Question 1

d1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect? A) an improvement in profit expectations by businesses B) a decrease in saving C) a decline in the interest rate D) an increase in the marginal propensity to consume" class="answers-bank-image d-inline" rel="preload" > Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

Accepted Answer

A)  an improvement in profit expectations by businesses
B)  a decrease in saving
C)  a decline in the interest rate
D)  an increase in the marginal propensity to consumeE) B) and C)
F) None of the above

Question 2

Refer to the above data.A 10 percent proportional tax on income would:

Accepted Answer

A)  affect neither the size of the multiplier nor the stability of the economy.
B)  increase the size of the multiplier and make the economy more stable.
C)  increase the size of the multiplier and make the economy less stable.
D)  reduce the size of the multiplier and make the economy more stable.E) B) and C)
F) C) and D)

Question 3

Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because:

Accepted Answer

A)  the opportunity cost of wartime expenditures was borne by the generation that lived during the war.
B)  the Federal government can shift expenditures from military goods to the production of other public goods.
C)  the Federal government has the power to levy taxes to pay its debts.
D)  wartime inflation reduces the relative size of the public debt.E) A) and D)
F) B) and D)

Question 4

The net export effect may partially counteract an expansionary fiscal policy.

Accepted Answer

A) True 
 B)False

Question 5

Proponents of the notion of a "political business cycle" suggest that:

Accepted Answer

A)  the cyclically adjusted budget is a better indicator of the state of the economy than the actual budget.
B)  cyclical swings in the economy are produced by the inherent instability found in capitalist economies.
C)  a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes.
D)  there is a trade-off among goals that tends to make the economic policies of state and local governments pro-cyclical.E) A) and B)
F) B) and C)

Question 6

The more progressive the tax system, the:

Accepted Answer

A)  less is the built-in stability for the economy.
B)  greater is the built-in stability for the economy.
C)  less is the effect of crowding-out on the economy.
D)  greater is the severity of business fluctuations on the economy.E) A) and B)
F) A) and C)

Question 7

The crowding-out effect arises when:

Accepted Answer

A)  government borrows in the money market, thus increasing interest rates and net investment spending in the economy.
B)  government borrows in the money market, thus increasing interest rates and decreasing net investment spending.
C)  the progressivity of the tax system increases, thus decreasing interest rates and increasing net investment spending.
D)  the progressivity of the tax system decreases, thus decreasing interest rates and net investment spending.E) B) and D)
F) All of the above

Question 8

When the economy is at full employment:

Accepted Answer

A)  one cannot generalize in comparing the actual and the full-employment budgets.
B)  the full-employment budget will show a surplus and the actual budget will show a deficit.
C)  the actual budget will show a surplus and the full-employment budget will show a deficit.
D)  the actual and the full-employment budgets will be equal.E) B) and C)
F) C) and D)

Question 9

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.E) All of the above
F) B) and C)

Question 10

If the full-employment surplus as a percentage of GDP is zero in one year, and 2 percent of GDP the next year, it can be concluded that:

Accepted Answer

A)  fiscal policy is expansionary.
B)  fiscal policy is contractionary.
C)  the federal government is borrowing money.
D)  the federal government is lending money.E) B) and C)
F) None of the above

Question 11

Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.This diagram portrays the notion of:

Accepted Answer

A)  regressive tax system.
B)  built-in stability.
C)  a balanced-budget.
D)  discretionary fiscal policy.E) None of the above
F) All of the above

Question 12

Countercyclical discretionary fiscal policy calls for:

Accepted Answer

A)  surpluses during recessions and deficits during periods of demand-pull inflation.
B)  deficits during recessions and surpluses during periods of demand-pull inflation.
C)  surpluses during both recessions and periods of demand-pull inflation.
D)  deficits during both recessions and periods of demand-pull inflation.E) All of the above
F) A) and B)

Question 13

The greater the progressiveness of the tax system, the less is the built-in stability of the economy.

Accepted Answer

A) True 
 B)False

Question 14

Refer to the above diagram where T is tax revenues and G is government expenditures.All figures are in billions of dollars.If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the full-employment or cyclically adjusted deficit is:

Accepted Answer

A)  $40 billion.
B)  zero.
C)  $60 billion.
D)  $20 billion.E) All of the above
F) A) and D)

Question 15

The "crowding-out effect" suggests that:

Accepted Answer

A)  the economy's productive capacity will reduce.
B)  imports are replacing domestic production.
C)  private investment is increasing at the expense of government spending.
D)  investment is increasing at the expense of consumption.E) A) and D)
F) C) and D)

Question 16

The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

Accepted Answer

A) True 
 B)False

Question 17

The table below shows the full-employment budget deficit as a percentage of GDP over a five-year period.  Refer to the above information.In which year was fiscal policy expansionary?

Accepted Answer

A)  Year 2
B)  Year 3
C)  Year 4
D)  Year 5E) A) and C)
F) A) and B)

Question 18

Which of the following represents the most contractionary fiscal policy?

Accepted Answer

A)  a $30 billion tax cut
B)  a $30 billion increase in government spending
C)  a $30 billion tax increase
D)  a $30 billion decrease in government spendingE) B) and C)
F) A) and D)

Question 19

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.E) A) and B)
F) A) and C)

Question 20

Assume that aggregate demand in the economy is excessive, causing an inflationary gap.Which of the following would be most in accord with appropriate government fiscal policy?

Accepted Answer

A)  an increase in federal income tax rates
B)  an increase in the size of income tax exemptions for each dependent
C)  passage of legislation providing for the construction of 8,000 new post office buildings
D)  an increase in soil conservation subsidies to farmersE) A) and C)
F) B) and D)

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

The more progressive the tax system, the:

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The greater the progressiveness of the tax system, the less is the built-in stability of the economy.

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Which of the following represents the most contractionary fiscal policy?

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The table below shows the full-employment budget deficit as a percentage of GDP over a five-year period. Refer to the above information.In which year was fiscal policy expansionary?

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When the economy is at full employment:

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Proponents of the notion of a "political business cycle" suggest that:

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The "crowding-out effect" suggests that:

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Countercyclical discretionary fiscal policy calls for:

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If the full-employment surplus as a percentage of GDP is zero in one year, and 2 percent of GDP the next year, it can be concluded that:

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Refer to the above diagram where T is tax revenues and G is government expenditures.All figures are in billions of dollars.If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the full-employment or cyclically adjusted deficit is:

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Assume that aggregate demand in the economy is excessive, causing an inflationary gap.Which of the following would be most in accord with appropriate government fiscal policy?

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Refer to the above diagram.Initially assume that the investment demand curve is Id1.Which of the following effects of a budget deficit might shift the investment demand curve from Id1 to Id2, wholly offsetting any crowding-out effect?

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The "crowding-out effect" suggests that:

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The net export effect may partially counteract an expansionary fiscal policy.

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The crowding-out effect occurs when an expansionary fiscal policy increases the interest rate, decreases investment spending, and weakens fiscal policy.

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The crowding-out effect arises when:

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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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Refer to the above data.A 10 percent proportional tax on income would:

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Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because:

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Refer to the above diagram wherein T is tax revenues and G is government expenditures.All figures are in billions.This diagram portrays the notion of:

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Refer to the above diagram.Initially assume that the investment demand curve is I_d1.Which of the following effects of a budget deficit might shift the investment demand curve from I_d1 to I_d2, wholly offsetting any crowding-out effect?

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