13) A legitimate concern regarding the national debt relates to
A) the higher taxes that are necessary to make the interest payments on the debt.
B) our inability to pay off such a large sum.
C) the fraction of the debt owed to foreign factions.
D) Both A and C are correct.
14) “Crowding out” refers to
A) the unwillingness of politicians to raise taxes or cut government spending to combat inflation.
B) the reduction in consumption spending that results from an increase in tax rates.
C) the reduction in investment spending that occurs when government borrowing pushes up
interest rates.
D) the reduced standard of living suffered by U.S. citizens as foreigners purchase a larger share
of our public debt.
15) Deficit spending is least likely to harm economic growth if it
A) occurs when the economy is operating at or beyond potential GDP.
B) is used to finance increases in transfer payments.
C) crowds out a substantial amount of investment spending.
D) is used to finance research and development efforts.
16) The lags associated with discretionary fiscal policy
A) make it more effective.
B) may make it counterproductive.
C) apply only to changes in government spending, not to changes in tax rates.
D) apply only to changes in tax rates, not to changes in government spending.
17) The phrase “expansionary bias ” refers to the fact that
A) discretionary fiscal policy works with a lagged effect.
B) politicians are more willing to lower taxes and increase spending than they are to do the
opposite.
C) policymakers tend to overestimate the size of the recessionary gap.
D) deficit-financed government spending can lead to crowding out.
1) How much money did the federal government plan to spend in 2010?
A) about $550 million
B) about $780 billion
C) about $3.6 trillion
D) about $12.2 trillion
Question Status: Revised
2) The major source of federal tax receipts is
A) personal income taxes.
B) corporate income taxes.
C) social insurance taxes.
D) excise taxes.
3) Which of the following is true?
A) Social insurance taxes have become a much more important source of revenue since the
1960s.
B) Corporate income taxes have become a much more important source of revenue since the
1960s.
C) The fraction of the federal government expenditures going to transfer payments has been
declining since about 1970.
D) The second largest category of government expenditures is interest on the national debt.
4) The largest category of government spending is
A) military spending.
B) transfer payments such as Social Security and Medicare.
C) purchases of goods and services spending for such things as road, parks, and schools.
D) interest payments on the public debt.
5) According to the Classical economists,
A) the federal government should increase its spending to combat unemployment.
B) the economy’s self-correcting mechanism works very slowly.
C) any reduction in aggregate demand would quickly be met by falling wages and prices.
D) government should play an active role in combating unemployment.
6) John Maynard Keynes
A) believed the economy could remain in an unemployment equilibrium for some time.
B) argued that the self-correcting model worked too slowly to be relied on.
C) believed that government should play an active role in trying to combat unemployment.
D) All of the above.
7) Which of the following is true?
A) John Maynard Keynes is regarded as a nonactivist; the classical economists are regarded as
activists.
B) The classical economists are regarded as nonactivists; John Maynard Keynes is regarded as an
activist.
C) Both Keynes and the classical economists are regarded as nonactivists.
D) Both Keynes and the classical economists are regarded as activists.
8) According to activists, when the economy is experiencing unemployment, the federal
government should
A) increase taxes.
B) reduce government spending.
C) deliberately incur a surplus budget.
D) reduce taxes.
Use the following diagram in answering the following question.
9) Based on the figure above, the economy depicted in the diagram is
A) experiencing a recessionary gap. Activists would call for a reduction in government spending
or a tax hike.
B) experiencing an inflationary gap. Activists would call for a reduction in government spending
or a tax hike.
C) experiencing a recessionary gap. Activists would call for an increase in government spending
or a tax reduction.
D) experiencing an inflationary gap. Activists would call for an increase in government spending
or a tax reduction.
10) According to activists, the appropriate discretionary fiscal policy for combating inflation
would be to
A) deliberately incur a budget deficit.
B) increase taxes and/or reduce government spending.
C) balance the federal budget.
D) None of the above
11) If the economy is experiencing unemployment, Keynesians (activists) would use
discretionary fiscal policy to
A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) shift the aggregate supply curve to the right.
D) shift both the aggregate demand and supply curves to the right.
12) Activists believe that a balanced budget is appropriate
A) when the economy is experiencing inflation.
B) during a period of unemployment.
C) when the economy is operating at potential.
D) when there is a recessionary gap.
13) Automatic stabilizers
A) work to pull an economy out of a recession.
B) help to reduce the magnitude of a recession or inflationary episode.
C) work without affecting the federal budget.
D) All of the above.
14) If the performance of the economy was unexpectedly strong, the likely result would be
A) a planned budget deficit.
B) an unexpected (unplanned) increase in the budget deficit.
C) a planned budget surplus.
D) an unexpected (unplanned) increase in the budget surplus.
15) Crowding out occurs when
A) the Federal Reserve increases interest rates, and the higher rates make it more difficult for
households to purchase new homes.
B) higher taxes leave consumers with less income to spend on goods and services.
C) government borrowing pushes up interest rates, and the higher interest rates discourage some
investment spending.
D) politicians decide to spend more for national defense, and this leaves less of the budget for
other forms of spending.
16) Which of the following is not a lag associated with discretionary fiscal policy?
A) recognition lag
B) legislative lag
C) implementation lag
D) impact lag
17) The “expansionary bias” associated with discretionary fiscal policy stems from the impact of
discretionary policy on
A) the public debt.
B) the prevailing interest rate.
C) the exchange rate.
D) None of the above
18) At the end of 2008, the public debt was approximately
A) $340 million.
B) $44.5 trillion.
C) $850 billion.
D) $5.8 trillion.
19) The burden of the public debt is greater
A) when a larger fraction of the debt is owed to foreigners, and interest payments on the debt are
growing more rapidly than GDP.
