Page 41
196.
If the government’s revenues are less than its expenditures, then it has a budget:
A)
deficit.
B)
surplus.
C)
balance.
D)
equality.
197.
If the government’s revenues are greater than its expenditures, then it has a budget:
A)
deficit.
B)
surplus.
C)
balance.
D)
equality.
198.
Which fiscal policy would make a budget surplus smaller or a budget deficit larger?
A)
an increase in government purchases of goods and services
B)
lower government transfers
C)
higher taxes
D)
lower interest rates
199.
Which fiscal policy would make a budget surplus larger or a budget deficit smaller?
A)
an increase in government purchases of goods and services
B)
lower government transfers
C)
lower taxes
D)
higher interest rates
200.
An increase in government spending of $300 billion and a tax cut of $300 billion will
have _____ effects on the budget balance and _____ effects on real GDP.
A)
equal; equal
B)
equal; unequal
C)
unequal; equal
D)
unequal; unequal
201.
An increase in government transfer payments of $250 billion and a tax cut of $250
billion will have _____ effects on the budget balance and _____ effects on real GDP.
A)
equal; equal
B)
equal; unequal
C)
unequal; equal
D)
unequal; unequal
Page 42
202.
When the unemployment rate increases, the budget:
A)
is unaffected.
B)
tends to move into deficit.
C)
tends to move into a surplus.
D)
remains neutral.
203.
Because of the role of automatic stabilizers and discretionary fiscal policy, the historical
record of the United States since 1970 shows that the budget tends to:
A)
move into a deficit during expansions.
B)
move into a surplus during recessions.
C)
move into a deficit during recessions.
D)
remain balanced throughout expansions and recessions.
204.
The cyclically adjusted budget deficit fluctuates _____ the actual budget deficit.
A)
more than
B)
less than
C)
about the same as
D)
inversely with
205.
If the economy is operating well below potential output, the cyclically adjusted budget
balance deficit is _____ than the actual budget balance.
A)
smaller than
B)
larger than
C)
unrelated to
D)
the same as
206.
The cyclically adjusted budget balance is an estimate of:
A)
the contractionary fiscal policy needed to close an inflationary gap.
B)
the tax increase needed to compensate for larger government transfers so that the
budget remains balanced.
C)
the expansionary fiscal policy needed to close a recessionary gap.
D)
what the budget balance would be if real GDP were exactly equal to potential
output.
207.
The cyclically adjusted budget balance refers to:
A)
the size of the budget in the current year.
B)
the average size of the budget over the long run.
C)
the swings in the budget as the business cycle changes.
D)
the budget balance if actual output were equal to potential output.
Page 43
208.
Over the past few decades in the United States, large federal budget deficits most often
have been caused by:
A)
decreased spending on welfare payments.
B)
excessive spending by the state governments.
C)
a depressed economy.
D)
excessive tax increases.
209.
A cyclically adjusted budget balance:
A)
shows what the budget balance would be with a significant amount of cyclical
unemployment.
B)
is an estimate of what the budget balance would be if real GDP were equal to
potential output.
C)
is a good indicator of the structural deficit in the economy.
D)
is the same as the national debt, and it rises as interest cost is accrued.
210.
The cyclically adjusted budget deficit:
A)
is no different from the actual budget deficit.
B)
fluctuates less than the actual budget deficit.
C)
fluctuates more than the actual budget deficit.
D)
remains unchanged throughout the business cycles.
211.
Budget deficits almost always:
A)
decrease with inflation and increase with deflation.
B)
increase when unemployment rises and decrease when unemployment falls.
C)
decrease when unemployment rises and increase when unemployment falls.
D)
increase when the aggregate price level rises and decreases when the aggregate
price level falls.
212.
When the unemployment rate decreases, the budget:
A)
will always be balanced.
B)
surplus gets smaller or the deficit gets larger.
C)
surplus gets larger or the deficit gets smaller.
D)
is unaffected.
Page 44
213.
The cyclically balanced budget is important because it:
A)
is an estimate of the amount of expansionary fiscal policy necessary to close an
inflationary gap.
B)
is an estimate of the amount of contractionary fiscal policy necessary to close a
recessionary gap.
C)
indicates the amount of tax revenue that will be available for implicit liabilities.
D)
helps to determine whether the government’s taxing and spending policies are
sustainable in the long run.
