81. Which of the following is an argument for tax cuts rather than government spending as a way to
promote recovery from a recession?
a.
Tax cuts are better suited to direct resources into projects that consumers value more
highly than the resources required for their production.
b.
100 percent of a tax cut will stimulate aggregate demand, but this will not be the case for
an increase in government expenditures.
c.
Tax cuts will encourage rent seeking; increases in government spending will not.
d.
Tax cuts will change the structure of aggregate demand more than increases in government
spending.
82. Spending programs that substantially alter the composition of aggregate demand will tend to
a.
decrease the rate of unemployment.
b.
increase the rate of unemployment.
c.
promote a more rapid recovery.
d.
reduce structural unemployment.
83. Expansionary fiscal policy during a recession is most effective when it
a.
creates jobs, even if they are on unproductive projects.
b.
directs the economy to full employment and resources into productive projects.
c.
substantially changes the composition of aggregate demand.
d.
provides members of Congress with large political contributions.
84. Which is more likely to stimulate aggregate demand in a timely manner?
a.
a tax cut, because households will increase their consumption by the full amount of their
tax reduction
b.
a tax cut, because disbursement can take place quickly while spending increases are
generally spread out over several years
c.
a spending increase, because disbursement can take place quickly while a tax cut will be
spread out over several years
d.
a spending increase, because it can be easily reversed once the economy has recovered
85. Which of the following is most likely to increase the incentive to invest, produce, and employ others?
a.
an increase in government expenditures to provide subsidies for large banks that made bad
investment decisions
b.
an increase in government expenditures that changes the composition of aggregate demand
c.
a reduction in tax rates
d.
an increase in payments to unemployed workers financed by borrowing
86. Fiscal stimulus is most likely to direct resources into productive projects when spending decisions are
left in the hands of
a.
government agencies.
b.
consumers.
c.
Congress.
d.
lobbyists and special-interest groups.
87. Within the framework of the AD-AS model, an increase in savings by households will
a.
increase the supply of loanable funds and reduce interest rates.
b.
be offset by a decrease in savings by businesses.
c.
cause long-run fluctuations in the rate of consumption.
d.
result in a decline in aggregate demand, output, and employment.
88. Politicians often instruct households to spend in order to help the economy. This advice overlooks the
fact that
a.
increases in consumption will make it easier for households to deal with unanticipated
future expenses.
b.
increases in consumption will provide more loanable funds for investment.
c.
you cannot have a strong economy if all or most households are spending just about
everything they earn.
d.
consumer spending is less than two-thirds of GDP.
89. Which of the following is most important for long-run growth and a healthy economy?
a.
a low rate of household savings and a high rate of consumption
b.
a high rate of both savings and consumption
c.
a high rate of government expenditures financed by borrowing
d.
high tax rates and budget surpluses
90. Since the mid-1980s, the debt-to–income ratio of American households
a.
has remained about the same as the previous 25 years.
b.
has been slowly declining.
c.
has fluctuated between about 55 and 70 percent of after-tax income.
d.
has rapidly increased.
91. When household debt as a share of income is abnormally high,
a.
rapid growth of consumption is likely to lead the recovery.
b.
the growth prospects of the economy will be excellent because high household debt is the
key to a strong economy.
c.
the growth of consumption is likely to remain sluggish even as the economy begins to
recover.
d.
consumers will be in a strong position to deal with irregular expenses.
92. Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?
a.
an increase in government spending as a share of the economy and an expansion in the
size of the budget deficit
b.
a reduction in government spending as a share of the economy and a shift of the budget
toward a surplus
c.
an increase in government spending as a share of the economy and a shift of the budget
toward a surplus
d.
a reduction in government spending as a share of the economy and an expansion in the
size of the budget deficit
93. Keynesian economists argue that during a recession
a.
private sector spending will rise and therefore government spending should be reduced
in order to help maintain aggregate demand at or near the full employment level.
b.
private sector spending will decline, and therefore government spending should increase
in order to help maintain a high level of aggregate demand.
c.
private sector spending will decline, and therefore government spending should be
reduced in order to avoid the crowding out of still more private sector spending.
d.
private sector spending will rise and therefore government spending should be
increased in order to provide more stimulus for the economy.
