when the govt deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it's exercising
B) discretionary fiscal policy
which of the following fiscal policy actions would be appropriate if the econ is experiencing an inflationary gap?
B) an increase in taxes
suppose the econ is experiencing a recessionary gap at the current level of GDP; which of the following fiscal policy actions would be most appropriate given this recessionary gap?
C) decreasing taxes
which of the following is NOT a fiscal policy action?
C) raising the quantity of money in circulation
which of the following is an example of a discretionary fiscal policy action?
A) increasing government spending to deal with a recession
which of the following is a discretionary fiscal policy action?
C) a deliberate tax cut when the econ experiences high unemployment
fiscal policy to solve short-run econ problems supports the Keynesian notion of
B) an active government role in the econ
according to traditional Keynesian economics, expansionary fiscal policy initiated by the federal govt
B) is an appropriate way to prevent recessions and depressions
Keynes believed that the way to precent recessions and depressions was to
D) increase AD through expansionary fiscal policy
to close a recessionary gap through fiscal policy, the govt should
B) increase govt spending in order to increase AD
fiscal policy includes all of the following EXCEPT
D) policies that influence the rate of growth of the quantity of money in circulation
if the econ is operating on teh LRAS curve, then expansionary fiscal policy will
D) generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more
if the econ is experiencing an inflationary gap and the govt wants to accelerate the adjustment to the long-run equil, it should
A) reduce AD by cutting govt spending or raising taxes
suppose the govt increases lump-sum taxes; this causes
A) disposable income to decrease, which causes consumption spending to decrease and AD to decrease
suppose there currently is an inflationary gap; what could the govt do to bring prices down?
B) reduce govt spending
in the short-run, expansionary fiscal policy usually will
A) increase the price level and increase real GDP
suppose the econ has a high level of unemployment; this would imply
B) that the econ is operating to the left of the LRAS curve and that govt spending could be increased to reduce unemployment
discretionary fiscal policy is so named because it
C) involves specific changes in taxes and govt spending undertaken by Congress and the president
which of the following conditions describes a recessionary gap?
B) the short-run equil level of real GDP is below the long-run level of real GDP
in 2009, Congress passed a bill that involved govt spending increases and tax cuts with the purpose of stimulating the U.S. econ; this policy is an example of
C) expansionary fiscal policy
which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap?
A) a tax decrease passed into law by Congress
which one of the following is an example of discretionary fiscal policy used to correct an inflationary gap?
A) a tax increase passed into law by Congress
what does research tell us about the impact of Ricardian equivalence effects on the econ?
D) Ricardian equivalence effects may exist, but their magnitudes are unclear
the concept that increased govt spending will lead to lower investment and consumer spending is referred to as the
B) crowding-out effect
by definition, a direct expenditure offset will occur whenever
A) the govt increases spending in an area that competes with the private sector
if the govt began providing free textbooks to college students who would otherwise have bought their books from the private sector, the govt's action would result in
B) a direct expenditure offset
if the govt increases spending and there is a complete direct expenditure offset, then
A) AD and real GDP will not change
the govt wants to increase its spending by $1 billion to stimulate the econ and is counting on the govt spending multiplier to help; taking into account direct expenditure offset effects, what is its best spending option?
A) a new cruise missile for the military
according to the supply-side economics, changes in marginal tax rates will have which of the following effects?
D) all of the above
-change the incentive to work
-change the incentive to save
-change the incentive to invest
one part of the supply-side argument is that
B) lower marginal tax rates can increase total tax revenues
the supporters of a proposal to increase marginal taxes on those earning over $200,000 a year say this change would generate $100 billion in new tax revenues; a supply-side economist would argue that the actual revenue raised will be
A) less than $100 billion because some people will respond by working less
when supply-side policy is successful in pushing up equil real GDP, the reason is that the policy generates
B) an increase in AS
at tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,
C) a reduction in tax rates increases tax revenues
if the crowding-out effect is complete and the MPS is .25, then an increase in govt spending of $100 billion will generate how much more real GDP?
a direct expenditure offset occurs when an increase in govt spending
C) results in a decrease in private spending
to the extent that a direct expenditure offset results from an expansionary fiscal policy,
A) the stimulative effect will be less than anticipated
suppose that real GDP is initially $14 trillion and the govt attempts to increase real GDP to $15 trillion; the MPC is .8 and every $1.00 increase in real govt spending crowds out $.50 in real planned investment expenditures; which increase in govt spending below could yield the desired level of real GDP?
