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566 Miller Economics Today, 16th Edition
74) Which of the following statements about fiscal policy is true?
A) Real Gross Domestic Product (GDP) can be increased above its long run equilibrium only
in the short run.
B) Real Gross Domestic Product (GDP) can never be increased above its long run
equilibrium, even for a brief period of time.
C) Government can shift the aggregate demand curve inward by increasing spending.
D) Government can shift the aggregate demand curve outward by reducing spending.
75) Which one of the following is an example of discretionary fiscal policy used to correct a
recessionary gap?
A) a tax decrease passed into law by Congress
B) an increase in the money supply by the Federal Reserve
C) a decrease in government expenditures approved by Congress
D) an agreement among major banks to raise interest rates
76) Which one of the following is an example of discretionary fiscal policy used to correct an
inflationary gap?
A) a tax increase passed into law by Congress
B) decrease in the money supply by the Federal Reserve
C) an increase in government expenditures approved by Congress
D) an agreement among major banks to lower interest rates
77) What is discretionary fiscal policy and what is its purpose?
78) Explain how fiscal policy can correct a contractionary gap.
79) Suppose the government believes the economy is operating beyond the full employment real
GDP. What kind of fiscal policy could it pursue?
13.2 Possible Offsets to Fiscal Policy
1) What does research tell us about the impact of Ricardian equivalence effects on the economy?
A) There is no evidence of any impact of Ricardian equivalence effects.
B) Ricardian equivalence effects have a huge impact on aggregate demand.
C) There is a very small impact on both aggregate demand and aggregate supply.
D) Ricardian equivalence effects may exist, but their magnitudes are unclear.
2) The Ricardian equivalence theorem states that
A) an increase in government spending has no effect on aggregate supply.
B) increases in government spending have a larger impact on real Gross Domestic Product
(GDP) than decreases in taxes.
C) an increase in the government budget deficit created by a current tax cut has no effect on
aggregate demand.
D) an increase in the government budget deficit has no effect on real Gross Domestic Product
(GDP) because it only affects the price index.
3) The concept that increased government spending will lead to lower investment and consumer
spending is referred to as the
A) inflationary effect. B) crowding out effect.
C) aggregate demand effect. D) Keynesian effect.
4) The Laffer curve shows a relationship between
A) inflation rates and unemployment rates.
B) interest rates and investment spending.
C) price level and real Gross Domestic Product (GDP).
D) tax rates and tax revenues.
5) By definition, a direct expenditure offset will occur whenever
A) the government increases spending in an area that competes with the private sector.
B) the government increases spending for the military.
C) the interest rate rises.
D) the interest rate falls.
6) If the government began providing free textbooks to college students who would otherwise
have bought their books from the private sector, the government s action would result in
A) an increase in real Gross Domestic Product (GDP).
B) a direct expenditure offset.
C) a Ricardian dilemma.
D) a reduction of the government deficit.
7) If the government increases spending and there is a complete direct expenditure offset, then
A) aggregate demand and real Gross Domestic Product (GDP) will not change.
B) aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of
the spending increase.
C) the price level will drop.
D) the government spending multiplier will be greater than zero.
8) The government wants to increase its spending by $1 billion to stimulate the economy and is
counting on the government spending multiplier to help. Taking into account direct expenditure
offset effects, what is its best spending option?
A) A new cruise missile for the military
B) Expanding the school lunch program
C) Constructing more low income housing
D) Providing textbooks for college students
9) According to supply side economics, changes in marginal tax rates will have which of the
following effects?
A) change the incentive to work B) change the incentive to save
C) change the incentive to invest D) all of the above
10) One part of the supply side argument is that
A) lower marginal tax rates are required to induce Congress to reduce government spending.
B) lower marginal tax rates can increase total tax revenues.
C) the marginal tax rate should be set at 50 percent.
D) the relevant aggregate supply curve is close to horizontal.
11) The supporters of a proposal to increase marginal taxes on those earning over $200,000 a year
say this change would generate $100 billion in new tax revenues. A supply side economist
would argue that the actual revenue raised will be
A) less than $100 billion because some people will respond by working less.
B) exactly $100 billion because there are no offsetting factors to a tax increase.
C) more than $100 billion, because lower income people will work harder when they perceive
the tax system to be fairer.
D) more than $100 billion because interest rates will also be affected.
