrease.
D)  and transfer payments increase.

Question 13

The net export effect works through international trade to:

Accepted Answer

A)  increase the effectiveness of expansionary and contractionary fiscal policy.
B)  decrease the effectiveness of expansionary and contractionary fiscal policy.
C)  decrease the effectiveness of expansionary fiscal policy and increase the effectiveness of contractionary fiscal policy.
D)  increase the effectiveness of expansionary fiscal policy and decrease the effectiveness of contractionary fiscal policy.

Question 14

Built-in stabilizers:

Accepted Answer

A)  intensify the business cycle.
B)  reduce the size of the multiplier.
C)  increase the government's deficit during a recession.
D)  are a part of discretionary fiscal policy.

Question 15

The "crowding-out effect" suggests that:

Accepted Answer

A)  tax increases are paid primarily out of saving and therefore are not an effective fiscal device.
B)  increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
C)  it is very difficult to have excessive aggregate spending in our economy.
D)  consumer and investment spending always vary inversely.

Question 16

If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

Accepted Answer

A) True 
 B)False

Question 17

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion at each price level by:

Accepted Answer

A)  reducing government expenditures by $125 billion.
B)  reducing government expenditures by $20 billion.
C)  increasing taxes by $50 billion.
D)  increasing taxes by $250 billion.

Question 18

Like households and businesses, the provincial and municipal governments increase their expenditure during good times and cut them during recession.As a result of such a practice:

Accepted Answer

A)  the economic recession would be eliminated while the inflationary situation is worsened.
B)  the economic recession and or inflationary situation is worsened.
C)  the economic recession and or inflationary situation is more manageable.
D)  the economic recession and or inflationary situation is corrected.

Question 19

The higher domestic interest rate resulting from an expansionary fiscal policy in Canada will tend to:

Accepted Answer

A)  increase domestic investment spending.
B)  increase Canadian exports.
C)  increase domestic consumption spending.
D)  decrease Canadian exports.

Question 20

A tax reduction of a specific amount will be more expansionary, the:

Accepted Answer

A)  smaller is the economy's MPC.
B)  larger is the economy's MPC.
C)  smaller is the economy's multiplier.
D)  less the economy's built-in stability.

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

If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

Correct AnswerverifiedShow Answer

The key to assessing whether fiscal policy is expansionary is to observe the change in the full-employment budget as a percentage of GDP.

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Increased government spending for investments such as highways or harbours financed by increasing the public debt would most likely:

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The higher domestic interest rate resulting from an expansionary fiscal policy in Canada will tend to:

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The "crowding-out effect" suggests that:

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In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .9, then it could:

Correct AnswerverifiedShow Answer

Refer to the above graph.If the economy was initially in equilibrium at point 3 and interest rates increase by 4 percentage points, then the crowding-out effect would be:

Correct AnswerverifiedShow Answer

If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion at each price level by:

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Like households and businesses, the provincial and municipal governments increase their expenditure during good times and cut them during recession.As a result of such a practice:

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The net export effect works through international trade to:

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Expansionary fiscal policy is so named because it:

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One of the timing problems with fiscal policy is an "operational lag" that occurs between the:

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The most likely way the public debt burdens future generations is by:

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The following budget information is for a hypothetical economy.All data are in billions of dollars. Refer to the above data.If year 1 is the first year of this nation's existence and year 5 is the present year, this nation's public debt is:

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With the expenditures programs and the tax system shown in the above diagram:

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A tax reduction of a specific amount will be more expansionary, the:

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Built-in stabilizers:

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Actual deficits are:

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The crowding-out effect of borrowing to finance the public debt:

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Which of the following is an example of an automatic stabilizer? As real GDP decreases, income tax revenues:

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