D) $400 billion
Suppose that real GDP is initially $13 trillion and the government attempts to increase real GDP to $14 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. How much increase in real government spending could lead to the desired level of real GDP?
C) $500 billion
according to the Ricardian equivalence theorem, a tax cut that increases the govt budget deficit will have
A) no effect on AD because people realize that there will be a future tax liability so that there is no increase in consumption expenditures
expansionary fiscal policy falls short of its goal; some economists claim it's due to indirect crowding out; what evidence would be consistent with this claim?
B) the interest rate increased
Three candidates for political office disagree over the benefits of enlarging the federal budget deficit. Candidate C says the stimulation package is needed to increase employment and real GDP; Candidate D says it will only cause higher prices; and Candidate F says it will have no effect on either real GDP or the price level. How do the three candidates differ with respect to the condition of the economy and the effects of fiscal policy?
C) candidate C thinks the econ is below the full-employment real GDP and that the SRAS curve is horizontal; candidate D believes the econ is at full employment; candidate F believes the expansionary policy will result only in direct fiscal offsets
"expansionary fiscal policy is always 100% effective when the SRAS curve is horizontal"; is this statement true?
C) no, b/c crowding out could take place
whenever govt spending is a substitute for private spending
C) the effects of expansionary fiscal policy are dampened
the govt has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese; we would expect this policy to lead to
D) an increase in AD but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset
supply-side economics focuses attention on how fiscal policy might be used to
B) shift the AD curve out
the Laffer curve indicates which of the following?
C) there is an ideal tax-revenue-maximizing tax rate for govt taxes
according to the Laffer curve, increases in the tax rate will lead to a(n)
D) initial increase in tax revenues and then a decrease in tax revenues
according to supply-side economics, lower tax rates on wages
B) create incentives to work more, which increases real GDP
a govt proposal to increase marginal tax rates on the wealthiest 2% of U.S. residents is supposed to generate an additional $100 billion in tax revenues; it is likely that
C) the actual revenue raised will be less than $100 billion, because some of the people will respond by working less and earning less income that can be taxed
an increase in govt spending without an accompanying increase in taxes
D) requires additional govt borrowing
which one of the following statements is NOT true?
D) when crowding out occurs, fiscal policy is more effective
in the extreme case of a complete crowding-out effect,
C) an increase in govt spending will not increase AD
because of crowding out,
C) expansionary fiscal policy is diluted by the decline in investment spending caused by higher interest rates
if an increase in govt spending causes an increase in govt borrowing, this could induce
A) an increase in interest rates, which would cause private domestic investment to fall
the crowding-out effect refers to
C) a decrease in consumption and investment caused by an increase in govt borrowing
suppose that Congress passes a budget that increases govt spending; also, suppose that this increase in govt spending causes an increase in interest rates and a reduction in planned investment; the effect of this fiscal policy action on planned investment is knows as which of the following?
D) none of the above
if the govt pays for a new library in your neighborhood that you regularly visit, and you stop going to Barnes and Noble to buy books, this is an example of
D) a direct expenditure offset
to the extent that the Ricardian equivalence theorem is true, which of the conditions below will hold?
A) increases in the govt budget deficit will not affect AD
which of the following is true of the Ricardian equivalence theorem?
D) the theorem states that the public will react to a tax cut by saving more
if there is a dollar-for-dollar direct expenditure offset, then
B) increases in govt spending will not increase AD
the theory that govt borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, was formulated by
C) David Ricardo
supply-side economists argue that changes in tax rates cause changes in
D) all of the above
-the full-employment level of output
supply-side economists argue that decreasing marginal tax rates
A) increases productivity and shift the AS curve to the right
if the federal govt borrows from the private sector to pay for increased budget deficits and interest rates increase, this will cause
A) a decrease in planned investment and planned consumption
the crowding out effect of expansionary fiscal policy refers to which of the following?
A) a reduction in private sector planned investment
suppose policy makers pass a budget that results in a reduction in govt spending an no changes in taxes; this reduction in govt spending will likely
C) reduce interest rates and increase planned investment
an increase in govt spending that is not financed by an increase in taxes will cause
B) an increase in interest rates and a reduction in planned investment
the crowding-out effect refers to the tendency of expansionary fiscal policy to
A) cause decreases in planned investment or planned consumption
to compensate for the possibility of indirect crowding out, a govt engaging in expansionary policy aimed at eliminating a recessionary gap could
B) increase spending more than the simplest Keynesian model would predict
which of the following is a basic assumption of the Ricardian equivalence theorem?