12) Supply side economists argue that
A) lower tax rates sometimes lead to increased tax revenues.
B) higher tax rates lead to increased productivity.
C) lower tax rates lead to a drop in real Gross Domestic Product (GDP).
D) lower tax rates always lead to lower tax revenues.
13) According to supply side economists, lower marginal tax rates will not necessarily lead to
lower tax revenues because
A) the crowding out effect does not apply to taxes.
B) lower tax rates have no effect on the opportunity cost of labor.
C) the aggregate supply curve will shift inward to the left if the tax rates are lowered.
D) the lower marginal tax rates will be applied to a growing tax base due to economic growth.
14) Supply side economics focuses on tax cuts to stimulate
A) aggregate demand by reducing saving.
B) aggregate supply by increasing production.
C) government spending.
D) military research.
15) When supply side policy is successful in pushing up equilibrium real Gross Domestic Product
(GDP), the reason is that the policy generates
A) a decrease in aggregate demand. B) an increase in aggregate supply.
C) a decrease in employment. D) a decrease in saving.
16) If the government increases spending but does not raise taxes,
A) aggregate demand will increase without any effect on the price level.
B)
b
orrowing by the government will take place.
C) the government will have to sell some assets, such as oil and national parks.
D) the government will have to either lower expenditures or raise taxes the next year.
17) The crowding out effect is
A) the tendency of contractionary fiscal policy to cause an increase in planned investment or
planned consumption in the U.S. private sector.
B) the tendency of expansionary fiscal policy to cause an increase in planned investment but
not in planned consumption in the U.S. private sector.
C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or
planned consumption in the U.S. private sector.
D) the tendency of contractionary fiscal policy to cause an increase in planned investment or
planned consumption in the U.S. private sector.
18) At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve,
A) an increase in tax rates increases tax revenues.
B) a reduction in tax rates reduces tax revenues.
C) a reduction in tax rates increases tax revenues.
D) any variation in tax rates has no effect on tax revenues.
19) If the government increases spending while holding taxes constant, we expect
A) an increase in investment spending by businesses too, as they anticipate future economic
growth.
B) a decrease in real saving as consumers follow suit and also increase borrowing.
C) planned real investment spending by businesses to increase.
D) interest rates to rise.
20) The tendency for expansionary fiscal policy to cause a reduction in planned real investment
spending by the private sector is called
A) the indirect effect. B) the interest rate effect.
C) the crowding out effect. D) the Laffer effect.
21) The crowding out effect is
A) due to the upward slope of the SRAS when the economy is operating to the right of the
LRAS curve.
B) due to the government being more powerful in the markets when there is an increase in
government spending.
C) a situation in which expansionary fiscal policy leads to a decrease in planned real
investment or planned real consumption in the private sector.
D) only relevant when an inflationary gap is present.
22) If the crowding out effect is complete and the marginal propensity to save is 0.25, then an
increase in government spending of $100 billion will generate how much more real GDP?
A) $0 B) $25 billion C) $100 billion D) $400 billion
23) A direct expenditure offset occurs when an increase in government spending
A) results in an increase in household saving for retirement.
B) is followed by an increase in consumer spending
C) results in a decrease in private spending.
D) is followed by an increase in taxes.
24) Refer to the above figure. The government has just engaged in expansionary fiscal policy
shifting the aggregate demand curve from AD1to AD2. Interest rates have started to rise.
Which of the following statements is true in the short run?
A) Real GDP will be $14 trillion since the effect of government spending is not influenced by
interest rates.
B) Real GDP will fall back to $11 trillion since the effect that increased government spending
has on real GDP is short lived.
C) Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in
interest rates.
D) Real GDP will end up somewhere between $11 and $14 trillion as businesses and
consumers reduce their spending in response to the increase in interest rates.
25) To the extent that a direct expenditure offset results from an expansionary fiscal policy,
A) the stimulative effect will be less than anticipated.
B) the stimulative effect will be more than anticipated.
C) the fiscal policy will not be discretionary.
D) the time lags associated with the implementation of fiscal policy will shorten.
26) Suppose that real GDP is initially $14 trillion and the government attempts to increase real GDP
to $15 trillion. The marginal propensity to consume is 0.8, and every $1.00 increase in real
government spending crowds out $0.50 in real planned investment expenditures. Which
increase in government spending below could yield the desired level of real GDP?
