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True / False
1. A federal budget surplus occurs when government expenditures exceed tax revenues.
a.
True
b.
False
2. When the government decides to increase income taxes, this is an example of contractionary fiscal policy.
a.
True
b.
False
3. The Laffer curve shows the exclusively direct relationship that exists between tax rates and tax revenues.
a.
True
b.
False
4. A permanent marginal tax rate cut would be expected to shift both the short-run and the long-run aggregate supply
curves to the right.
a.
True
b.
False
5. The transmission lag is the period that elapses between the time fiscal policy is enacted and the time it is put into effect.
a.
True
b.
False
6. According to Keynesian theory, a recessionary gap can be closed using expansionary fiscal policy.
a.
True
b.
False
7. Complete crowding out occurs when an increase in government spending is completely offset by an equal increase in
tax revenues.
a.
True
b.
False
8. Crowding out results when an increase in government spending leads to declines in consumption, investment, and/or
net exports.
a.
True
b.
False
9. The marginal tax rate is found by dividing a person's tax payment by the person's taxable income.
a.
True
b.
False
10. The AD curve shifts to the right with an increase in taxes or a decrease in government purchases.
a.
True
b.
False
11. A "flat tax" is another term for a regressive tax.
a.
True
b.
False
12. The United States currently has a progressive income tax structure.
a.
True
b.
False
13. With a progressive income tax, as taxable income rises (up to a certain point), one's tax rate rises.
a.
True
b.
False
14. To identify whether fiscal policy is expansionary or contractionary, one should focus on the cyclical deficit.
a.
True
b.
False
15. A structural deficit refers to that part of the deficit that exists as a result of a downturn in economic activity.
a.
True
b.
False
16. The distinctive feature of a progressive tax is that the dollar value of taxes paid rises as income rises.
a.
True
b.
False
17. According to the textbook, in 2011 the top 1 percent of income earners in the U.S. earned more than $388,905.
a.
True
b.
False
18. A value-added tax (VAT) is a less visible form of a sales tax.
a.
True
b.
False
19. A tax rate increase necessarily leads to an increase in tax revenue for the government.
a.
True
b.
False
20. To finance a budget deficit the federal government borrows funds.
a.
True
b.
False
21. A subsidy is the same thing as a tax deduction
a.
True
b.
False
22. According to the textbook, if the government had taxed everyone who earned more than $1 million an income tax rate
of 100 percent in 2012, the budget deficit for that year would have been completely eliminated.
a.
True
b.
False
23. Buchanan and Wagner assert that there is a political bias toward contractionary fiscal policy and not expansionary
fiscal policy.
a.
True
b.
False
Multiple Choice
24. A balanced budget occurs when
a.
the national debt is reduced to zero dollars.
b.
a budget deficit during one year is matched by a budget surplus in the next year.
c.
transfer payments equal tax revenues.
d.
government expenditures equal tax revenues.
e.
the deficit-GDP ratio equals one.
25. A budget surplus
a.
occurs when government expenditures exceed tax revenues.
b.
occurs when tax revenues exceed government expenditures.
c.
occurs when tax revenues exceed transfer payments.
d.
occurs when monetary policy works in the opposite direction of fiscal policy.
e.
is an impossibility.
26. A budget deficit
a.
occurs when government expenditures exceed tax revenues.
b.
occurs when tax revenues exceed government expenditures.
c.
occurs when transfer payments exceed tax revenues.
d.
will always result when Congress and the president cannot agree on expenditures.
e.
occurs when monetary policy works in the opposite direction of fiscal policy.
27. Fiscal policy refers to
a.
efforts to balance a government's budget.
b.
changes in the money supply to achieve particular economic goals.
c.
changes in government expenditures and taxation to achieve particular economic goals.
d.
the change in private expenditures that occurs as a consequence of changes in government spending.
28. Suppose Congress increases income taxes. This is an example of
a.
expansionary fiscal policy.
b.
expansionary monetary policy.
c.
contractionary fiscal policy.
d.
contractionary monetary policy.
