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Economics Chapter 12—Fiscal Policy, Incentives, and Secondary Effects
MULTIPLE CHOICE
1. The crowding-out effect suggests that
a.
expansionary fiscal policy causes inflation.
b.
restrictive fiscal policy is an effective weapon against inflation.
c.
a reduction in private spending that results from higher interest rates caused by a budget
deficit will largely offset the expansionary effects of the deficit.
d.
a tax reduction financed by borrowing will increase the disposable income of households
and, thereby, lead to a strong expansion in aggregate demand, output, and employment.
2. The new classical model implies that substitution of debt for tax financing
a.
increases aggregate demand and exerts an expansionary effect on real output.
b.
is highly effective against inflation.
c.
reduces savings because it increases both the current and future tax liability of households.
d.
leaves wealth, and therefore aggregate demand, unchanged because the debt will require
higher future tax rates.
3. If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
a.
add demand stimulus during a slowdown but restraint during an economic boom.
b.
exert an expansionary impact during all phases of the business cycle.
c.
restrain aggregate demand during all phases of the business cycle.
d.
keep the government's budget in balance.
4. Keynesians and non-Keynesians would largely agree on which one of the following statements?
a.
Expansionary fiscal policy will tend to substantially increase current real output.
b.
Proper timing of discretionary fiscal policy is difficult to achieve.
c.
The use of discretionary fiscal policy is an important stabilization tool.
d.
Market forces will automatically direct the economy toward full employment.
5. The persistence of budget deficits during the last several decades is not surprising because politicians
will find
a.
budget surpluses more attractive than budget deficits.
b.
tax increases more attractive than increases in government expenditures.
c.
budget deficits more attractive than budget surpluses.
d.
reductions in government expenditures more attractive than tax reductions.
6. Other things being constant, countries with higher rates of saving
a.
will have smaller GDPs than countries with lower rates of saving.
b.
will have higher rates of investment, but slower growth.
c.
will have higher rates of investment and growth.
d.
will be operating at less than full employment and potential output.
7. The supply-side effects of a reduction in taxes are the result of
a.
increases in the disposable income of households accompanying reductions in tax rates.
b.
the stimulus effects of increases in government expenditures.
c.
increased attractiveness of productive activity relative to leisure and tax avoidance.
d.
reductions in interest rates that generally accompany expansionary fiscal policy.
8. Between 1986 and 2010, the top marginal personal income tax rate was 40 percent or less compared to
70 percent or more prior to 1981. Compared to the earlier time period, in recent years the share of
personal income taxes paid by high income taxpayers
a.
has been lower.
b.
has been virtually unchanged.
c.
has been higher.
d.
increased in the late 1980s, but has been falling ever since.
9. The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are
characteristic of
a.
expansionary fiscal policy.
b.
the crowding-out effect.
c.
restrictive fiscal policy.
d.
the paradox of thrift.
10. Which of the following would be most likely to maintain that spending increases and larger budget
deficits would help promote recovery from the recession of 2008-2009?
a.
supply-side economists
b.
new classical economists
c.
Keynesian economists
d.
proponents of the crowding-out theory
11. According to the crowding-out effect, expansionary fiscal policy will lead to
a.
higher interest rates, an appreciated dollar, and reduced net exports.
b.
higher interest rates, an appreciated dollar, and increased net exports.
c.
reduced interest rates, an appreciated dollar, and reduced net exports.
d.
reduced interest rates, an appreciated dollar, and increased net exports.
12. The crowding-out effect stresses that increased government borrowing to cover a budget deficit will
cause
a.
a higher interest rate and depreciation of the U.S. dollar.
b.
a higher interest rate and appreciation of the U.S. dollar.
c.
a lower interest rate and depreciation of the U.S. dollar.
d.
a lower interest rate and appreciation of the U.S. dollar.
e.
no change in the interest rate and depreciation of the U.S. dollar.
13. If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP,
this could be taken as evidence of
a.
Laffer curve effect.
b.
structural deficit.
c.
crowding-out.
d.
monetary policy ineffectiveness.