214.
Since 1965, the budget deficit _____ of GDP.
A)
has never been more than 12%
B)
has been as high as 50%
C)
has usually been 0%
D)
has usually been between 0% and -20%
215.
Do economists believe that the budget should be balanced each fiscal year?
A)
Yes, a budget should be balanced annually; otherwise persistent budget deficits can
cause havoc in the economy.
B)
Yes, as the law states that both the federal and state budgets should always be
balanced.
C)
Yes, since the balanced budget multiplier is larger, so it makes the economy grow
faster.
D)
No, a budget should be balanced only on average; it can be in a deficit during a
recession and offset by surpluses when the economy is doing well.
216.
States that are required by their constitution to have annually balanced budgets are
likely to _____ than those not required to balance their budget.
A)
have less severe business cycles
B)
have more severe business cycles
C)
grow faster
D)
have a better quality of life
217.
If legislation required the budget to be balanced at all times, _____ as an automatic
stabilizer of the business cycle.
A)
fiscal policy could not operate
B)
it would reduce the effectiveness of monetary policy
C)
it would increase the effectiveness of discretionary fiscal policy
D)
monetary policy could not operate
Page 45
218.
Most economists believe that a balanced budget requirement would:
A)
undermine the role of taxes and transfers as automatic stabilizers.
B)
enhance the effect of automatic stabilizers.
C)
strengthen the ability of policy makers to conduct discretionary fiscal policy.
D)
not have any impact on the role of taxes and transfers as automatic stabilizers.
219.
A law requiring the federal budget to be balanced each year would likely:
A)
make business cycles more severe.
B)
make business cycles less severe.
C)
not affect the severity of business cycles.
D)
increase the effectiveness of automatic stabilizers.
220.
Many U.S. states have rules requiring that they balance their budgets. These rules:
A)
make automatic stabilizers more effective.
B)
fully offset the effects of automatic stabilizers at the federal level.
C)
help ensure that the federal government budget will be balanced.
D)
limit the ability of government at all levels to offset the effects of a recession.
221.
Which statement is NOT a reason for the Congressional Budget Office’s change in its
projections of implicit liabilities for 2010 and 2016?
A)
Spending on major health programs as a percentage of GDP is expected to
increase.
B)
Social Security spending as a percentage of GDP is expected to decrease.
C)
Spending on major health programs as a percentage of GDP is expected to
decrease.
D)
Social Security spending as a percentage of GDP is expected to increase.
222.
What can the federal government do to finance a deficit?
A)
cut taxes
B)
increase purchases of goods and services
C)
increase transfer payments
D)
borrow funds
Page 46
223.
What was the main financial problem that the government of Greece faced in 2009?
A)
It had a large budget surplus that it needed to invest, but it was unable to find
investments that offered a high rate of return.
B)
It had a large budget surplus, but the president vetoed attempts to use the surplus to
give tax refunds to the citizens.
C)
It had a large budget deficit, but the parliament refused to raise transfer payments
to reduce the deficit.
D)
It had a large budget deficit, but most of its creditors were unwilling to make loans
to Greece or charged extremely high interest rates to compensate them for the risk
of loss.
224.
Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal
year, its purchases of goods and services and its transfers are $2 trillion, and tax
revenues are $1.5 trillion. At the end of the fiscal year, the debt is:
A)
$10.5 trillion.
B)
$6.5 trillion.
C)
$9 trillion.
D)
$7.5 trillion.
225.
When the government has a deficit, it will most likely finance the deficit by:
A)
cutting the salaries of the president and Congress.
B)
selling some military bases.
C)
borrowing the money.
D)
charging higher admission fees at national parks.
226.
If government spending increases and taxes decrease:
A)
implicit liabilities will increase.
B)
implicit liabilities will decrease.
C)
the public debt will increase.
D)
the public debt will decrease.
227.
According to the text, the public debt of the U.S. federal government at the end of fiscal
year 2015 equaled about:
A)
$30 trillion.
B)
$13.1 trillion.
C)
$7.4 trillion.
D)
$4.8 trillion.
Page 47
228.
When the budget is in deficit, the government generally:
A)
raises taxes.
B)
increases the public debt.
C)
sells public assets like national parks.
D)
decreases military spending.
229.
