Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 12: Fiscal Policy
1) In 2010, the federal government planned to spend approximately
A) $170 million.
B) $5.6 billion.
C) $550 billion.
D) $3.6 trillion.
E) $22 trillion.
2) The major source of federal tax receipts is
A) personal income taxes.
B) corporate income taxes.
C) social insurance taxes.
D) excise taxes.
E) estate and gift taxes.
3) The largest category of government expenditures is
A) purchases of goods and services.
B) transfer payments.
C) the salaries of government economists.
D) debt interest.
E) defense spending.
4) The classical economists believed that unemployment could not persist because
A) the government would step in and stimulate the economy by increasing government spending.
B) rising prices would make up for any deficiency in spending and make it profitable to rehire
workers.
C) falling wages would cause businesses to expand employment.
D) unemployment benefits would eventually run out, and voluntarily unemployed workers would
return to their jobs.
E) workers would move abroad, reducing the unemployment ranks.
5) According to the classical economists, if there was too little spending for goods and services,
A) businesses would increase their prices to make up for the lost sales.
B) a surplus of goods and services would result, and prices would tend to fall.
C) a shortage of goods and services would result, and prices would tend to rise.
D) businesses would increase their output to make up for the deficiency.
E) prices and wages would remain stable, and spending by foreigners would expand to take up
the slack.
6) Keynes believed that if unemployment existed,
A) it could not persist for very long.
B) it would be automatically eliminated.
C) it could be reduced by increasing the level of government spending.
D) taxes should be increased in order to reduce the amount of spending in the economy.
E) it was voluntary.
7) Keynesians are considered ________ economists, whereas the classical economists are
considered ________ economists.
A) nonactivist; activist
B) conservative; liberal
C) laissez-faire; activist
D) activist; nonactivist
E) nonactivist; laissez-faire
8) If potential GDP is $2,000 billion and equilibrium GDP is $1,600 billion,
A) an inflationary gap exists.
B) activists would propose a tax increase.
C) activists would propose a cut in government spending.
D) a recessionary gap exists.
E) Both A and B are true.
9) According to activists, if the economy were experiencing unemployment, which of the
following would be most appropriate?
A) an increase in government spending with no change in the level of taxation
B) a reduction in government spending coupled with a tax increase
C) a balanced federal budget
D) a tax reduction, coupled with a decrease in government spending of the same amount
E) an increase in taxes
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10) If the economy were experiencing high unemployment, which of the following would an
activist favor?
A) an increase in taxes to help pay the increased claims for unemployment compensation
B) an increase in government spending for interstate highways
C) a reduction in federal spending for space exploration
D) an increase in the tax rates on corporate income
E) a reduction in welfare payments in order to reduce voluntary unemployment
11) When an economic expansion has resulted in substantial inflationary pressures, the proper
activist fiscal policy would be to
A) reduce taxes.
B) increase the size of the government’s budget deficit.
C) increase spending by the federal government.
D) reduce the size of the government’s budget deficit.
E) reduce taxes but increase government spending.
12) If a recessionary gap exists, which of the following policies would an activist support?
A) an increase in personal tax rates
B) an increase in interest rates
C) a reduction in the level of government spending
D) an increase in government spending
E) an increase in corporate tax rates
13) If an inflationary gap existed, increasing government spending would
A) eliminate the gap.
B) make the problem worse.
C) either reduce or eliminate the gap.
D) lead to unemployment.
E) reduce GDP.
14) If rapid economic growth resulted in substantial inflation, which of the following policies
would be appropriate, according to the Keynesian or activist model?
A) an increase in government spending
B) a reduction in the tax rates on corporate income
C) an increase in personal income tax rates
D) a program of more aggressive antitrust enforcement against firms with substantial market
power
E) policies designed to increase the size of the economy’s multiplier
15) A decision by policymakers to alter taxes in order to influence the level of economic activity
is an example of
A) automatic stabilizers in action.
B) expansionary bias.
C) crowding out.
D) discretionary fiscal policy.
E) transfer payments.
16) Which of the following is a FALSE statement about automatic stabilizers?
A) They do not require legislative approval.
B) They can help to prevent a minor recession from becoming a major depression.
C) They can stop a severe inflation that is well underway.
D) They can help to prevent inflationary pressures from building.
E) They do not require politicians to make unpopular decisions.
17) Because of the existence of automatic stabilizers, the federal budget
A) will tend toward surplus during a recession.
B) automatically tends to be balanced on an annual basis.
C) will tend toward deficit during a recession.
D) will tend toward deficit during a period of economic expansion.
E) injects the economy with additional spending during inflationary periods.
18) One major advantage of automatic stabilizers when compared to discretionary fiscal policy is
that
A) automatic stabilizers can pull an economy from a deep recession, while discretionary fiscal
policy cannot.
B) the multiplier effect associated with built-in stabilizers is larger than that associated with
discretionary policy.
C) the lags associated with built-in stabilizers are shorter than those associated with discretionary
policy.