14. Which of the following tends to make the size of a shift in aggregate demand resulting from a tax
change smaller than would otherwise be the case?
a.
the multiplier effect
b.
the crowding-out effect
c.
expansionary monetary policy
d.
None of the above is correct.
15. Crowding out refers to the situation in which
a.
borrowing by the federal government raises interest rates and causes firms to invest less.
b.
foreigners sell their bonds and purchase U.S. goods and services.
c.
borrowing by the federal government causes state and local governments to lower their
taxes.
d.
increased federal taxes to balance the budget causes interest rates to increase and
consumer credit to decrease.
16. The crowding-out effect implies that a
a.
budget surplus will be highly effective against inflation.
b.
budget deficit is likely to stimulate aggregate demand and cause inflation.
c.
budget deficit will increase real interest rates and, thereby, retard private spending.
d.
budget surplus will retard aggregate demand and throw the economy into a downward
spiral.
17. The crowding-out effect suggests that
a.
restrictive fiscal policy is an effective weapon against inflation.
b.
expansionary fiscal policy will be a highly effective weapon for fighting a recessionary
downturn
c.
a budget surplus will cause the demand for loanable funds to decline, interest rates to rise,
and aggregate demand to decrease.
d.
budget deficits that lead to higher interest rates reduce private investment spending.
18. The crowding-out effect stresses that
a.
an increase in government expenditures will stimulate aggregate demand and, thereby,
help to prevent recessions.
b.
an increase in taxes will restrain aggregate demand and, thereby, help to control inflation.
c.
additional government borrowing to finance a larger deficit will increase the demand for
loanable funds, causing real interest rates to rise.
d.
a budget deficit is a highly effective tool with which to combat recessions.
e.
both a and d are correct.
19. The crowding-out effect indicates that budget deficits
a.
will stimulate aggregate demand and, therefore, exert a strong impact on output and
employment.
b.
will lead to additional borrowing and higher interest rates that will reduce the level of
private spending.
c.
are highly appropriate when the threat of inflation is present.
d.
are highly appropriate when the threat of recession is present.
20. The crowding-out effect implies that restrictive fiscal policy will
a.
increase aggregate demand and employment.
b.
lead to a significant increase in the natural rate of unemployment.
c.
be highly effective against inflation.
d.
reduce real interest rates.
21. The crowding-out effect refers to the tendency of
a.
the additional borrowing accompanying larger budget deficits to increase interest rates and
reduce private spending.
b.
higher future taxes accompanying budget deficits to reduce private consumption.
c.
the inflation rate to rise when the unemployment rate is low.
d.
increases in private savings to reduce interest rates and, thereby, crowd-out government
expenditures.
22. Which of the following best describes the crowding-out effect?
a.
An increase in government expenditures will cause taxes to rise, which will reduce both
aggregate demand and output.
b.
An increase in borrowing by the government will push interest rates upward, which will
lead to a reduction in private spending.
c.
An increase in borrowing by the government will decrease the money supply and, thereby,
reduce aggregate demand.
d.
An increase in government expenditures will cause the general level of prices to fall and,
thereby, reduce aggregate demand and output.
23. Which of the following will be most likely to dampen the expansionary effects of an increase in
government spending financed by borrowing?
a.
The budget deficit will cause business decision makers to become more optimistic.
b.
The increase in demand for loanable funds as the result of borrowing will cause interest
rates to rise and private investment to fall.
c.
The increase in government spending will cause the money supply to expand, thereby
causing an inflationary boom.
d.
The additional borrowing will cause the central bank to buy more bonds, which will
reduce aggregate demand.
24. The expansionary effects of an increase in government expenditures will tend to be offset, at least
partially, if
a.
government borrowing drives interest rates upward.
b.
taxes are not also increased.
c.
business decision makers and consumers become more optimistic as the result of the fiscal
stimulus.
d.
the economy is operating well below its full-employment capacity.