94. Critics of the Keynesian view argue that increases in government spending financed by borrowing will
hamper the recovery from a recession and slow long term growth because
a.
more spending and debt will lead to higher future taxes to cover the cost of government
and the interest on the debt.
b.
government spending is directed by political forces, rather than efficient cost-revenue
comparisons.
c.
more political spending will lead to more wasteful rent-seeking activities and less
production of goods and services that people value.
d.
All of the above are true.
95. During 2001-2012, the federal budget deficit
a.
expanded and real government spending increased rapidly, indicating that fiscal policy
was restrictive.
b.
expanded and real government spending increased rapidly, indicating that fiscal policy
was expansionary.
c.
declined and real government spending fell, indicating that fiscal policy was restrictive.
d.
declined and real government spending fell, indicating that fiscal policy was
expansionary.
96. Measured as a share of GDP, federal spending during 2001-2010
a.
increased more rapidly than during the 1990s.
b.
increased less rapidly than during the 1990s.
c.
declined after increasing rapidly during the 1990s.
d.
was virtually unchanged during the decade.
97. Compared to a reduction in tax rates, a one-time tax rebate will exert
a.
a weaker impact on aggregate demand because the increase in the incentive to earn and
impact on long-term income will be smaller for the temporary tax cut.
b.
a stronger impact on aggregate demand because both the increase in the incentive to earn
and impact on long-term income will be larger for the temporary tax cut.
c.
an identical impact on aggregate demand because the size of the budget deficit will be the
same regardless of whether the tax cut is temporary or permanent.
d.
an identical impact on aggregate demand because the incentive effects of a tax cut will be
the same regardless of whether it is temporary or permanent.
98. Compared to a permanent reduction in tax rates, a temporary tax cut will generally
a.
exert a larger impact on output and employment because its effects are immediate,
long-lasting, and do not add much to the national debt.
b.
exert a smaller impact on output and employment because the temporary cut will not exert
much impact on long-term income or the incentive to earn.
c.
exert a larger impact on output and employment because the temporary tax cut will lead to
a larger budget deficit.
d.
exert an identical impact on output and employment because the incentive effects will be
the same regardless of whether the tax cut is temporary or permanent.
99. From 1990 to the year 2000, real federal spending rose about 21 percent, while from 2000 to 2010, real
federal spending rose by about
a.
17 percent.
b.
30 percent.
c.
59 percent.
d.
112 percent.
100. Measured as a share of GDP, the net federal debt
a.
increased during the 1990s, but fell sharply during 2001-2011.
b.
fell during most of the 1990s, but rose sharply during 2001-2011.
c.
was virtually unchanged during the 1990s, but fell sharply during 2001-2011.
d.
fell during the 1990s, but was virtually unchanged during 2001-2011.
101. The paradox of excessive consumption argues that when households spend all they earn,
a.
actual output and potential output will be in equilibrium.
b.
the financial anxiety of families will be low.
c.
the economy will achieve rapid, sustainable growth.
d.
consumption can stagnate because families are in a poor position to deal with increases in
debt and financial setbacks.
102. Which of the following helped transform the budget deficits of the early 1990s into surpluses later in
the decade?
a.
Rapid growth in the number of persons moving into the retirement phase of life during the
1990s
b.
A reduction in defense expenditures following the end of the Cold War
c.
A 1997 increase in the tax rate imposed on income derived from capital gains
d.
A reduction in Social Security and health-care benefits during the 1990s
103. Which of the following about fiscal policy is true?
a.
The expansionary fiscal policy of the 1980s stimulated aggregate demand and led to high
rates of inflation during the latter half of the decade.
b.