Public debt is:
A)
taxes minus government purchases minus government transfers.
B)
government debt held by foreigners.
C)
government debt held by individuals and institutions outside the government.
D)
the government deficit divided by GDP.
230.
Suppose that the budget deficit of a country remains level for five years. The federal
debt will:
A)
remain constant.
B)
fall.
C)
rise.
D)
either remain constant or fall.
231.
The national debt _____ when the federal government incurs a _____.
A)
falls; deficit
B)
rises; surplus
C)
stays the same; surplus
D)
rises; deficit
232.
The national debt:
A)
is the sum of all past federal surpluses.
B)
grows when the government runs a deficit.
C)
grows when the government runs a surplus.
D)
did not exist until 1998.
233.
The difference between a budget deficit and government debt is that:
A)
a deficit is the amount by which government spending exceeds tax revenues,
whereas debt is the sum of money the government owes.
B)
debt is the amount by which government spending exceeds tax revenues, whereas a
deficit is the sum of money the government owes.
C)
a deficit is measured as of a particular time, whereas debt is measured over time.
D)
a deficit harms the economy, whereas debt improves the economy.
Page 48
234.
In the United States in 2015, public debt accounted for about _____% of GDP.
A)
12
B)
18
C)
82
D)
91
235.
In Japan during the 1990s _____ policies were put into effect to _____.
A)
contractionary tax; counter inflation
B)
contractionary spending; counter inflation
C)
expansionary tax; counter inflation
D)
expansionary spending; prop up aggregate demand
236.
The U.S. national debt as a percentage of GDP is _____ that of Greece.
A)
slightly higher than
B)
equivalent to
C)
substantially higher than
D)
lower than
237.
When the government borrows funds to pay for budget deficits:
A)
planned aggregate spending decreases rather than increases.
B)
the multiplier effect of government purchases increases.
C)
private investment spending may be crowded out.
D)
the interest rate and savings decrease.
238.
The larger the amount of outstanding public debt:
A)
the lower the tax revenue the government must collect.
B)
the more spending the government can afford.
C)
the smaller the crowding out of private investment spending.
D)
the larger the fraction of the federal budget deficit that must be devoted to interest
payments.
239.
A government can pay off its debt if:
A)
GDP and the debt grow at the same rate.
B)
the ratio of debt to GDP is increasing.
C)
GDP grows faster than the debt.
D)
the debt grows faster than GDP.
Page 49
240.
Consider an economy that already has a sizable budget deficit. If the economy is facing
a major downturn, the government should:
A)
stimulate the economy by raising expenditure as long as the ratio of debt to GDP is
declining.
B)
stimulate the economy by raising expenditure irrespective of the ratio of debt to
GDP.
C)
not stimulate the economy by raising expenditure because of the burden of debt.
D)
not increase government expenditure, since the budget should be balanced.
241.
Fiscal experts in the United States are most concerned about the country’s:
A)
implicit liabilities.
B)
high ratio of debt to GDP.
C)
risk of debt default.
D)
low ratio of debt to GDP.
242.
If the average retirement age decreases:
A)
implicit liabilities will increase.
B)
implicit liabilities will decrease.
C)
implicit liabilities will be unaffected.
D)
the public debt will immediately increase.
243.
Spending promises made by governments that are effectively a debt, despite the fact that
they are not included in the usual debt statistics, are known as:
A)
implicit liabilities.
B)
explicit liabilities.
C)
implicit assets.
D)
explicit assets.
244.
Implicit liabilities of a government are:
A)
bonds held by foreigners.
B)
spending promises, like Social Security benefits, that are effectively debt although
no bond is associated with the promise.
C)
debt of a country adjusted for the price ratio.
D)
the ratio of a country’s debt to its GDP.
245.
Implicit liabilities refers to promises made by the government, such as:
A)
aid to foreign countries.
B)
building roads and bridges.
C)
Social Security and Medicare payments.
D)
contributions to the National Endowment for the Arts.
Page 50
246.
Social Security spending is projected to:
A)
increase as baby boomers retire.
B)
decrease as baby boomers retire.
C)
stay the same over the next decade.
D)
increase for this decade and then decline.
247.
The Social Security trust fund is the:
A)
cash held in a savings account by the government.
B)
government bonds held by the Social Security system.
C)
money held by the government from the Medicare tax.