29. Suppose Congress decreases income taxes. This is an example of
a.
expansionary fiscal policy.
b.
expansionary monetary policy.
c.
contractionary fiscal policy.
d.
contractionary monetary policy.
30. Expansionary fiscal policy actions include __________ government spending and/or __________ taxes, while
contractionary fiscal policy actions include __________ government spending and/or __________ taxes.
a.
increasing; increasing; decreasing; decreasing
b.
decreasing; decreasing; increasing; increasing
c.
increasing; decreasing; increasing; decreasing
d.
decreasing; increasing; increasing; decreasing
e.
increasing; decreasing; decreasing; increasing
31. __________ flows from government to households.
a.
A transfer payment
b.
A tax payment
c.
The Laffer Curve
d.
Crowding out
32. An expansionary fiscal policy will
a.
always result in a budget deficit.
b.
always result in a budget surplus.
c.
sometimes result in a budget deficit.
d.
never result in a budget surplus.
e.
More information is necessary to answer this question.
33. When the economy is in a recessionary gap, Keynesian economists will often advocate expansionary policy measures.
Why?
a.
Keynesians believe the economy sometimes gets stuck in a recessionary gap and can't get itself out without
government intervention.
b.
Keynesians believe the economy itself sometimes takes too long to eliminate the recessionary gap and return
to full-employment output.
c.
Keynesians are generally in favor of increasing taxes.
d.
a and b
e.
a and c
34. Suppose aggregate demand is too low to bring about the Natural Real GDP level. A Keynesian policy prescription
would call for a(n) _____________________ to close this recessionary gap.
a.
increase in government spending
b.
decrease in government spending
c.
increase in taxes
d.
decrease in taxes
e.
a or d
35. An example of automatic fiscal policy is
a.
the unemployed automatically become eligible for unemployment benefits when they lose their jobs in a
recession.
b.
when interest rates automatically fall in a recession.
c.
Congress passes a law during a recession that automatically extends unemployment benefits for those whose
benefits will soon expire.
d.
a and b
e.
a, b and c
36. Suppose the economy is at a point below its physical production possibilities frontier but above its institutional
production possibilities frontier. In response to this situation, Keynesian economists may propose that government enact
__________ fiscal policy to correct this __________ gap by __________ government expenditures.
a.
expansionary; inflationary; increasing
b.
contractionary; inflationary; decreasing
c.
expansionary; recessionary; increasing
d.
contractionary; recessionary; decreasing
e.
contractionary; inflationary; increasing
37. Suppose the economy is at a position below its institutional production possibilities frontier. To improve this situation,
Keynesian economists might propose that government __________ taxes, which will cause the aggregate demand curve to
shift to the __________ and Real GDP will __________.
a.
increase; right; increase
b.
increase; left; decrease
c.
decrease; left; decrease
d.
decrease; right; decrease
e.
decrease; right; increase
38. Suppose the economy is at a point below its institutional production possibilities frontier. To improve this situation,
Keynesian economists might propose that the government should __________ expenditures, which will cause the
aggregate demand curve to shift to the __________ in an attempt to close this __________ gap.
a.
decrease; left; inflationary
b.
increase; right; inflationary
c.
decrease; right; inflationary
d.
increase; right; recessionary
e.
decrease; left; recessionary
39. Reductions in private spending as a result of increased government spending or the need to finance a budget deficit is
called
a.
pushing in.
b.
rushing forth.
c.
crowding in.
d.
crowding out.
40. Crowding out results in a decrease in
a.
transfer payments.
b.
defense spending.
c.
private spending.
d.
government spending.
41. Which of the following is an example of crowding out?
a.
A decrease in the rate of growth of the money supply which causes a decrease in Real GDP.
b.
A budget deficit causes an increase in interest rates, which causes a decrease in investment spending.
c.
An increase in tariffs which causes a decrease in imports.
d.
A decrease in government housing subsidies which causes an increase in private spending on housing.
42. With complete crowding out, an increase in government spending
a.
is completely offset by a reduction in private spending.
b.
is matched by an increase in private spending.
c.
results in an increase in aggregate supply.
d.
results in an increase in aggregate demand.