The restrictive fiscal policy of the 1990s led to sluggish economic growth during the
decade.
c.
Even though fiscal policy was highly expansionary during the 1980s, the inflation rate fell
and remained at relatively low levels.
d.
Even though fiscal policy was restrictive during the 1990s, the real growth rate of the
economy was strong.
e.
Both c and d are true.
104. Measured as a share of GDP, the total federal debt
a.
increased during the 1990s, but it has declined substantially during the most recent decade.
b.
increased substantially during the recession of 2008-2009, but it is still well below the
levels of the 1960s and 1970s.
c.
has steadily trended downward during both the 1990s and the most recent decade.
d.
is now approximately 100 percent of GDP, which is higher than at any time since the years
immediately following World War II.
105. Which of the following is true of debt financing?
a.
Elected political officials will find debt financing attractive because it allows them to
provide voters with visible current benefits while pushing the more visible costs into the
future.
b.
Debt financing is unattractive to elected political officials because voters recognize that
excessive debt will lead to the future collapse of the economy.
c.
Debt financing is attractive to elected political officials because countries with a higher
debt to GDP ratio generally grow more rapidly.
d.
Elected political officials will be reluctant to run budget deficits because they recognize
that taxes will have to be raised in the future to pay the interest on the larger amount of
outstanding debt.
106. Public choice analysis indicates that elected political officials will find debt financing
a.
unattractive because voters will recognize that excessive debt will lead to the future
collapse of the economy.
b.
attractive because countries with a higher debt to GDP ratio generally grow more rapidly.
c.
unattractive because both politicians and voters will recognize that a larger outstanding
debt will mean higher future taxes.
d.
attractive because current spending can provide voters with highly visible goods, services,
and transfer payments, while borrowing will push the most visible cost of this spending
into the future.
107. Which of the following makes it more likely that a country will get caught in a vicious circle of debt
financing, higher taxes, and sluggish growth?
a.
Politicians like to raise taxes, but they are reluctant to spend on education, health care, and
roads.
b.
High levels of debt will eventually lead to higher taxes just to pay the interest on the
debt, but high taxes will slow economic growth.
c.
As outstanding debt increases, politicians will be reluctant to run budget deficits, which
will cause the economy to slow.
d.
As outstanding debt increases, short-sighted politicians will want to run large budget
surpluses in order to pay off the national debt quickly.
108. Which of the following countries have experienced recession and high levels of unemployment related
to their inability to control the growth of government and high levels of debt?
a.
Greece.
b.
Portugal.
c.
Italy.
d.
all of the above.
109. Which of the following is true of government debt?
a.
The interest payments on federal bonds held by Americans will be paid to investors in
other countries.
b.
The share of the federal debt held by foreigners has declined from 35 percent of GDP in
1990 to less than 10 percent of GDP in 2012.
c.
Between 2000 and 2012, federal debt owed to foreigners has risen from approximately 10
percent to 35 percent of GDP.
d.
Less than 5 percent of the federal debt is owed to foreigners.
110. Measured as a share of GDP, the borrowing of the federal government from foreigners
a.
is zero; the federal government does not borrow from foreigners.
b.
is 100 percent; the federal government borrows only from foreigners.
c.
has been approximately 50 percent of GDP since the early 1990s.
d.
was approximately 10 percent of GDP in 2000, but it soared to 35 percent of GDP in
2012.
111. Which of the following will make it more difficult for the United States to control the growth of the
federal debt in the decade ahead?
a.
Debt financing makes it possible for elected political officials to provide voters with
highly visible current benefits without having to impose visible current cost in the form of
higher taxes.
b.
The movement of the large baby-boom generation into the retirement phase of life will
make it more difficult to control federal spending.
c.
The recent growth of the federal debt as a share of GDP will mean higher interest costs in
the future.
d.
All of the above.