D) built-in stabilizers have no impact on the federal budget, while discretionary fiscal policy
does.
E) the multiplier effect associated with built-in stabilizers is smaller than that associated with
discretionary policy.
19) According to the Keynesian (activist) model, the federal government
A) should balance its budget annually.
B) should incur deficits during periods of inflation and surpluses during periods of
unemployment.
C) should always incur budget deficits.
D) should incur surpluses during periods of inflation and deficits during periods of
unemployment.
E) should always incur budget surpluses.
20) Deficit spending exists when
A) government tax revenues exceed government spending.
B) government tax revenues are declining.
C) government spending exceeds government revenue.
D) the government fails to earn enough tax revenue to pay off the public debt.
E) government revenue exceeds government spending.
21) If the federal government spends more than it collects in tax revenue,
A) it will have a balanced budget.
B) it will incur a budget deficit, and the public debt will decline.
C) it will have a surplus budget.
D) it will incur a budget deficit, and the public debt will increase.
E) the public debt will decline.
22) An unplanned budget deficit might result from
A) the use of discretionary fiscal policy to combat unemployment.
B) the use of discretionary fiscal policy to combat inflation.
C) a reduction in the unemployment rate.
D) a downturn in the economy.
E) an unexpectedly strong upturn in the economy.
23) According to the Keynesian (activist) model, an attempt to balance the budget during a
period of unemployment
A) would be consistent with sound economic policy.
B) would tend to intensify the unemployment problem.
C) would lead to stagflation—simultaneous unemployment and inflation.
D) would lead to inflation.
E) would shift the aggregate demand curve upward.
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24) According to the Keynesian (activist) model, a planned budget deficit
A) is always desirable.
B) is desirable if the economy is experiencing inflation but undesirable if it is experiencing
unemployment.
C) is always undesirable.
D) is inappropriate if the economy is operating at full employment.
E) is appropriate only if the economy is operating at full employment.
25) If the economy were in the midst of a severe recession, an activist would support a policy
decision to
A) balance the federal budget.
B) deliberately incur a deficit in the federal budget.
C) plan for a surplus in the federal budget.
D) reduce the money supply in order to slow spending.
E) increase taxes.
26) The public debt in 2008 was about
A) $840 million.
B) $22.3 trillion.
C) $5.8 trillion.
D) $350 billion.
E) $180 million.
27) Which of the following is a true statement regarding the public debt?
A) Approximately 70 percent of the public debt is owed to foreigners.
B) Interest payments on the public debt tend to redistribute income.
C) The public debt must be paid off by the year 2020.
D) The public debt has remained approximately constant in size since World War II.
E) Future generations will own the bonds and securities that make up the public debt, but they
will not be required to pay taxes to service the debt.
28) Which of the following is a true statement regarding the public debt?
A) The public debt is the same thing as the federal budget deficit.
B) Taxpayers are not required to pay off the public debt but they must pay the interest on the
public debt.
C) The fraction of the public debt owed to foreigners has been declining.
D) The size of the public debt has roughly doubled since World War II.
E) At present, interest payments on the debt are equal to about 10% of GDP.
29) The fraction of the public debt held by foreigners is
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A) less burdensome to taxpayers than the portion held by American businesses and citizens.
B) particularly burdensome, because interest payments provide foreigners with claims on
American goods.
C) no more or less burdensome than the fraction of the debt held by American citizens, because
interest payments must be made in either case.
D) particularly burdensome, because foreigners must be paid an interest premium to convince
them to invest in the United States.
E) particularly burdensome, because foreigners must be paid in gold.
30) Approximately what fraction of the public debt is owned by foreigners?
A) 15 percent
B) 27 percent
C) 35 percent
D) 48 percent
31) The “crowding out” phenomenon refers to the fact that
A) increased government spending can lead to higher interest rates and thereby reduce
investment.
B) higher tax rates can lead to lower consumption spending by households and a lower level of
equilibrium income.
C) increases in government spending tend to have a larger impact on equilibrium GDP than
similar-sized increases in consumption spending by households.
D) businesses now provide many of the services households once provided for themselves.
E) every crowd has a silver lining.
32) If “crowding out” occurs,
A) the economy remains in disequilibrium.
B) private investment is reduced.
C) government spending is reduced.
D) the income distribution becomes more unequal.
E) the economy’s expansion will be greater than it would have been without “crowding out.”
33) Which of the following could lead to “crowding out”?
A) increased consumption spending and rising prices
B) increased government spending and rising interest rates
C) increased investment spending and rising prices
D) reduced government spending and falling prices
E) increased taxes
34) Discretionary fiscal policy is said to have an expansionary bias. This is true because
A) expansionary policies are more attractive politically than contractionary policies.
B) expansionary fiscal policies increase equilibrium GDP but contractionary policies don’t
reduce equilibrium GDP.
C) discretionary fiscal policy is much more effective in combating inflation than in combating
unemployment.
D) the “crowding out” effect helps to expand the economy but does not work in reverse.