B) when a smaller fraction of the debt is owed to foreigners, and interest payments on the debt
are growing more rapidly than GDP.
C) when a larger fraction of the debt is owed to foreigners, and interest payments on the debt are
growing more slowly than GDP.
D) when a smaller fraction of the debt is owed to foreigners, and interest payments on the debt
are growing more slowly than GDP.
20) Which of the following is a true statement regarding the public debt?
A) The fraction of the public debt owed to foreigners has been decreasing.
B) The fraction of the public debt owed to foreigners has remained constant for several decades.
C) In recent years, interest payments on the public debt have been decreasing as a percent of
GDP, but that trend may be soon reversed.
D) Interest payments on the public debt have been increasing as a percent of GDP since World
War II.
21) “Tax cuts are more popular with voters than tax increases.” This statement illustrates why
discretionary fiscal policy
A) results in crowding out.
B) is subject to an expansionary bias.
C) is subject to substantial time lags.
D) None of the above.
22) Crowding out
A) results when increased government spending drives up interest rates.
B) is unlikely to be a significant problem when the economy is depressed.
C) can slow the economy’s rate of economic growth.
D) All of the above.
1) The amount paid out as unemployment compensation automatically increases when the
jobless rate begins to rise. This is an example of discretionary fiscal policy in action.
2) According to activists, the appropriate discretionary fiscal policy for a period of
unemployment would be for the federal government to increase the level of government
spending or cut taxes.
3) Keynesians (activists) believe that when inflation exists, taxes should be cut to enable
households to keep up with inflation.
4) According to activists, increased spending for roads and infrastructure would be a sensible
policy during a period of unemployment.
5) When taxes are increased, the aggregate demand curve shifts to the right.
6) Unemployment compensation and federal spending for highways are examples of automatic
stabilizers.
7) Built-in stabilizers can help to pull an economy out of a deep recession.
Question Status: Previous Edition
8) Built-in stabilizers can help to reduce the depth of recessions, but they cannot pull an
economy out of an existing recession.
9) One advantage of built-in stabilizers is that they are not subject to the substantial lags
associated with discretionary policy.
10) Without government transfer payments, the economy’s spending would decline more steeply
during recessions.
11) According to activists, the federal government should always attempt to balance the budget
annually.
12) Keynesians (activists) argue that the federal government should plan for budget deficits
during periods of unemployment and budget surpluses during periods of inflation.
13) If the economy unexpectedly weakens, this change is likely to increase the size of the federal
government’s budget deficit.
14) The public debt in 2008 was about $550 billion.
15) The public debt and the federal deficit are the same thing.
16) The major problem posed by the existence of the public debt is our obligation to pay it off by
the year 2020.
17) “Crowding out” refers to the reduction in consumption spending that results when taxes are
increased.
18) When the federal government borrows money to finance its spending, the resulting higher
interest rates tend to encourage additional investment spending.
19) “Crowding out” results when government borrowing drives up interest rates and reduces
investment spending.
20) The time lags associated with discretionary fiscal policy increase its effectiveness.
21) There is an “expansionary bias” associated with fiscal policy because politicians find it easier
to increase taxes than to reduce them.
22) Politicians are more willing to cut taxes or increase government spending than they are to
increase taxes or reduce government spending. This is an example of the “expansionary bias”
associated with discretionary fiscal policy.
23) Crowding out may partially offset some of the impact of increased government spending and
result in a smaller increase in equilibrium GDP.
24) The existence of “crowding out” tends to make discretionary fiscal policy a more effective
tool for combating unemployment.
25) If the time lags associated with discretionary fiscal policy are substantial in length, they may
make the policy counter productive.
26) Interest payments on the public debt have remained a relatively constant fraction of GDP
since World War II.
27) The fraction of the public debt owed to foreigners has remained relatively constant for the
last 20 years.
28) In 2008, foreign interests owned more than 45% of the public debt.
29) Interest payments on the public debt have been declining as a percentage of GDP, but that
trend appears to be ending.
30) Economists view the portion of the public debt owed to foreigners as less burdensome to the
U.S. than the portion owed to Americans.
1) Explain the difference between automatic and discretionary fiscal policy and discuss the
limitations of each.
2) Summarize the debate between the classical economists and John Maynard Keynes.
3) Suppose a recessionary gap exists. What fiscal policy actions would an activist economist
propose?
4) Why do activist economists generally oppose a balanced budget amendment?
5) The federal budget deficit in 1997 was much smaller than anticipated. Provide an explanation
for this unexpected outcome.
6) Keynes believed that the federal government should deliberately incur budget deficits during
periods of unemployment and budget surpluses during periods of inflation. But for several
decades the federal government has been planning continual budget deficits, even when the
economy was strong. What’s the problem here; don’t our politicians understand the Keynesian
model?
7) Some economists have argued that the continual budget deficits of the federal government
over the last several decades have contributed to a slower rate of economic growth for the U.S.
economy. Explain how this might be possible.
8) Many economists argue that the ratio of interest payments (on the debt) to GDP is the most
reasonable measure of the burden that the federal debt imposes on society. Explain.
9) In April of 2001, President George W. Bush recommended to Congress a budget with a
projected surplus of $231 billion for the 2002 fiscal year. Instead of the projected surplus, the
federal government finished the fiscal year with a budget deficit of $158 billion. Explain the
disparity between the government’s projections and reality.
10) One criticism of discretionary fiscal policy is the fact that it is subject to a time lag. What are
the three elements of this time lag? Why does the presence of a lag constitute a problem?
11) Many economists are concerned about the substantial federal budget deficits that are
projected for the next decade and beyond, as “baby boomers” retire and claim social security
benefits. Why do these projected deficits pose a threat to our economy’s long-run performance?