D)
interest earned over time by the money from Social Security taxes.
248.
Spending promises made by the government that are effectively a debt, although they
are not included in the usual debt statistics, are known as:
A)
burden of debt.
B)
structural deficit.
C)
implicit liabilities.
D)
constructive debt.
249.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of
the expenditure multiplier?
A)
1
B)
2
C)
2.8
D)
5
250.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If the government
increases spending by $10 billion, real GDP will increase by:
A)
$10 billion.
B)
$20 billion.
C)
$27.8 billion.
D)
$50 billion.
Page 51
251.
Real GDP equals $200 billion, the government collects 20% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If potential output
equals $255.6 billion, the government could close the _____ gap by increasing
government spending by _____.
A)
recessionary; $20 billion
B)
recessionary; $55.6 billion
C)
inflationary; $20 billion
D)
inflationary; $55.6 billion
252.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of
the multiplier?
A)
1
B)
2.5
C)
4
D)
5
253.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If the government
decreases spending by $40 billion, real GDP will decrease by:
A)
$40 billion.
B)
$80 billion.
C)
$100 billion.
D)
$200 billion.
254.
Real GDP equals $400 billion, the government collects 25% of any increase in real GDP
in the form of taxes, and the marginal propensity to consume is 0.8. If potential output
equals $250 billion, the government could close the _____ gap by decreasing
government spending by _____.
A)
recessionary; $30 billion
B)
recessionary; $150 billion
C)
inflationary; $30 billion
D)
inflationary; $60 billion
255.
Fiscal policy is the use of taxes, government transfers, or government purchases to shift
the aggregate demand curve.
A)
True
B)
False
Page 52
256.
Medicare covers much of the cost of medical care for Americans with low incomes.
A)
True
B)
False
257.
The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate
demand.
A)
True
B)
False
258.
When faced with a recessionary gap, the government can increase taxes and cut
spending to close it.
A)
True
B)
False
259.
Expansionary fiscal policy pushes the aggregate demand curve to the right.
A)
True
B)
False
260.
Increased government transfers constitute contractionary fiscal policy.
A)
True
B)
False
261.
Lyndon Johnson’s tax surcharge was an expansionary fiscal policy that increased
aggregate demand.
A)
True
B)
False
262.
One of the lags associated with fiscal policy is the time it takes to recognize that the
economy has developed a recessionary or inflationary gap.
A)
True
B)
False
263.
Some economists argue that when a government tries too hard to stabilize the economy
through fiscal or monetary policy, it can end up making the economy less stable.
A)
True
B)
False
Page 53
264.
The size of the multiplier increases as the size of the marginal propensity to consume
increases.
A)
True
B)
False
265.
The marginal propensity to consume is the percentage of a household’s income that is
used to pay income tax.
A)
True
B)
False
266.
If the marginal propensity to consume is 0.80, the multiplier for government purchases
of goods and services will be 1.25.
A)
True
B)
False
267.
If the marginal propensity to consume is 0.8 and government purchases of goods and
services decrease by $30 billion, real GDP will decrease by $24 billion.
A)
True
B)
False
268.
An increase in government spending for goods and services is an autonomous increase
in aggregate demand.
A)
True
B)
False
269.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should increase government purchases of goods and services
by $75 billion.
A)
True
B)
False
270.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should decrease government purchases of goods and services by
$40 billion.
A)
True
B)
False
Page 54
271.
A change in government transfers shifts the aggregate demand curve by more than a
change in government spending for goods and services and has a larger effect on real
GDP.
A)
True
B)
False
272.
A change in taxes shifts the aggregate demand curve by less than a change in
government spending for goods and services and has a smaller effect on real GDP.
A)
True
B)
False
273.
For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100
billion in government purchases of goods and services is smaller than the multiplier
effect of a tax cut of $100 billion.
A)
True
B)
False
274.
The multiplier effect of an increase in transfer payments is smaller than that of an equal
increase in government purchases of goods and services because some of the transfer
payment is likely to be saved.
A)
True
B)
False
275.
The tax and government transfer payment multiplier is smaller than the government
purchases multiplier because all of an increase in government purchases is spent; only
some of tax cuts or increases in government transfers is spent.
A)
True
B)
False
276.
Suppose the marginal propensity to consume is 0.8. If the government cut taxes by $100
billion, then real GDP would increase by $500 billion.