25. In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to
higher real interest rates,
a.
there will be an inflow of foreign capital, which will cause the dollar to appreciate and net
exports to decline.
b.
there will be an outflow of foreign capital, which will cause the dollar to depreciate and
net exports to increase.
c.
there will be an inflow of foreign capital, which will cause the dollar to depreciate and net
exports to increase.
d.
there will be an outflow of foreign capital, which will cause the dollar to appreciate and
net exports to decline.
26. If heavy federal borrowing pushes up real interest rates in the United States, which of the following
will most likely result?
a.
an inflow of capital and an appreciation in the foreign exchange value of the dollar
b.
an outflow of capital and a depreciation in the foreign exchange value of the dollar
c.
an inflow of capital and a depreciation in the foreign exchange value of the dollar
d.
an outflow of capital and an appreciation in the foreign exchange value of the dollar
27. If there is an increase in foreign financial investment in the United States as the result of large U.S.
budget deficits and attractive interest yields,
a.
fiscal policy will be more expansionary since there will be no crowding-out effect.
b.
fiscal policy will be more expansionary since U.S. residents will increase their savings, so
they can repay the foreigners in the future.
c.
foreign exchange value of the dollar will depreciate, which will lead to an increase in net
exports and aggregate demand.
d.
foreign exchange value of the dollar will appreciate, which will lead to a decrease in net
exports and aggregate demand.
28. If a budget surplus leads to a decrease in U.S. real interest rates, the lower rates will tend to cause
a.
the dollar to appreciate.
b.
the dollar to depreciate.
c.
a decrease in private investment.
d.
a decrease in net exports.
29. If decreased government borrowing drives down real interest rates in the United States,
a.
private investment will tend to decline.
b.
the dollar will depreciate leading to an increase in net exports.
c.
an inflow of capital will cause the dollar to depreciate.
d.
All of the above are true.
30. Which of the following attributes of the recession of 2008-2009 is most supportive of the Keynesian
view that the crowding-out effect will be minimal during a severe recession?
a.
the immediate increase in output and employment generated by the budget deficits of
2008-2009
b.
the decline in the general level of prices during 2009
c.
short-term interest rates falling to near zero, despite growing budget deficits during
2008-2009
d.
short-term interest rates falling to near zero, as the budget deficit declined during
2008-2009
31. Advocates of the crowding-out effect maintain that the large budget deficits during the recession of
2008-2009
a.
stimulated output and employment, leading to a quicker recovery.
b.
will lead to a slower recovery than would have been the case if government borrowing had
been more restrained.
c.
led to lower interest rates, stimulating private investment and consumption.
d.
will lead to lower future taxes and more private spending as the economy recovers.
32. According to new classical economists, the most appropriate policy during a recession would be for
the government to
a.
increase the minimum wage.
b.
impose wage and price controls.
c.
cut taxes and increase the budget deficit.
d.
do nothing.
33. If policymakers cut taxes because they perceive that recession is a major threat, a proponent of the new
classical view will be most likely to argue that the tax cut is
a.
highly appropriate because it will stimulate aggregate demand and, thereby, help to
strengthen the economy.
b.
highly inappropriate because it will exert a restrictive impact on aggregate demand,
output, and employment.
c.
not very important because the "demand stimulus effects" of the tax cut will be largely
offset by additional borrowing and higher interest rates.
d.
not very important because the "demand stimulus effects" of lower current taxes will be
largely offset by the expectation of higher taxes in the future.
34. New classical economists believe that an increase in deficit financing by the government will
a.
reduce government spending.
b.
increase consumption.
c.
reduce future taxes.
d.
increase savings.
35. New classical economists stress that an increase in government expenditures financed by borrowing
rather than taxes will
a.
exert a strong expansionary impact on aggregate demand and real output.
b.
affect the timing of taxes but not their magnitude.
c.
lead to higher interest rates.
d.
undermine confidence and reduce the level of private saving.
36. Which of the following provides the clearest statement of the Ricardian equivalence theorem?
a.
Both an increase in government expenditures and a reduction in taxes will provide a
substantial stimulus for aggregate demand.
b.
When additional debt is used to finance a tax cut, the lower taxes and higher interest rates
will exert an equivalent impact on aggregate demand.
c.