A) $100 billion B) $125 billion C) $200 billion D) $400 billion
27) Suppose that real GDP is initially $13 trillion and the government attempts to increase real GDP
to $14 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real
government spending crowds out $0.50 in real planned investment expenditures. How much
increase in real government spending could lead to the desired level of real GDP?
A) $200 billion B) $250 billion C) $500 billion D) $1 trillion
28) Refer to the above figure. If the economy is at E and the government wants to increase aggregate
demand to AD3, but the increase in spending only shifts the aggregate demand curve to AD2,
then
A) complete crowding out has occurred.
B) some crowding out has occurred.
C) the increased borrowing caused interest rates to fall.
D) the short run aggregate supply curve is steeper than the figure indicates.
29) Refer to the above figure. Suppose the economy is at E and the government uses an
expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the
aggregate demand curve is still AD1. A possible reason for this is that
A) the economy is already at full employment.
B) the increased borrowing causes higher interest rates, which encourage people to save more
and increase investment spending due to the extra saving.
C) people increase saving because they anticipate higher future taxes, resulting in a reduction
in current consumption spending that offsets the increased government spending.
D) some of the increased government spending is not counted in GDP.
30) The Ricardian equivalence theorem states that
A) an increase in government spending by the federal government leads to offsetting
reductions in state government spending.
B) an increase in government spending financed by higher taxes has no effect on aggregate
demand.
C) spending on national defense is a direct expenditure offset.
D) government spending financed by taxes is equivalent to government spending financed by
borrowing.
31) According to the Ricardian equivalence theorem, a tax cut that increases the government budget
deficit will have
A) no effect on aggregate demand because people realize that there will be a future tax
liability so that there is no increase in consumption expenditures.
B) no effect on aggregate demand because people only look at changes in taxes or
government spending in the present.
C) a positive effect on aggregate demand because people look at changes in taxes or
government spending in the present.
D) an effect on aggregate demand. The magnitude the effect will have depends upon whether
the increase is caused by a reduction in taxes or an increase in government spending.
32) A decrease in taxes will have no effect on real GDP if
A) people look at changes in taxes only in the present.
B) there is no crowding out.
C) the Ricardian equivalence theorem holds.
D) the tax decrease is offset by an increase in government spending.
33) The proposition that decreases in taxes that raise the government budget deficit has no effect on
aggregate demand is called the
A) open economy effect. B) federalism effect.
C) Ricardian equivalence theorem. D) interest rate effect.
34) According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts
A) increase aggregate demand. B) decrease aggregate demand.
C) have no effect on aggregate demand. D) affect only aggregate supply.
35) Expansionary fiscal policy falls short of its goal. Some economists claim it is due to indirect
crowding out. What evidence would be consistent with this claim?
A) An increase in consumer spending occurred.
B) The interest rate increased.
C) Saving decreased.
D) The price level decreased.
36) Three candidates for political office disagree over the benefits of enlarging the federal budget
deficit. Candidate C says the stimulation package is needed to increase employment and real
GDP; Candidate D says it will only cause higher prices; and Candidate F says it will have no
effect on either real GDP or the price level. How do the three candidates differ with respect to
the condition of the economy and the effects of fiscal policy?
A) Candidate C thinks the simple Keynesian model is applicable, while D thinks the
expansionary policy will fully crowd out private investment. F believes the economy is
experiencing a recessionary gap.
B) Candidate C thinks the simple Keynesian model is applicable; D thinks the short run
aggregate supply curve is horizontal; and F thinks the expansionary policy will generate
lower interest rates.
C) Candidate C thinks the economy is below the full employment real GDP and that the
short run aggregate supply curve is horizontal. Candidate D believes the economy is at
full employment. Candidate F believes the expansionary policy will result only in direct
fiscal offsets.
D) Candidate C thinks the short run aggregate supply curve is upward sloping; D thinks
interest rates will rise; and F thinks the economy is at full employment.
37) Expansionary fiscal policy is always 100 percent effective when the short run aggregate supply
curve is horizontal. Is this statement true?
A) Yes, because theoretically nothing else can offset the effects of fiscal policy.
B) Yes, when the long run aggregate supply curve is horizontal too.
C) No, because crowding out could take place.
D) No, because the increased spending may cause the price level to increase.
38) Direct expenditure offsets are
A) the discretionary changing of government expenditures to achieve a higher employment
level.