112. Which of the following most clearly indicates that fiscal policy is becoming more expansionary?
a.
An increase in the budget deficit relative to GDP
b.
A reduction in the budget deficit relative to GDP
c.
An increase in the budget surplus relative to GDP
d.
An increase in the nominal (dollar) size of the budget deficit
113. Which of the following most clearly indicates that fiscal policy is becoming more restrictive?
a.
An increase in the budget deficit relative to GDP
b.
A reduction in the budget deficit relative to GDP
c.
An increase in government expenditures as a share of GDP
d.
A reduction in tax revenues as a share of GDP
114. Fiscal policy moved toward expansion during the 1980s but toward restriction during the 1990s. How
did these differences affect the economy?
a.
The expansionary fiscal policy of the 1980s led to strong growth while the restrictive
policy of the 1990s led to stagnation.
b.
The expansionary fiscal policy of the 1980s led to weaker growth than the restrictive
policy of the 1990s.
c.
The expansionary fiscal policy of the 1980s generated more rapid growth than the
restrictive policy of the 1990s.
d.
There is little evidence that the differences in fiscal policy between the two decades
exerted much impact on either aggregate demand or real output.
115. Budget projections for 2014-2020 indicate both higher levels of government spending and large budget
deficits. According to the Keynesian view, this will lead to
a.
an increase in aggregate supply during that decade.
b.
weak aggregate demand and a continuation of recessionary conditions.
c.
an increase in aggregate demand and real output.
d.
higher interest rates and taxes that will retard future growth.
116. Budget projections for 2014-2020 indicate both higher levels of government spending and large budget
deficits. Non-Keynesian economists argue that this will lead to
a.
lower taxes, which will reduce aggregate supply and retard long-term growth.
b.
growth rates above the historic average for the decade.
c.
an increase in aggregate demand and real output.
d.
higher interest rates, higher taxes, and sluggish future growth.
117. Increases in government expenditures and large budget deficits are projected for 2014-2020. If strong
growth is observed during this decade, this would be most consistent with
a.
the Keynesian view.
b.
the supply-side view.
c.
the crowding-out effect.
d.
the new classical theory.
118. Increases in government expenditures and large budget deficits are projected for 2014-2020. If the
economic recovery is weak and growth is sluggish during this decade, this will be
a.
supportive of the Keynesian view, but inconsistent with the crowding-out, new classical,
and supply-side theories.
b.
inconsistent with the Keynesian view, but supportive of the crowding-out, new classical,
and supply-side theories.
c.
inconsistent with both Keynesian and non-Keynesian theories.
d.
supportive of both Keynesian and non-Keynesian theories.
119. The fiscal policy response to the recession of 2008-2009 was
a.
a substantial increase in the budget deficit just as Keynesian analysis would recommend.
b.
a balanced budget, just as Keynesian analysis would recommend.
c.
a substantial increase in the budget deficit, which was highly inconsistent with Keynesian
analysis.
d.
a shift of the federal budget toward a large surplus, which reflected the views of the
critics of Keynesian economics.
120. In response to the recession of 2008-2009, the United States
a.
increased government spending as a share of the economy and enlarged the size of the
budget deficit.
b.
reduced government spending as a share of the economy and shifted the budget toward a
surplus.
c.
increased government spending as a share of the economy and shifted the budget toward a
surplus.
d.
reduced government spending as a share of the economy and enlarged the size of the
budget deficit.
121. According to the Keynesian view, the rapid increase in government spending and large budget
deficits in response to the recession of 2008-2009 would
a.
slow the recovery process and result in weak long-term growth of real GDP.
b.
speed the recovery process and provide the foundation for strong long-term growth of real
GDP.
c.
stimulate a more rapid recovery, but cause the economy to fall back into a recession in the
near future.
d.
slow the recovery process, but provide the foundation for rapid long-term growth of real
GDP.