D) consumers consider future tax payments when deciding how much to spend and save today
the effect time lag of fiscal policy refers to
C) the time between the onset of a policy and when the policy has impact on the econ
fiscal policy may end up being destabilizing to an econ because
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve
once either expansionary or contractionary fiscal policy has been undertaken,
C) a time lag exists between implementation and the results of the policy
the amount of time it takes Congress to debate the size of a tax cut is know as the
A) action time lag
the various time lags involved with fiscal policy imply that
C) fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over
in Jan 2009, the president submitted a bill to Congress that was designed to stimulate the econ and increase employment; the legislation was passed March 2009, and the spending occurred from June 2009 to Sept 2010; consequently,
D) the full effect of the spending would be felt some time after Sept 2010 because the full multiplier effects could not be felt until all the increase in spending took place
in Jan 2009, the president submitted a bill to Congress in order to stimulate the econ and increase employment; the legislation was pass in March 2009, and the spending occurred from June 2009 to March 2011; as a result,
A) the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag
sto the extent that the political process of moving legislation through Congress is slow,
C) the action time lag will be long
a problem with using fiscal policy to fine-tune the econ is that
A) agreeing on the appropriate fiscal policy is time consuming
when there is an interval between when the fiscal policy changes and corresponding changes in AS, we have a(n)
D) effect time lag
a recession begins in July but govt policy makers do not reach a consensus that a recession had in fact begun until Oct; this is an example of
A) recognition time lag
one characteristic of built-in or automatic stabilizers is that
A) they require no new legislative action by Congress to have an effect
unemployment compensation programs are called automatic stabilizers because payments increase during
all of the following are automatic stabilizers EXCEPT
A) a congressionally mandated decrease in tax rates to stimulate the econ
when real GDP falls, which of the following will automatically occur?
B) a decrease in income tax revenues
an advantage of automatic stabilizers over discretionary fiscal policy is that
A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy
in the U.S. econ, the progressive income tax and unemployment compensation are both
C) automatic stabilizers
suppose there are two econs that are identical in every way with the following exception; Econ A has an unemployment compensation system while Econ B does NOT have an unemployment compensation system; now suppose both econs experience the same drop in planned investment; which of the following is correct?
B) real GDP will fall more in Econ B than in Econ A
which of the following might be considered an automatic fiscal stabilizer?
C) unemployment compensation
which of the following is NOT an automatic stabilizer?
B) the system of national defense procurement
the advantage of automatic stabilizers is that they
C) reduce the fluctuations in the business cycle
if the govt increases AD when the econ is at both short-run and long-run equil, the full long-run effect of this fiscal policy will be to
B) increase the price level
during normal times, discretionary fiscal policy
B) is probably not very effective in influencing real GDP due to time lags
D) is when discretionary fiscal policy leads to spending more than is collected in taxes
the traditional Keynesian approach to fiscal policy assumes that
C) consumers spend more when their incomes are higher
in the traditional Keynesian model, if the govt increases spending, then
A) real GDP will rise and the price level will remain constant
in the traditional Keynesian model, an increase in govt spending
A) cause the C+I+G+X line to shift upward by the full amount of the increase in govt spending
according to the traditional Keynesian analysis, if the govt increases spending by $10 million, then
A) consumption will increase, and so total expenditures will increase by more than $10 million
in the traditional Keynesian model, an increase in govt spending raises total planned real expenditures by more than the original increase in govt spending because
B) consumption spending depends positively on real GDP
according to the traditional Keynesian approach, if the govt increases taxes, then
A) real GDP will fall and the price level will remain constant
according to the traditional Keynesian approach, a tax cut raises AD because
B) disposable income available to consumers increases
in the traditional Keynesian model, an income tax cut raises real GDP because
B) consumption spending depends positively on after-tax income
suppose there are 2 policy options facing a vote in the Senate; in the first, govt spending will increase $50 billion, while the second option is to cut taxes by $50 billion; a Keynesian economist would argue for
D) the spending option because it has a bigger impact on total spending; the spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier
in country Z, the govt simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion; if the MPS is equal to .2, the gov's action _______ real GDP by ______
B) increases; $25 billion
in country Z, the govt simultaneously decreases its expenditures by $20 billion and decreases taxes by $20 billion; if the MPS is equal to .2, the gov's action _______ real GDP by ________
B) decreases; $20 billion