E) expansionary fiscal policies tend to reduce interest rates.
35) Which of the following is not a reason that discretionary fiscal policy tends to work more
slowly than policymakers desire?
A) There is a time lag before the need for action is recognized.
B) Some time is required to draft legislation.
C) It takes time to implement the policy.
D) The economy does not always provide clear signals about the future.
E) Policy changes are always attractive to politicians.
36) The lags in discretionary fiscal policy
A) are desirable because they provide time for the economy to adjust to the policy.
B) are desirable because they result in a larger effect on the economy.
C) are undesirable because they reduce the size of the effect on the economy.
D) are undesirable because the policy action may be inappropriate by the time its impact is felt.
E) are desirable because they provide time for the expansionary or contractionary effect to fully
develop.
37) Which of the following is most likely to impose a burden on future taxpayers?
A) deficit spending to finance higher social security benefits for retirees
B) deficit financed increases in spending for education
C) deficit financed increases in spending for scientific research
D) deficit spending to improve prenatal care
E) deficit spending to improve the interstate highway system
38) A deficit financed increase in spending for education may be less burdensome to taxpayers
than an equal-sized increase in spending for higher Social Security benefits. This is because
A) the increase in education spending may help to boost future incomes and the capacity to pay
future taxes.
B) the increase in social security benefits is likely to be saved so it won’t stimulate the economy.
C) deficit-financed education spending does not add to the public debt.
D) everyone loves school teachers and children.
E) crowding out tends to dampen the expansionary effect of education spending.
1) In the period from 1960-2010,
A) personal income taxes have grown as a fraction of federal tax revenue.
B) corporate income taxes have grown as a fraction of federal tax revenue.
C) social insurance taxes have grown as a fraction of federal tax revenue.
D) excise taxes have grown as a fraction of federal tax revenue.
2) The largest category of federal government expenditures is
A) interest on the national debt.
B) transfer payments.
C) purchases of goods and services.
D) military spending.
3) Suppose the economy is experiencing substantial unemployment and a rising budget deficit.
An activist economist would probably recommend
A) raising taxes to reduce the budget deficit.
B) waiting for falling wages and prices to restore full employment.
C) cutting taxes and increasing government spending to combat the unemployed.
D) reducing unemployment compensation to force unemployed workers to look for jobs.
4) When an inflationary gap exists, activists would recommend a
A) tax reduction.
B) surplus budget.
C) increase in government spending.
D) deficit budget.
Use the following exhibit in answering the following question(s).
5) Based on the figure above, if the economy is in equilibrium at the intersection of AD1 and AS,
then
A) a recessionary gap exists; the gap is equal to $400 billion.
B) a recessionary gap exists; the gap is equal to $900 billion.
C) an inflationary gap exists; the gap is equal to $400 billion.
D) an inflationary gap exists; the gap is equal to $900 billion.
6) Based on the figure above, if the economy is in equilibrium at the intersection of the AS curve
and
A) AD1, activists would recommend a surplus budget.
B) AD2, activists would recommend a balanced budget.
C) AD3, activists would recommend a deficit budget.
D) AD2, activists would recommend a deficit budget.
7) Based on the figure above, suppose the economy is in short-run equilibrium at an output of
$1,600 billion. If activist policies are not used, the economy will
A) eventually return to an output of $2,000 billion, but at a price level less than 85.
B) eventually return to an output of $2,000 billion, but at a price level of 120.
C) remain at an output of $1,600 billion indefinitely.
D) eventually return to an output of $2,000 billion, but at a price level of 100.
8) Based on the figure above, suppose the economy is in short-run equilibrium at an output of
$2,500 billion. If activist policies are not used, the economy will
A) return to an output of $2,000 billion when wage contracts expire and the aggregate demand
curve shifts to the left.
B) remain at an output of $2,500 billion indefinitely.
C) return to an output of $2,000 billion when wage contracts are renegotiated and the aggregate
supply curve shifts left.
D) return to an output of $2,000 billion when the aggregate demand curve automatically shifts
back to AD2.
9) Which of the following is not an advantage of automatic stabilizers?
A) They do not involve the political hassle associated with discretionary fiscal policy.
B) They help speed recovery from a recession.
C) They go to work automatically, so that lags are minimal.
D) They help prevent a minor downturn from becoming a major recession.
10) Because of automatic stabilizers, the budget will
A) tend toward surplus during a recession.
B) tend toward deficit during an economic expansion.
C) tend toward deficit during a recession.
D) always remain in balance.
11) According to the activist model, when the economy is in a recession, the shortest route to a
balanced budget may entail
A) higher taxes.
B) less government spending.
C) lower taxes and more government spending.
D) Both A and B are correct.
12) Which of the following statements is true?
A) Unplanned deficits occur when the economy performs better than expected.
B) The “expansionary bias” is a source of budget surpluses.
C) Activists support deficit spending during periods of inflation.
D) If the economy is operating at full employment, a reduction in taxes may increase inflationary
pressures.