122. According to the critics of Keynesian economics, the rapid increase in government spending and
large budget deficits in response to the recession of 2008-2009 would
a.
slow the recovery process and result in weak long-term growth of real GDP.
b.
speed the recovery process and provide the foundation for strong long-term growth of real
GDP.
c.
stimulate a more rapid recovery, but cause the economy to fall back into a recession in the
near future.
d.
slow the recovery process, but provide a foundation for rapid long-term growth of real
GDP.
Use the figure below to answer the following question(s).
Figure 12-1
123. Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a Keynesian
economist be most likely to favor?
a.
a reduction in government expenditures
b.
an increase in government expenditures
c.
an increase in taxes
d.
continuation of the current tax and expenditure policies
124. Refer to Figure 12-1. If the output of the economy is Y1, which of the following would a new classical
economist be most likely to favor?
a.
a reduction in government expenditures
b.
a reduction in taxes
c.
an increase in taxes
d.
continuation of the current tax and expenditure policies
Use the figure below to answer the following question(s).
Figure 12-2
125. Refer to Figure 12-2. If an economy is operating in the short run at point a, Keynesian analysis
indicates that expansionary fiscal policy will
a.
increase AD and move the economy toward point b.
b.
increase AD and move the economy toward point c.
c.
increase SRAS and move the economy toward point b.
d.
decrease SRAS and move the economy toward point c.
126. Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if
the economy is operating at point a?
a.
a balanced budget
b.
restrictive fiscal policy
c.
expansionary fiscal policy
d.
continuation of the current tax and expenditure policies (dependence on the economy’s
self-correcting mechanism to restore full employment)
127. Refer to Figure 12-2. Which of the following will most likely be favored by a new classical economist
if the economy is operating at point a?
a.
a tax increase to balance the budget
b.
restrictive fiscal policy
c.
expansionary fiscal policy
d.
continuation of the current tax and expenditure policies (dependence on the economy’s
self-correcting mechanism to restore full employment)
128. Refer to Figure 12-2. When the economy is operating at point a, reliance on the self-correcting
mechanism will
a.
result in higher resource prices and a shift to the left in the SRAS curve.
b.
result in lower resource prices and a shift to the right in the SRAS curve.
c.
lead to lower interest rates and a shift to the right in the AD curve.
d.
lead to higher interest rates and a shift to the left in the AD curve.
e.
do both b and c.
Use the figure below to answer the following question(s).
Figure 12-3
129. Refer to Figure 12-3. If an economy is currently operating at Y1, which of the following would a
Keynesian economist be most likely to favor?
a.
a shift in the federal budget toward a surplus
b.
a shift in the federal budget toward a deficit
c.
a balanced budget
d.
an increase in taxes
130. Refer to Figure 12-3. If an economy is currently operating at Y1, which of the following would a new
classical economist be most likely to favor?
a.
higher taxes and reductions in expenditures in order to shift the budget toward a surplus
b.
lower taxes and increase in expenditures in order to shift the budget toward a deficit
c.
a balanced budget
d.
no government action and reliance on the self-corrective mechanism
131. The crowding-out effect refers to the possibility that an
a.
increase in the money supply will result in a decline in taxes.
b.
increase in consumption spending will crowd out government spending.
c.
increase in private savings will crowd out the taxable income of households.
d.
increase in government borrowing will result in higher interest rates, which will crowd out
private investment and consumption.
132. If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?
a.
It will make fiscal policy more potent.
b.
It will make fiscal policy less potent.
c.
The potency of fiscal policy will be unaffected.
d.
The potency of expansionary fiscal policy will be reduced, but that of restrictive fiscal
policy will be enhanced.
133. If a reduction in government borrowing leads to lower real interest rates in the United States,
a.
U.S. investors will decrease their investments abroad.
b.
U.S. exports will decrease relative to imports.
c.
the inflow of loanable funds from abroad will moderate the fall in the real rate of interest.
d.
the dollar will depreciate in the foreign exchange market.