B) the decrease in planned investment that occurs as the result of an increase in interest rates.
C) the same as the Ricardian equivalence theorem.
D) the decrease in spending in the private sector in areas in which the government is
competing.
39) Whenever government spending is a substitute for private spending
A) interest rates will rise.
B) the Ricardian equivalence theorem holds.
C) the effects of expansionary fiscal policy are dampened.
D) there is a direct multiplier effect.
40) The government has decided to give every person in the U.S. a $5 coupon that they can use at
the grocery store to purchase their choice of cheese. We would expect this policy to lead to
A) an increase in aggregate demand equivalent to the full impact of all of the coupons
redeemable.
B) no increase in aggregate demand due to the Ricardian equivalence theorem.
C) no increase in aggregate demand because there would be no direct expenditure offset.
D) an increase in aggregate demand but not equivalent to the full impact of all of the coupons
redeemed due to some direct expenditure offset.
41) The Laffer curve
A) initially slopes upward as increasing tax rates lead to increasing tax revenue but
eventually will slope downward as increasing tax rates lead to decreasing tax revenue.
B) slopes downward throughout its range since increasing tax rates will always lead to
decreases in tax revenue.
C) slopes upward throughout its range since increasing tax rates will always lead to increases
in tax revenue.
D) is horizontal because tax revenue is independent of the rate of interest.
42) Supply side economics focuses attention on how fiscal policy might be used to
A) increase aggregate demand to the full employment level of real GDP.
B) shift the aggregate supply curve out.
C) align aggregate demand and aggregate supply.
D) increase consumption.
43) The Laffer curve indicates which of the following?
A) There is an ideal interest rate that will maximize investment spending.
B) There is an ideal amount of government spending that will lead to full national
employment.
C) There is an ideal tax revenue maximizing tax rate for government taxes.
D) There is an ideal tariff rate that will maximize exports and minimize imports.
44) According to the Laffer curve, increases in the tax rate will lead to a(n)
A) steady decrease in tax revenues.
B) steady increase in tax revenues.
C) initial decrease in tax revenues and then an increase in tax revenues.
D) initial increase in tax revenues and then a decrease in tax revenues.
45) Refer to the above figure. Which panel is consistent with the Laffer curve?
A) Panel A B) Panel B C) Panel C D) Panel D
46) If the government wishes to promote a higher rate of growth of real GDP, a supply side
economist would argue the appropriate policy is
A) engaging in expansionary fiscal policy by lowering marginal tax rates.
B) engaging in expansionary fiscal policy of increasing government spending.
C) lowering marginal tax rates on people and raising them on corporations.
D) leaving the economy alone and letting the natural forces bring it into a long run
equilibrium.
47) According to supply side economics, lower tax rates on wages
A) generate higher revenues for the government and increased unemployment.
B) create incentives to work more, which increases real GDP.
C) are less productive than lower tax rates on consumers.
D) have little effect on the economy.
48) The idea that creating incentives for individuals and firms to increase productivity leading to an
increase in long run aggregate supply is
A) supply side economics. B) demand side economics.
C) the Ricardian equivalence theorem. D) consistent with crowding out.
49) Supply side economics
A) promotes expansionary fiscal policy by increasing government spending.
B) promotes reducing taxes to create incentives to increase productivity.
C) promotes increasing taxes to create additional revenue for government spending.
D) is based on the Ricardian equivalence theorem.
50) A government proposal to increase marginal tax rates on the wealthiest 2 percent of U.S.
residents is supposed to generate an additional $100 billion in tax revenues. It is likely that
A) the actual revenue raised will exceed the $100 billion, because the other 98 percent of the
population will increase their work effort with a more fair tax system.
B) the actual revenue raised will be more than $100 billion, because the short run aggregate
supply curve is upward sloping.
C) the actual revenue raised will be less than $100 billion, because some of the people will
respond by working less and earning less income that can be taxed.
D) the actual revenue raised will be close to $100 billion, because the wealthy don t respond to
work incentives the way poorer workers do.
51) An increase in government spending without an accompanying increase in taxes
A) does not increase aggregate demand.
B) would effectively eliminate an inflationary gap.
C) causes investment spending to increase.
D) requires additional government borrowing.
52) Which one of the following statements is NOT true?
A) Expansionary fiscal policy is employed to offset recessionary gaps.