The finance of government spending with additional debt is essentially the same thing as
finance with higher taxes because the larger debt implies higher taxes in the future.
d.
A 10 percent reduction in tax rates will reduce tax revenues by 10 percent.
37. The new classical model implies that a
a.
budget surplus will effectively retard inflation emanating from excess demand.
b.
budget deficit will increase the real interest rate.
c.
substitution of debt for tax financing will leave aggregate demand and real output
unchanged.
d.
planned budget deficit will be a highly effective tool to combat a recession.
38. The new classical model implies that a shift to a more expansionary fiscal policy (the substitution of
debt financing for taxes) will
a.
stimulate aggregate demand and employment.
b.
retard aggregate demand and employment.
c.
increase the real rate of interest.
d.
exert little or no impact on the real interest rate, aggregate demand, and employment.
39. According to the new classical view, budget deficits will
a.
cause real interest rates to rise, which will decrease aggregate demand, output, and
employment.
b.
lead to an expansion in spending, which will stimulate both real output and employment.
c.
fail to stimulate aggregate demand because people will save more in order to pay the
higher future taxes implied by the expansion in government debt.
d.
lead to inflation because the deficits expand the money supply.
40. According to the new classical theory, a $50 billion increase in government expenditures financed by a
$50 billion increase in the budget deficit will
a.
cause real output to expand $200 billion if the marginal propensity to consume is
three-fourths.
b.
exert little impact on real output because higher real interest rates will crowd out private
spending.
c.
stimulate aggregate demand, causing prices to rise (inflation).
d.
be largely offset by a reduction in private spending because individuals will anticipate
higher future taxes.
41. Ricardian Equivalence maintains that an increase in government spending financed by debt will result
in a corresponding increase in
a.
savings, in anticipation of future taxes.
b.
output and consumption, stimulated by the additional government spending.
c.
consumer spending, in anticipation of lower future taxes.
d.
aggregate demand, because the additional spending was financed by borrowing rather than
current taxation.
42. Are jobs the key to economic progress and the achievement of high income levels?
a.
Yes, as long as people are working, real income levels will be high.
b.
Yes, when full employment is present, income levels will be at their maximum.
c.
No, it is not just employment, but employment that expands production of goods and
services that others value highly relative to cost.
d.
Uncertain, additional employment will increase real income only when the general level of
prices is unchanged.
43. Higher standards of living are the result of
a.
an increase in the general level of prices.
b.
trade restrictions that favor domestic industries over foreign competition.
c.
an increase in the availability of goods and services that people value.
d.
government subsidies that expand employment.
44. Government spending programs that create jobs are often popular because
a.
the created jobs are highly visible, while the secondary effects of lost jobs in other areas,
higher interest rates, and higher future taxes are less visible.
b.
if a spending program is approved by Congress, it means that the value of what is
produced is greater than the value of the resources used to produce it.
c.
the benefits of job creation are always greater than the costs. Jobs are the key to
economic progress.
d.
when spending programs are funded by the government there are no secondary effects.
45. Public choice analysis indicates that it will be politically more attractive to
a.
enact restrictive fiscal policy during an economic expansion than to enact expansionary
fiscal policy during a recession.
b.
enact expansionary fiscal policy during an economic expansion than to enact restrictive
fiscal policy during a recession.
c.
enact expansionary fiscal policy during a recession than to enact restrictive fiscal policy
during an economic expansion.
d.
raise taxes than to increase spending.
46. It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find
a.
it more attractive to raise taxes than to increase spending.
b.
it attractive to increase taxes during a recession, but they will be reluctant to reduce them
during an expansion.
c.
budget deficits attractive during a recession, but they will be reluctant to run budget
surpluses during an expansion.
d.
budget surpluses attractive during a recession, but they will be reluctant to run budget
deficits during an expansion.
47. Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization
tool?
a.
Successful fiscal policy would be easy to achieve if Congress had greater access to
forecasting tools.
b.
Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability
to predict the future is limited.
c.
Successful fiscal policy is easier to achieve today because econometric forecasting models
are highly accurate.
d.