A)
True
B)
False
277.
The tax multiplier for someone living below the poverty line is smaller than the tax
multiplier for someone with an annual income of $1 million.
A)
True
B)
False
Page 55
278.
If the marginal propensity to consume is 0.8, the multiplier for taxes and transfer
payments will be more than 5.
A)
True
B)
False
279.
If the marginal propensity to consume is 0.8 and government transfers decrease by $30
billion, real GDP will decrease by less than $150 billion.
A)
True
B)
False
280.
If policy makers want to increase real GDP by $100 billion and the marginal propensity
to consume is 0.75, they should increase government transfers by $75 billion.
A)
True
B)
False
281.
If policy makers want to decrease real GDP by $100 billion and the marginal propensity
to consume is 0.6, they should increase taxes by more than $40 billion.
A)
True
B)
False
282.
The effect of automatic stabilizers is to increase the size of the multiplier.
A)
True
B)
False
283.
If government purchases decrease so the budget may be balanced, some government
transfers will automatically increase, reducing the multiplier effect.
A)
True
B)
False
284.
Taxes increase as GDP rises. This is an example of an automatic stabilizer.
A)
True
B)
False
285.
Discretionary government spending is an automatic stabilizer.
A)
True
B)
False
Page 56
286.
Discretionary fiscal policy is the direct result of deliberate actions by policy makers
rather than an automatic adjustment.
A)
True
B)
False
287.
A government program that puts millions of unemployed Americans to work building
bridges, roads, and parks would be considered an automatic stabilizer.
A)
True
B)
False
288.
Automatic stabilizers are government spending and taxation rules that cause fiscal
policy to be automatically expansionary when the economy contracts and automatically
contractionary when the economy expands.
A)
True
B)
False
289.
Automatic stabilizers are government spending and taxation rules that cause fiscal
policy to be automatically contractionary when the economy contracts and automatically
expansionary when the economy expands.
A)
True
B)
False
290.
Medicaid, food stamps, and sales taxes are all automatic stabilizers.
A)
True
B)
False
291.
A lump sum tax is a tax whose rate increases as income increases.
A)
True
B)
False
292.
A budget deficit necessarily indicates that fiscal policy is expansionary.
A)
True
B)
False
293.
Higher government transfers or lower taxes make a budget surplus smaller or a budget
deficit larger.
A)
True
B)
False
Page 57
294.
Lower government transfers or higher taxes make a budget surplus smaller or a budget
deficit larger.
A)
True
B)
False
295.
Fiscal policy measures of the same dollar amounts will have equal effects on the budget
balance but may change real GDP by different amounts.
A)
True
B)
False
296.
An increase in government transfer payments of $100 billion and a tax cut of $100
billion will have equal effects on the budget balance and unequal effects on real GDP.
A)
True
B)
False
297.
Changes in the budget balance may be the result of economic policy, or they may be
caused by fluctuations in the economy.
A)
True
B)
False
298.
The business cycle and the budget balance are unrelated.
A)
True
B)
False
299.
The budget deficit usually decreases when the unemployment rate increases.
A)
True
B)
False
300.
The cyclically balanced budget is an estimate of what the budget balance would be if
real GDP were exactly equal to potential output.
A)
True
B)
False
301.
The cyclically balanced budget is an estimate of what the budget balance would be
during a recessionary gap with real GDP less than potential output.
A)
True
B)
False
Page 58
302.
The cyclically balanced budget deficit doesn’t fluctuate as much as the actual budget
deficit.
A)
True
B)
False
303.
In most years since 1970, the actual budget deficit has been more than 25% of GDP.
A)
True
B)
False
304.
Most economists oppose a constitutional amendment requiring the federal budget to be
balanced annually.
A)
True
B)
False
305.
Most economists believe that the government should balance the budget on average,
allowing deficit years when the economy is in recession to be offset by surpluses during
years of expansion.
A)
True
B)
False
306.
If the government were required to balance the budget during a recession, it would have
to decrease taxes and increase government spending.
A)
True
B)
False
307.
If the government were required to balance the budget during a recession, it would have
to increase taxes and decrease government spending.
A)
True
B)
False
308.
Most economists oppose an annually balanced budget because it would undermine
automatic stabilizers.
A)
True
B)
False