134. In the new classical model, a $100 billion increase in government purchases financed by borrowing
will
a.
increase the real interest rate, which will crowd out private spending.
b.
lead to a $100 billion increase in real GDP.
c.
lead to a $400 billion increase in real GDP if the marginal propensity to consume is
three-fourths.
d.
leave the interest rate, aggregate demand, and real output unchanged.
135. The new classical model states that a
a.
budget surplus will effectively retard inflation that comes from excess demand.
b.
budget deficit will have no impact on real interest rates.
c.
budget deficit will increase the real interest rate.
d.
substitution of debt for tax financing will increase aggregate demand and real output.
136. The modern synthesis view of fiscal policy stresses
a.
how easy it is to time fiscal policy changes so they exert a stabilizing influence on the
economy.
b.
the ineffectiveness of fiscal policy, even during periods of widespread unemployment.
c.
the difficulties involved in timing fiscal policy changes so they will exert a stabilizing
impact on the economy.
d.
that automatic stabilizers do not help smooth fluctuations in the economy.
137. Kimani sells life insurance and is considering buying a $50,000 Cadillac for business purposes (thus,
the expense reduces her taxable income). If Kimani is in the 40 percent marginal tax bracket, how
much after-tax income will she have to give up in order to enjoy the Cadillac?
a.
$20,000
b.
$30,000
c.
$25,000
d.
$70,000
138. A supply-side economist would stress which of the following attributes of fiscal policy?
a.
the impact of marginal tax rates on the supply and productivity of resources
b.
the impact of government spending on aggregate demand, output, and employment
c.
the impact of budget deficits on interest rates and aggregate demand
d.
the impact of budget deficits on the rate of taxation in the future
139. A substantial decrease in marginal tax rates will encourage individuals to
a.
increase their earnings and work effort.
b.
save a smaller portion of their income.
c.
take more time off for vacations.
d.
spend more on tax-deductible items.
140. During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less
than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the
personal income tax collected from the top one-half of one percent of earners has
a.
fallen sharply from the level of years prior to 1981.
b.
increased sharply during the Clinton administration, but declined substantially during the
administration of George W. Bush.
c.
been virtually unchanged from the level of years prior to 1981.
d.
increased substantially from the level of years prior to 1981.
141. The most effective fiscal stimulus will
a.
create jobs, even if the employment is on unproductive projects.
b.
substantially change the composition of aggregate demand.
c.
encourage interest groups to lobby more intensely and make larger political contributions.
d.
direct the economy to full employment and direct resources toward economically
productive projects.
142. Which of the following most clearly states the “paradox of thrift”?
a.
If households simultaneously attempt to increase their savings, the result may be a
reduction in demand, output, and total savings.
b.
A strong, healthy economy can be achieved if most households are heavily in debt.
c.
A high savings rate will provide the funds for investment, which is a driving force of
long-term economic growth.
d.
A reduction in savings and an increase in consumption will expand output and
employment.
143. According to the Keynesian view, government spending will have its greatest impact during a severe
recession because
a.
automatic stabilizers will shift the budget toward a surplus during a severe recession.
b.
underemployed resources will be widespread and the crowding out of private spending
will be minimal.
c.
budget deficits will reduce interest rates and thereby stimulate private investment.
d.
increases in the government’s outstanding debt will lead to lower future taxes.
ESSAY
144. What is the “crowding-out” effect? How does the crowding-out effect influence the potency of fiscal
policy?
ANS:
145. How do new classical economists differ from Keynesian economists in their assumptions about how
government borrowing affects household consumption and borrowing patterns?
146. What effect will expansionary fiscal policy have on the economy, according to new classical
economists?
147. What is supply-side economics, and how does it differ from the Keynesian emphasis on fiscal policy?
148. Supply-side economics concentrates on the benefits of reducing marginal tax rates. Describe three
ways that high marginal tax rates are likely to retard output growth.
