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586 Miller Economics Today, 16th Edition
69) Supply side economists argue cuts in tax rates
A) always reduce tax revenues. B) may increase tax revenues.
C) always increase budget deficits. D) have no effect on tax revenues.
70) The notion that a decline in tax rates and other incentives will spur individuals and firms to
increase productivity is typically referred to as
A) demand side economics. B) Ricardian equivalence.
C) supply side economics. D) Keynesian economics.
71) The Laffer curve shows that as tax rates increase
A) initially tax revenues increase, then decrease.
B) tax revenues decrease as the incidence of cheating on tax returns increases.
C) tax revenues increase as more individuals and businesses have to pay taxes.
D) tax revenues remain unchanged.
72) According to the Laffer curve, we know with certainty that an increase in the tax rate will
A) cause tax revenue to increase.
B) cause tax revenue to decrease.
C) have no effect on tax revenue.
D) cause tax revenue to increase, decrease, or remain unchanged.
73) Consider the above figure. The curve shown is sometimes referred to as
A) the Laffer curve. B) the Ricardian curve.
C) the Keynesian curve. D) the Phillips curve.
74) Consider the above figure. This curve suggests that as the government raises the tax rate, a point
will eventually be reached at which the revenues that are collected will
A) increase. B) decline.
C) approach infinity. D)
b
ecome negative.
75) Refer to the above figure. Suppose that the economy initially is operating along AD 1. If the
government seeks to close the recessionary gap by raising government spending without any
change in taxation, which moves the aggregate demand curve from AD1to AD2, then to AD3.
Which of the following scenarios is true?
A) Interest rates fall and investment rises. B) Both interest rates and investment fall.
C) Both interest rates and investment rise. D) Interest rates rise and investment falls.
76) Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces
taxes, then the economy goes to AD2, but then falls back to AD3. This is an example of
A) partial crowding out effect. B) Ricardian equivalence.
C) laissez faire. D) complete crowding out effect.
77) Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces
taxes, then the economy goes to AD2, but then falls back to AD1. This is an example of
A) partial crowding out effect. B) the free rider problem.
C) laissez faire. D) complete crowding out effect.
78) If the federal government borrows from the private sector to pay for increased budget deficits
and interest rates increase, this will cause
A) a decrease in planned investment and planned consumption.
B) an increase in planned investment and planned consumption.
C) a decrease in planned investment and an increase in planned consumption.
D) an increase in planned investment and a decrease in planned consumption.
79) The crowding out effect of expansionary fiscal policy refers to which of the following?
A) a reduction in private sector planned investment
B) a reduction in the stock of inventories
C) the reduction in the size of the budget deficit
D) the reduction in the size of the recessionary gap
80) When private expenditures decrease as a result of increased government spending, this is
known as
A) the stabilizer effect. B) the crowding out effect.
C) the multiplier effect. D) government deficit spending.
81) The crowding out effect is often associated with
A) a temporary increase in taxes.
B) an increase in the interest rate caused by government borrowing.
C) the reinforcing impact of state and local tax changes on federal tax changes.
D) the impact of a tax rate increase when the aggregate supply function is horizontal.
82) Suppose policy makers pass a budget that results in a reduction in government spending and no
change in taxes. This reduction in government spending will likely
A) increase government borrowing and increase interest rates.
B) generate extra tax revenues to cover the extra spending.
C) reduce interest rates and increase planned investment.
D) reduce interest rates, increase in planned investment, and increase real GDP.
83) An increase in government spending that is not financed by an increase in taxes will cause
which of the following?
A) an increase in interest rates and an increase in planned investment
B) an increase in interest rates and a reduction in planned investment
C) a reduction in interest rates and an increase in planned investment
D) a reduction in interest rates and a reduction in planned investment
84) The crowding out effect refers to the tendency of expansionary fiscal policy to
A) cause decreases in planned investment or planned consumption.
B) cause households to save less.
C) replace low skilled labor with higher skilled labor.
D) cause firms to produce beyond capacity.
85) To compensate for the possibility of indirect crowding out, a government engaging in
expansionary policy aimed at eliminating a recessionary gap could
A) increase spending less than the simplest Keynesian model would predict.
B) increase spending more than the simplest Keynesian model would predict.
C) reduce taxes rather than increase government spending.
D)
b
oth reduce taxes and reduce spending to be able to achieve full employment.
86) If other factors are held constant, what happens when the federal government finances a
growing budget deficit by increasing the amount it borrows from the private sector?
A) There will be an increase in the interest rate.
B) There will be a decrease in the interest rate.
C) The crowding out effect will be cancelled out.
D) There will be an increase in net exports.
87) According to David Ricardo, an increase in government spending without any tax increase will
not increase aggregate demand because
A) consumers will consume less and save more to prepare for increased taxes in the future.
B) the private sector is more likely than the public sector to spend any extra income on
national defense.
C) consumers will increase their consumption proportionately more than Keynesian
economists believe they will.
D) consumers will save less than they otherwise would have.
88) The Ricardian equivalence theorem suggests that an increase in the government budget deficit
created by a tax cut will
A) increase real Gross Domestic Product (GDP) in both the short and long run.