Congress and the President have persistently altered fiscal policy in a stabilizing manner.
48. Which of the following about fiscal policy is true?
a.
Modern forecasting methods make it relatively easy to time fiscal policy changes in a
manner that will help stabilize the economy.
b.
Legislative action is necessary if automatic stabilizers are going to smooth the ups and
downs of the business cycle.
c.
Proper timing of changes in discretionary fiscal policy is both crucially important and
difficult to achieve.
d.
Both the crowding-out and new classical theories indicate that expansionary fiscal policy
will exert a powerful impact on aggregate demand.
49. Which of the following most accurately indicates the political incentive to spend and/or tax?
a.
Politicians will find tax increases more attractive than increases in government
expenditures.
b.
Voters will generally support higher taxes in order to eliminate budget deficits.
c.
Politicians are rewarded for raising taxes and punished for providing programs that benefit
their constituents.
d.
Politicians are rewarded for providing programs that benefit their constituents and
punished for raising taxes.
50. The political incentive structure tends to
a.
encourage a balanced budget regardless of economic conditions.
b.
discourage budget deficits during recessions.
c.
encourage budget surpluses during both recessions and expansions.
d.
encourage budget deficits during both recessions and expansions.
51. Which of the following is a consensus view among economists with regard to fiscal policy?
a.
Changes in fiscal policy exert a strong influence on real output, just as the basic Keynesian
model suggests.
b.
Expansionary fiscal policy will not help promote recovery from a recession.
c.
Restrictive fiscal policy is a potent anti-inflationary weapon.
d.
Since changes in discretionary policy are difficult to time correctly, fiscal policy should
not be altered in response to each minor disturbance.
52. Both the crowding-out effect and new classical model indicate that
a.
expansionary fiscal policy is a highly effective weapon with which to fight an economic
downturn.
b.
restrictive fiscal policy is a highly effective weapon with which to control inflation caused
by excess demand.
c.
there are side effects of budget deficits that will substantially, if not entirely, offset their
expansionary impact on aggregate demand.
d.
fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a
weapon against recession.
53. Which of the following is part of the synthesis view of fiscal policy?
a.
During a severe recession, the best policy is a "balanced budget policy."
b.
During a recession, higher real interest rates and lower net exports will help direct the
economy back to full employment.
c.
Since changes in discretionary policy are easy to time, fiscal policy should be altered in
response to each minor disturbance.
d.
Automatic stabilizers help reduce the fluctuations in aggregate demand and output.
54. Which of the following is part of the synthesis view of fiscal policy?
a.
Automatic stabilizers offset some of the fluctuations in aggregate demand without any
government action.
b.
Fiscal policy is much less potent than the early Keynesian view implied.
c.
The effectiveness of discretionary fiscal policy as a stabilization tool is highly
questionable given the difficulties in proper timing.
d.
All of the above are correct.
e.
None of the above is correct.
55. Both Keynesians and non-Keynesians now recognize
a.
the limitations of automatic stabilizers as a stabilization tool.
b.
the adverse effects of high marginal tax rates on economic growth.
c.
the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing
manner.
d.
the highly expansionary impact of budget deficits.
56. Which one of the following is an area of agreement among modern macroeconomists with regard to
the use of fiscal policy?
a.
Congressional action is necessary if automatic stabilizers are going to be an effective
stabilization tool.
b.
It is difficult to time changes in discretionary fiscal policy in a manner that will promote
stability.
c.
Fiscal policy is more potent than the early Keynesian view implied.
d.
Budget deficits are a highly effective tool with which to combat a severe recession.
57. Reductions in personal income tax rates that increase labor supply and work effort, can be expected to
also
a.
decrease consumption spending.
b.
increase consumption spending.
c.
decrease investment spending.
d.
increase export sales.
58. If the government cuts the tax rate, workers get to keep
a.
less of each additional dollar they earn, so work effort increases, and aggregate supply
shifts right.
b.
less of each additional dollar they earn, so work effort decreases, and aggregate supply
shifts left.
c.
more of each additional dollar they earn, so work effort increases, and aggregate supply
shifts right.
d.
more of each additional dollar they earn, so work effort decreases, and aggregate supply
shifts left.
59. Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but
it can also reduce aggregate supply if
a.
the higher taxes lead workers to seek out a second job.
b.
the higher taxes cause workers to work less.
c.
the government purchases goods with the additional revenue.
d.
the government uses the additional revenue to retire some of the federal debt.
e.
the higher taxes cause people to save less.
60. Supply-side economics stresses that
a.
aggregate demand is the major determinant of real output.
b.
marginal tax rates exert important incentive effects that influence real output.
c.
an increase in government expenditures and tax rates will cause real income to rise.
d.
expansionary monetary policy will cause real output to expand without accelerating
inflation.
61. Supply-side economics stresses that
a.
budget deficits will stimulate demand, output, and employment.
b.
budget deficits will lead to higher interest rates, which will weaken their expansionary
impact.
c.
an increase in government expenditures financed by higher tax rates will cause real
income to rise.
d.
changes in marginal tax rates exert important effects on real output and employment.
62. Which of the following attributes of fiscal policy will most likely be stressed by a proponent of
supply-side economics?
a.
the impact of budget deficits on interest rates and aggregate demand
b.
the impact of government spending on aggregate demand, output, and employment
c.
the impact of marginal tax rates on the supply and productivity of resources
d.
the impact of budget deficits on the rate of taxation in the future
63. Which of the following propositions would a proponent of supply-side economics be most likely to
stress?
a.
Because they expand government revenues, higher marginal tax rates will lead to a
reduction in the budget deficit and to lower interest rates.
b.
Because they encourage investors to undertake low-productivity projects with substantial
tax-avoidance benefits, higher marginal tax rates promote economic inefficiency.
c.
Because they do not consume resources directly, income redistribution payments will
exert little impact on real aggregate supply.
d.
The primary impact of a tax reduction on aggregate supply will stem from the influence of
the tax change on the size of the budget deficit or surplus.
64. Diego's annual income increased from $20,000 to $25,000. If Diego faces a 40 percent effective
marginal tax rate, the $5,000 increase in income will expand his disposable income by
a.
$2,000.
b.
$3,000.
c.
$3,600.
d.
$5,000.
65. Shaniqua sells life insurance and is considering buying a $60,000 Lexus for business purposes (thus,
the expense reduces her taxable income). If Shaniqua is in the 40 percent marginal tax bracket, how
much after-tax income will she have to give up in order to enjoy the Lexus?
a.
$24,000
b.
$36,000
c.
$30,000
d.
$84,000
66. During 1960-1980, those with the highest incomes confronted federal marginal tax rates between 70
and 90 percent. Since 1986, the highest federal income tax rate has been less than 40 percent. Since
1986, the share of the personal income tax collected from the top one-half of one percent of earners
has been
a.
substantially lower than during the 1960s and 1970s.
b.
only slightly lower than during the 1960s and 1970s.
c.
virtually the same as during the 1960s and 1970s.
d.
higher than during the 1960s and 1970s.
67. Supply-side economics stresses that high marginal tax rates
a.
are the key to maintaining a balanced budget.
b.
are an effective short-run countercyclical tool to promote recovery from a recession.
c.
discourage people from working harder and using their resources productively.
d.
encourage people to work, supply resources, and use them more efficiently.
68. Supply-side economic policies are best viewed as
a.
a short-run countercyclical tool.
b.
a long-run strategy to promote economic growth.
c.
a strategy for the control of long-run inflation.
d.
a stabilization tool to smooth the ups and downs of the business cycle.
69. Which of the following best explains why high marginal tax rates retard output?
a.
High marginal tax rates reduce the incentive to earn, invest, and use resources efficiently.
b.
High marginal tax rates will encourage foreign investment.
c.
High marginal tax rates will reduce budget deficits and lower interest rates.
d.
High marginal tax rates encourage people to substitute more-desired nondeductible goods
for less-desired tax-deductible goods.
