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Exam 2

If the cyclically-adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is:

A cyclical deficit

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is:

Discretionary Fiscal Policy

A budget surplus means that:

Government revenues are greater than expenditures in a given year

One of the potential consequences of the public debt is that it may:

Lead to additional future taxes that reduce economic incentives

Refer to the above graph. Assume that the economy initially has a price level of P1 and output level Q1. If the government implements expansionary fiscal policy, and the full multiplier effect was felt, it would bring the economy to:

P1 and Q3

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is:


Which combination of fiscal policy actions would most likely be offsetting?

Increase taxes and government spending

The crowding-out effect from government borrowing to finance the public debt is reduced when:

Public investment complements private investment

An increase in the public debt and its subsequent repayment will tend to:

Mildly increase the income inequality in the U.S.

The Great Recession that started in 2007 and the consequent policy response made the:

Actual budget deficit rise faster than the cyclically-adjusted deficit

The more progressive the tax system, the:

Greater is the built-in stability for the economy

The crowding-out effect works through interest rates to:

Decrease the effectiveness of expansionary fiscal policy

When the Federal government cut taxes and increases spending to stimulate the economy during a period of recession, such actions are designed to be:


When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:

Fiscal policy

The set of fiscal policies that would be most contractionary would be a(n):

Decrease in government spending and an increase in taxes

Up until 2008, Social Security revenues exceeded payouts, and the excess inflow was used to buy:

Treasury securities

If people expected that a tax cut was temporary, then this fiscal policy's effect on the economy will tend to be:


Fiscal policy is enacted through changes in:

Taxation and government spending

The group that often initiates changes in fiscal policy is the:

Council of Economic Advisors

Which of the following serves as an automatic stabilizer in the economy?

The progressive income tax

During a recession, fiscal policy is typically:

Counter-cyclical at the Federal level and pro-cyclical at the state level

One timing problem with fiscal policy to counter a recession is an "operational lag" that occurs between the:

Time fiscal action is taken and the time that the action has its effect on the economy

The cyclically-adjusted surplus in the U.S. was +1.1% of GDP in 2000 and +0.5% of GDP in 2001. This suggests that the government during that period:

Cut taxes and increased spending

The economic burden of World War II for the United States was primarily:

Borne by the persons who lived during the war period

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n):

Expansionary fiscal policy

The following are important problems associated with the public debt, except:

Government borrowing to finance the debt may lead to too much private investment

In the later part of 2009, something interesting happened relative to Social Security, in that for the first time:

Social Security contributions fell short of payouts

Actions by the Federal government that decrease the progressivity of the tax system:

Decrease the effect of automatic stabilizers

The public debt is the:

Total of all past deficits minus all past surpluses

The intent of contractionary fiscal policy is to:

Decrease aggregate demand

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

The crowding-out effect suggests that:

Increases in government spending may reduce private investment

State and local governments are limited in their ability to respond to recessions because of:

Constitutional and other requirements to balance their budgets

The two reasons why bankruptcy is a false concern regarding the public debt are:

Refinancing and taxation

In 2009, the public debt in the U.S. on a per capita basis was about:


The lag between the time the need for fiscal action is recognized and the time action is taken is referred to as the:

Administrative lag

Medicare and Social Security are similar in the following respects, except:

They are both intended to benefit older current workers

The crowding-out effect arises when:

Government borrows in the money market, thus causing an increase in interest rates

One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the:

Start of the recession and the time it takes to recognize that the recession has started .

Built-in stabilizers:

Reduce the size of the multiplier

An expansionary fiscal policy can be illustrated by a:

Upward movement along an aggregate supply curve

The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be:

In deficit

As of 2009, most of the U.S. Federal debt was owed to:


The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would:

Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy

One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has:

The power to print money to finance the debt

Which would tend to reduce the crowding-out effect that occurs when the Federal government increases its borrowing to finance a deficit?

The economy is operating at less than full employment

The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n):

Recognition lag

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

The American Recovery and Reinvestment Act of 2009 included mostly:

Increases in government spending and decreases in taxes

The Federal budget deficit is calculated each year by:

Subtracting government spending from government revenues

A major concern with the Social Security trust fund is that:

The fund will be insufficient to cover obligations in one or two decades

If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement:

Contractionary fiscal policy

The crowding-out effect tends to be stronger when the economy:

Is at, or close to, full employment

Crowding out is a decrease in private investment caused by:

An expansionary fiscal policy

A Federal budget deficit is financed by the:

Government issuance or sale of Treasury securities

How is the public debt calculated?

By cumulating the annual difference between tax revenues and government spending over the years

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