B) decrease real Gross Domestic Product (GDP) in both the short and long run.
C) decrease real Gross Domestic Product (GDP) in the short run, but increase it in the long
run.
D) have no effect on aggregate demand.
89) Which of the following is a basic assumption of the Ricardian equivalence theorem?
A) Consumers pay no attention to government budget deficits.
B) Consumers think only in terms of the present.
C) If current tax cuts result in budget deficit increases, aggregate supply falls.
D) Consumers consider future tax payments when deciding how much to spend and save
today.
90) The proposition that an increase in the federal budget deficit caused entirely by a current tax cut
has no effect on aggregate demand is called the
A) indirect effect. B) interest rate effect.
C) open economy effect. D) Ricardian equivalence theorem.
91) What is supply side economics?
92) Using graphs, explain how indirect crowding out can occur when the government increases
spending in an attempt to stimulate the economy.
93) What are direct expenditure offsets and how do they influence the effects of fiscal policy?
94) Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the
expected demand side effects? What are the possible offsets to the demand side effect? How
might supply side effects change these results?
95) Explain how indirect crowding out can offset expansionary fiscal policy.
96) Explain the Ricardian equivalence theorem.
97) Explain why proponents of supply side effects of tax rate variations who also believe that
tax rate changes influence aggregate demand might claim that cuts in marginal income tax rates
can potentially push up real Gross Domestic Product (GDP) without generating inflation.
13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags
1) The period between the recognition of a problem and the implementation of a policy to solve
the problem is
A) the recognition lag. B) the action time lag.
C) the effect time lag. D) the fine tuning lag.
2) Which of the following are lags that fiscal policy makers must cope with?
A) Recognition time lags. B) Action time lags.
C) Effect time lags. D) All of the above are correct.
3) The effect time lag of fiscal policy refers to
A) the time needed for Congress to enact a policy.
B) the delay in recognizing an economic problem.
C) the time between the onset of a policy and when the policy has impact on the economy.
D) the difficulty in getting the President and the Congress to agree on an appropriate policy.
4) The time required to collect information about the current state of the economy is known as
A) the recognition time lag. B) the action time lag.
C) the effect time lag. D) the fiscal lag.
5) Fiscal policy may end up being destabilizing to an economy because
A) there is never a long enough time lag.
B) the economy is almost always at full employment.
C) the President may have different goals than Congress.
D) various time lags associated with fiscal policy cause the policy changes to take effect too
late to solve the problem it was supposed to solve.
6) The recognition time lag recognizes that it takes time
A) to collect information about the state of the economy.
B) to get politicians to agree on the best policy to enact.
C) for any change in policy to take effect and for people to recognize that the policies are
effective.
D) for the politicians to enact the policy once the need for change has been recognized.
7) The amount of time that it takes to identify a national economic problem is
A) fiscal policy. B) the recognition time lag.
C) the effect time lag. D) the action time lag.
8) The amount of time that it takes between recognizing an economic problem and implementing
policy to solve it is
A) fiscal policy. B) the recognition time lag.
C) the effect time lag. D) the action time lag.
9) The amount of time that elapses between the implementation of a policy and the results of that
policy is
A) fiscal policy. B) the recognition time lag.
C) the effect time lag. D) the action time lag.
10) Once either expansionary or contractionary fiscal policy has been undertaken,
A) aggregate demand will respond quickly and the problems in the economy will be
corrected.
B) aggregate demand will respond quickly in the short run but the economy will not improve
in the long run.
C) a time lag exists between implementation and the results of the policy.
D) taxes will need to be adjusted because of the recognition time lag.
11) The amount of time it takes Congress to debate the size of a tax cut is known as the
A) action time lag. B) effect time lag.
C) recognition time lag. D) Ricardian equivalence time lag.
12) The various time lags involved with fiscal policy imply that
A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long
run.
B) fiscal policy is most effective as a short run measure to fine tune the economy s quarterly
ups and downs.
C) fiscal policy may often be destabilizing if the effects of the policy kick in after the need is
over.
D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the
full employment level of real GDP.
13) In January 2009, the President submitted a bill to Congress that was designed to stimulate the
economy and increase employment. The legislation was passed in March 2009, and the
spending occurred from June 2009 to September 2010. Consequently,
A) the economy should have been at full employment by December 2009.
B) the full impact of the bill would be felt by March 2009 because people anticipated the
effects of the increased spending.
C) the full impact of the bill would be felt by the end of September 2010.
D) the full effect of the spending would be felt some time after September 2010 because the
full multiplier effects could not be felt until all the increase in spending took place.
14) In January 2009, the President submitted a bill to Congress in order to stimulate the economy
and increase employment. The legislation was passed in March 2009, and the spending occurred
from June 2009 to March 2011. As a result,
A) the full effect of the fiscal policy change would not be felt until after March 2011 because of
the effect time lag.
B) the full effect of the fiscal policy change would not be felt until after March 2011 because of
the recognition time lag.
C) the full effect of the fiscal policy change would be felt by March 2011 because people
anticipated the spending and changed their behavior accordingly.