43. If there is complete crowding out as a result of an increase in government spending there will be
a.
a decrease in aggregate demand.
b.
no change in aggregate demand.
c.
an increase in aggregate demand.
d.
a downward movement along the aggregate demand curve.
44. Some economists argue that a rise in the interest rate, brought about by a rise in government borrowing in the loanable
funds market to finance a budget deficit, brings in foreign funds in search of the higher interest rate return. This, in turn,
dampens the rise in the interest rate. If this is true as far as it goes, there will be __________ crowding out than there
would be if foreign funds did not flow into the country.
a.
more
b.
less
c.
the same amount of
d.
none of the above
45. Suppose the government attempts to stimulate the economy by increasing spending without increasing taxes. Which of
the following statements is most likely to be accepted by someone who believes in crowding out?
a.
The government's actions will have their intended effect.
b.
The government's actions will cause businesses to become more optimistic about the economy, and they will
increase their output even more than the government had intended.
c.
The government's actions will raise interest rates, causing decreased investment and consumption, and the
economy will not expand as much as the government had intended.
d.
This is a trick question, because the federal government is required by law to increase taxes by the same
amount as it increases expenditures.
46. Suppose the government increases spending on public education by $700 million and individual spending on private
education drops by $700 million. This is an example of
a.
incomplete crowding out.
b.
complete crowding out.
c.
zero crowding out.
d.
a and c
e.
none of the above
47. Suppose the government increases spending on public education by $700 million and individual spending on private
education drops by $500 million. This is an example of
a.
incomplete crowding out.
b.
complete crowding out.
c.
zero crowding out.
d.
a and c
e.
none of the above
48. The AD curve shifts to the left with a __________ in government purchases (G) or a __________ in taxes.
a.
rise; rise
b.
rise; fall
c.
fall; rise
d.
fall; fall
49. The AD curve shifts to the right with a __________ in government purchases (G) or a __________ in taxes.
a.
rise; rise
b.
rise; fall
c.
fall; rise
d.
fall; fall
50. Fiscal policy may not work as policymakers intend it to work because of
a.
crowding out.
b.
lags.
c.
the position of the physical production possibilities frontier.
d.
a and b
e.
a, b, and c
51. Which of the following illustrates the data lag?
a.
The economy turns down on January 8, 2006, but policymakers do not figure this out until April 19, 2006.
b.
Policymakers wait and see what is really going on with the economy.
c.
Policymakers implement policy X on September 12, 2006, but the effects are not felt until six months later.
d.
The data lag is illustrated equally well by a, b, and c.
52. Which of the following illustrates the wait-and-see lag?
a.
Policymakers believe an economic downturn has occurred, but they decide not to take action until they are
sure.
b.
Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.
c.
Policymakers first learn of the recession when it is five months old.
d.
Policymakers implement policy X, but it will be a few months before it starts working.
e.
Policymakers agree to policy X, but it will be at least two months before the policy is implemented.
53. The lag between an increase in government spending and the impact of this increased spending on the economy is
called the __________ lag.
a.
effectiveness
b.
transmission
c.
legislative
d.
data
54. Which of the following illustrates the effectiveness lag?
a.
Policymakers believe an economic downturn has occurred, but they decide not to take action until they are
sure.
b.
Policymakers are in the process of proposing policy measures to deal with the current economic slowdown.
c.
Policymakers first learn of the recession when it is five months old.
d.
Policymakers implement policy X, but it will be a few months before it starts working.
e.
Policymakers agree to policy X, but it will be at least two months before the policy is implemented.
55. The period that elapses between the passage of legislation reducing taxes and the time the tax cut is put into effect is
called the __________ lag.
a.
data
b.
wait-and-see
c.
legislative
d.
transmission
56. If an individual pays an additional $0.30 in taxes as a result of a $1.00 increase in income, then that individual must
have a(n) __________ tax rate of 30 percent.
a.
average
b.
fixed
c.
total
d.
marginal
Exhibit 11-1
57. Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and
there is no crowding out. As a result, the aggregate demand (AD) curve in the exhibit
a.
maintains its present position at AD1.
b.
shifts rightward, ideally so that it goes through point 2.
c.
shifts rightward, ideally so that it goes beyond point 2.
d.
shifts leftward.
e.
does not shift, but the SRAS curve will shift rightward so that it goes through point 3.
58. Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, Keynesian economists would most likely
propose
a.
an increase in government purchases.
b.
a decrease in government purchases.
c.
an increase in taxes.
d.
a and c
e.
b and c
59. Refer to Exhibit 11-1. The economy is currently at point 1. In this situation, supply-side economists would most likely
propose _______________ to make the price level ______________ and Real GDP ___________.
a.
cutting marginal tax rates; fall; rise
b.
raising marginal tax rates; fall; rise
c.
raising government spending; fall; rise
d.
cutting government spending; rise; fall
e.
cutting marginal tax rates; rise; fall
60. Refer to Exhibit 11-1. The economy is currently at point 1. Suppose the federal government increases purchases and
there is complete crowding out. As a result, the aggregate demand (AD) curve in the exhibit
a.
will maintain its present position at AD1.
b.
will shift rightward, ideally so that it goes through point 2.
c.
will shift rightward, ideally so that it goes beyond point 2.
d.
will shift leftward.
e.
does not shift, but the SRAS curve will shift rightward so that it goes through point 3.
Exhibit 11-6
61. Refer to Exhibit 11-6. The economy is currently in short-run equilibrium producing Q1. In this situation, Keynesian
economists would most likely propose
a.
an increase in government purchases.
b.
a decrease in government purchases.
c.
an increase in taxes.
d.
a or c
e.
b or c
62. A curve showing the relationship between tax rates and tax revenues is called a __________ curve.
a.
Phillips
b.
Keynesian
c.
Gaussian
d.
Laffer
63. Elaine's taxable income increases by $1 and her tax payment increases by $0.28. Her marginal tax rate is
a.
72 percent.
b.
28 percent.
c.
56 percent.
d.
There is not enough information to answer the question.
Exhibit 11-2
64. Refer to Exhibit 11-2. Compare points A and B. Which of the following is true?
a.
At A and B, the tax rates are the same, but tax revenues are different.
b.
At A tax rates are higher than at B, but tax revenues are the same at both points.
c.
At B tax rates are higher than at A, but tax revenues are the same at both points.
d.
none of the above
65. Refer to Exhibit 11-2. At point A, if we cut tax rates slightly, tax revenues will
a.
increase.
b.
decrease.
c.
will not change.
d.
drop to zero.
66. Refer to Exhibit 11-2. At point B, if we cut tax rates slightly, tax revenues will
a.
increase.
b.
decrease.
c.
will not change.
d.
immediately drop to zero.
67. Refer to Exhibit 11-2. At the highest point above the horizontal axis, tax revenues
a.
are maximized.
b.
are lower than at A and higher than at B.
c.
are lower than at B and higher than at A.
d.
drop to zero.
68. All other things held constant, lower marginal (income) tax rates
a.
necessarily increase tax revenues.
b.
necessarily decrease tax revenues.
c.
decrease the attractiveness of productive activities relative to leisure and tax- avoidance activities, and shift the
SRAS curve rightward.
d.
do not affect the attractiveness of productive activities relative to leisure and tax- avoidance activities and
therefore the SRAS does not shift rightward or leftward.
e.
increase the attractiveness of productive activities relative to leisure and tax- avoidance activities and shift the
SRAS curve rightward.
69. Fiscal policy is implemented primarily by
a.
local governments alone.
b.
the defense department.
c.
state governments alone.
d.
the federal government.
e.
state and local governments.
70. Fiscal policy refers to
a.
changes in the amount of government expenditures and taxes to achieve particular economic objectives.
b.
changes in the composition of a given amount of government expenditures to achieve particular economic
objectives.
c.
changes in interest rates initiated by government action.
d.
any change in government spending or taxes that has the intended effect of destabilizing the economy.
71. When we speak of expansionary fiscal policy, we are talking about policymakers __________ government spending,
or __________ taxes, or both.