70. The incentive to consume tax-deductible goods, instead of nondeductible goods, increases when
a.
marginal tax rates are high.
b.
marginal tax rates are low.
c.
the inflation rate is low and relatively stable.
d.
This is a trick question: the consumption of tax-deductible goods is not affected by
marginal tax rates.
71. When the tax rates imposed on the rich are high, a reduction in these rates
a.
will always lead to a reduction in the tax revenue collected from the rich.
b.
will not affect the tax revenue collected from the rich.
c.
will increase the reported incomes of the rich and it may also lead to an increase in tax
revenue collected from them.
d.
will decrease the reported incomes of the rich, and thereby reduce the tax revenue
collected from them.
72. Which one of the following is an area of continued disagreement among modern macroeconomists
with regard to the use of fiscal policy?
a.
Automatic stabilizers help reduce the fluctuations in aggregate demand and output.
b.
It is difficult to time changes in discretionary fiscal policy in a manner that will promote
stability.
c.
Fiscal policy is much less potent than the early Keynesian view implied.
d.
Budget deficits are a highly effective tool with which to combat a severe recession.
73. According to the Keynesian view, the proper response to a severe recession would be
a.
an increase in taxes in order to reduce the budget deficit.
b.
an increase in government spending financed by borrowing.
c.
a shift toward a restrictive monetary policy to reduce aggregate demand.
d.
reliance on automatic stabilizers to direct the economy toward full employment.
74. Why might an expansion in government spending increase the severity of the coordination problem
during a recession?
a.
Increases in government spending will not affect the composition of aggregate demand.
b.
Congress is unlikely to approve increases in government spending during a recession.
c.
Spending increases will be driven by political considerations and will often flow into areas
where resources are already fully employed.
d.
Government spending can be counted on to flow toward high productivity projects.
75. An increase in subsidies and other government spending during a recession is likely to result in
a.
an increase in rent-seeking activity.
b.
an increase in productive projects and a reduction in unproductive projects.
c.
a decrease in the level of future taxes.
d.
greater reliance on profits and losses in the allocation of resources.
76. How will an increase in government expenditures during a recession be reflected in GDP?
a.
An increase in government spending will reduce aggregate demand and decrease GDP.
b.
An increase in government spending will not affect GDP.
c.
An increase in government spending will increase GDP, but only if it is directed toward
economically productive projects.
d.
The government spending will increase GDP even if the spending encourages rent seeking
and other unproductive activities.
77. According to non-Keynesians, how will an increase in government spending financed by borrowing
during a recession affect recovery?
a.
Higher future taxes and interest rates will be required to finance the larger debt and this
will weaken the recovery.
b.
Repayment of the debt can always be shifted to the future, making it possible to keep tax
rates low and thereby strengthen the recovery.
c.
Higher interest payments will increase future government spending, and thereby promote a
stronger the recovery.
d.
The increase in government spending will exert a multiplier effect on the economy,
leading to a stronger recovery.
78. The coordination problem accompanying expansionary fiscal policy refers to
a.
the tendency of increases in government expenditures to expand private sector output by
an even larger amount.
b.
the possibility that demand stimulus programs will direct resources toward unproductive
projects and areas of full employment.
c.
the possibility that borrowing to finance current spending will lead to lower future interest
rates.
d.
the reluctance of Congress to approve increases in government spending during a
recession.
79. When government spending flows to areas where resources are already fully employed,
a.
the additional spending will stimulate strong growth in those areas.
b.
aggregate demand will place downward pressure on the general level of prices.
c.
the coordination problem accompanying the composition of aggregate demand is likely to
improve.
d.
the coordination problem accompanying the composition of aggregate demand is likely to
worsen.
80. Historically, Keynesian economists have argued that government spending will stimulate aggregate
demand more than tax cuts because
a.
government spending will stimulate aggregate demand more quickly than a tax cut.
b.
there are fewer adverse side effects to an increase in government spending.
c.
all of the spending will add to aggregate demand, but a portion of the tax cut will be saved.
d.
an increase in government spending can quickly be reversed once the economy has
recovered.