D) the full effect of the fiscal policy change would be felt when the last of the funds were
spent by the government.
15) Discretionary fiscal policy
A) may not have desired effects on real GDP because of the time lags.
B) may not have desired effects on real GDP because it leads to increases in aggregate
demand.
C) may not have desired effects on real GDP because it leads to increases in aggregate
demand.
D) would have a larger effect on real GDP if the multiplier was smaller.
16) To the extent that the political process of moving legislation through Congress is slow,
A) the effect time lag will be long.
B) the recognition time lag will be long.
C) the action time lag will be long.
D) automatic stabilizers will not be effective.
17) The time required to acquire information about the state of the economy is referred to as
A) the action time lag. B) the recognition time lag.
C) the effect time lag. D) the data lag.
18) The time that elapses between the implementation of a policy and its intended result is referred
to as
A) the action time lag. B) the recognition time lag.
C) the effect time lag. D) the data lag.
19) A problem with using fiscal policy to fine tune the economy is that
A) agreeing on the appropriate fiscal policy is time consuming.
B) fiscal policy impacts the economy too fast.
C) fiscal policy impacts only urban areas of the nation.
D) fiscal policy impacts only the largest states in the nation.
20) The recognition time lag is the time that elapses between
A) when an economic problem manifests itself and it is officially acknowledged.
B) the recognition of an economic problem and implementing policies to solve it.
C) implementing policies to solve an economic problem and when the results of that policy
can be measured.
D) the beginning of the budgetary process and the final budget resolution.
21) The action time lag is the time period that elapses
A)
b
etween when an economic problem manifests itself and it is officially acknowledged.
B)
b
etween the recognition of an economic problem and implementing policies to solve it.
C)
b
etween implementing policies to solve an economic problem and when the results of that
policy can be measured.
D)
b
etween the beginning of the budgetary process and the final budget resolution.
22) The effect time lag is the time period that elapses
A)
b
etween when an economic problem manifests itself and it is officially acknowledged.
B)
b
etween the recognition of an economic problem and implementing policies to solve it.
C)
b
etween implementing policies to solve an economic problem and when the results of that
policy can be measured.
D)
b
etween the beginning of the budgetary process and the final budget resolution.
23) When data on the economy requires some time to gather and interpret, we have a(n)
A) aggregate time lag. B) action time lag.
C) recognition time lag. D) effect time lag.
24) When it takes time for the president and Congress to change fiscal policy to act on economic
data, we have a(n)
A) aggregate time lag. B) action time lag.
C) recognition time lag. D) effect time lag.
25) When there is an interval between when the fiscal policy changes and corresponding changes in
aggregate spending, we have a(n)
A) aggregate time lag. B) action time lag.
C) recognition time lag. D) effect time lag.
26) When fiscal policy is used, time lags are variable and last anywhere from
A) one to three weeks. B) one to three months.
C) one to three years. D) one to three decades.
27) Fiscal policy time lags tend to be
A) constant, always thirteen months long.
B) variable, between one and three years.
C) variable, between one and three weeks.
D) variable, between one and three months.
28) A recession begins in July but government policy makers do not reach a consensus that a
recession had in fact begun until October. This is an example of a(n)
A) recognition time lag. B) action time lag.
C) effect time lag. D) quick time lag.
29) What are the various time lags that affect discretionary fiscal policy, and what are their effects?
13.4 Automatic Stabilizers
1) One characteristic of built in or automatic stabilizers is that
A) they require no new legislative action by Congress to have an effect.
B) they automatically produce surpluses during recessions and deficits during inflation.
C) they have no effect on the distribution of income.
D) they reduce the size of the public debt during times of recession.
2) Unemployment compensation programs are called automatic stabilizers because payments
increase during
A) expansionary periods. B) recessions.
C)
b
oth recessions and expansions. D) wartime only.
3) All of the following are automatic fiscal stabilizers EXCEPT
A) a congressionally mandated decrease in tax rates to stimulate the economy.
B) a decrease in unemployment compensation payments during an expansion.
C) a decrease in overall tax revenues during a recession.
D) an increase in unemployment expenditures during a recession.
4) When real Gross Domestic Product (GDP) falls, which of the following will automatically occur?
A) A decrease in all tax rates
B) A decrease in income tax revenues
C) A decrease in unemployment compensation expenditures
D) An increase in income tax revenues
5) Automatic stabilizers are
A) provisions that cause changes in government spending and taxes without new action by
Congress or the President.
B) policies set by certain committees in Congress.
C) tools used by the President s Council of Economic Advisers.
D) provisions that cause the aggregate supply curve to be upward sloping.
6) An example of an automatic stabilizer is
A) unemployment compensation.
B) a newly enacted surtax to slow down an overheated economy.
C) a horizontal aggregate supply curve.
D) a change in the marginal tax rates.
7) An advantage of automatic stabilizers over discretionary fiscal policy is that
A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy.
B) automatic stabilizers can be easily fine tuned to move the economy to full employment.
C) only the President is involved in implementing automatic stabilizers, instead of both the
President and Congress.
D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to
discretionary fiscal policy.
