Chapter 13: Fiscal Policy

1. Chapter 13: Fiscal Policy

2. When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising • monetary policy. • discretionary fiscal policy. • a Ricardian policy. • a laissez-faire policy.

3. Which of the following is NOT a fiscal policy action? • increasing government expenditures on military hardware • decreasing government spending on the arts • raising the quantity of money in circulation • lowering income tax rates

4. What does research tell us about the impact of Ricardian equivalence effects on the economy? • There is no evidence of any impact of Ricardian equivalence effects. • Ricardian equivalence effects have a huge impact on aggregate demand. • There is a very small impact on both aggregate demand and aggregate supply. • Ricardian equivalence effects may exist, but their magnitudes are unclear.

5. One part of the supply-side argument is that • lower marginal tax rates are required to induce Congress to reduce government spending. • lower marginal tax rates can increase total tax revenues. • the marginal tax rate should be set at 50 percent. • the relevant aggregate supply curve is close to horizontal.

6. The period between the recognition of a problem and the implementation of a policy to solve the problem is • the recognition lag. • the action time lag. • the effect time lag. • the fine tuning lag.

7. The various time lags involved with fiscal policy imply that • fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. • fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. • fiscal policy may often be destabilizing if the effects of the policy kick in after the need is over. • when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP.

8. One characteristic of built-in or automatic stabilizers is that • they require no new legislative action by Congress to have an effect. • they automatically produce surpluses during recessions and deficits during inflation. • they have no effect on the distribution of income. • they reduce the size of the public debt during times of recession.

9. Refer to the figure below. As the real national income expands from Y2 to Y3, • a budget surplus occurs. • a budget deficit occurs. • tax revenues fall. • government transfers rise.

10. If the government increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect of this fiscal policy will be to • increase real Gross Domestic Product (GDP). • increase the price level. • increase either the real Gross Domestic Product (GDP) or the price level, depending on the length of the time lag. • decrease both real Gross Domestic Product (GDP) and the price level.

11. The traditional Keynesian approach to fiscal policy assumes • current taxes are the only taxes taken into account by firms and consumers. • the focus of attention should be the long run. • prices are flexible while interest rates are not. • exchange rates are fixed.

12. In the traditional Keynesian model, if the government increases spending, then • real Gross Domestic Product (GDP) will rise and the price level will remain constant. • real Gross Domestic Product (GDP) will increase and the price level will fall. • both real Gross Domestic Product (GDP) and the price level will rise. • real Gross Domestic Product (GDP) will remain constant and the price level will rise.

13. In the traditional Keynesian model, an increase in government spending raises total planned real expenditures by more than the original increase in government spending because • consumption spending depends negatively on real GDP. • consumption spending depends positively on real GDP. • consumption spending is not related to real GDP. • of the crowding-out effect on consumption spending.

14. According to the traditional Keynesian approach, if the government increases taxes, then • real Gross Domestic Product (GDP) will fall and the price level will remain constant. • real Gross Domestic Product (GDP) will fall but the price level will rise. • both real Gross Domestic Product (GDP) and the price level will fall. • real Gross Domestic Product (GDP) will remain constant but the price level will rise.

15. According to the Keynesian approach, a decrease in taxes • will increase consumption exactly by the amount of the taxes. • will increase consumption by an amount of less than the change in taxes. • will not impact consumption, as most consumption is autonomous. • will decrease consumption, as the government will have to spend less.

16. In Country Z, the government simultaneously increases its expenditures by $25 billion and increases taxes by $25 billion. If the MPS is equal to 0.2, the government's action ________ real GDP by ________. • increases; $125 billion • increases; $25 billion • increases; $100 billion • has no effect on; $0

17. According to the traditional Keynesian approach, if the government increases spending by $5 million and raises current taxes by $5 million at the same time, then • real GDP will increase by $5 million. • real GDP will decrease by $5 million. • real GDP will decrease by more than $5 million. • real GDP will remain the same.

18. The balanced-budget multiplier is equal to • the percentage increase in government expenditures. • the reciprocal of the increase in government expenditures. • the percentage increase in taxes. • 1.

19. The Keynesian approach assumes that • there is no unemployment in the economy. • the economy is self-regulating. • the government budget is always in deficit. • the price level is fixed.

20. According the traditional Keynesian approach, an increase in government spending is effective in lowering unemployment if • the price level is fixed. • the price level is flexible. • the price level does not exist. • Ricardian equivalence occurs, regardless of the price level.

21. If the price level is fixed, then an increase in government spending will lead to • a larger increase in nominal GDP than in real GDP. • a smaller increase in nominal GDP than in real GDP. • no increase in either nominal GDP or real GDP. • an increase in nominal GDP by the same amount as an increase in real GDP.