B) Expansionary fiscal policy has an effect on interest rates.
C) Crowding out dilutes the effect of expansionary fiscal policy.
D) When crowding out occurs, fiscal policy is more effective.
53) In the extreme case of a complete crowding out effect,
A) an increase in interest rates will stimulate investment spending.
B) an increase in tax rates will stimulate work effort.
C) an increase in government spending will not increase aggregate demand.
D) an increase in government spending will stimulate investment spending.
54) Because of crowding out,
A) expansionary fiscal policy during a recession must involve a tax increase.
B) expansionary fiscal policy during a recession is reinforced by private investment spending.
C) expansionary fiscal policy is diluted by the decline in investment spending caused by
higher interest rates.
D) expansionary fiscal policy is completely achieved even with a decline in investment
spending.
55) If an increase in government spending causes an increase in government borrowing, this could
induce
A) an increase in interest rates, which would cause private domestic investment to fall.
B) an increase in interest rates, which would cause private domestic investment to rise.
C) an increase in interest rates but no effect on private domestic investment.
D) a decrease in interest rates, which would cause private domestic investment to rise.
56) The crowding out effect refers to
A) an increase in the consumption of domestic goods at the expense of imported goods.
B) an increase in the consumption of imported goods at the expense of domestic goods.
C) a decrease in consumption and investment caused by an increase in government
borrowing.
D) a decrease in consumer spending caused by a decrease in consumer confidence.
57) Suppose that Congress passes a budget that increases government spending. Also, suppose that
this increase in government spending causes an increase in interest rates and a reduction in
planned investment. The effect of this fiscal policy action on planned investment is known as
which of the following?
A) cost push inflation B) demand pull inflation
C) automatic stabilizers D) none of the above
58) If the government pays for a new library in your neighborhood that you regularly visit, and you
stop going to Barnes and Noble to buy books, this is an example of
A) the free rider problem. B) externalities.
C) laissez faire. D) a direct expenditure offset.
59) To the extent that the Ricardian equivalence theorem is true, which of the conditions below will
hold?
A) Increases in the government budget deficit will not affect aggregate demand.
B) Exports will not be considered part of aggregate demand.
C) Investment spending will not be considered part of aggregate demand.
D) The long run aggregate supply curve will not be vertical.
60) Which of the following is true of the Ricardian equivalence theorem?
A) The theorem is strongly supported by empirical evidence from the 1970s.
B) The theorem is strongly supported by empirical evidence from the 1980s and 1990s.
C) The theorem states that changes in the interest rate do not affect investment spending.
D) The theorem states that the public will react to a tax cut by saving more.
61) If there is a dollar for dollar direct expenditure offset, then
A) increases in aggregate demand will also increase long run aggregate supply.
B) increases in government spending will not increase aggregate demand.
C) increases in aggregate demand will increase the price level, but leave real output
unchanged.
D) increases in aggregate demand will increase real output, but leave the price level
unchanged.
62) The theory that government borrowing may function like an increase in taxes, that is, reducing
current consumption and business expenditures, is known as
A) the marginal propensity to consume. B) the Ricardian equivalence theorem.
C) planned tax policy. D) Congressional Tax policy.
63) The theory that government borrowing may function like an increase in taxes, that is, reducing
current consumption and business expenditures, was formulated by
A)
J
ohn Maynard Keynes B)
J
ean Baptiste Say.
C) David Ricardo. D) Adam Smith.
64) The idea that a tax reduction funded by government borrowing has no effect on aggregate
demand is known as
A) the expenditure offset theorem. B) the Keynesian Cross.
C) the balanced budget multiplier. D) the Ricardian equivalence theorem.
65) Supply side economists argue that changes in tax rates cause changes in
A) the full employment level of output. B) labor supply.
C) saving. D) all of the above.
66) Supply side theory asserts that high marginal tax rates
A) encourage private saving. B) encourage business investment.
C) discourage government expenditures. D) discourage work effort.
67) Supply side theory suggests that
A) aggregate supply does not depend on labor productivity.
B) increased government spending does not increase aggregate demand.
C) lower tax rates may not reduce overall tax revenues.
D) increased labor productivity may not increase real output.
68) Supply side economists argue that decreasing marginal tax rates
A) increases productivity and shifts the AS curve to the right.
B) increases productivity and shifts the AS curve to the left.
C) increases productivity and shifts the AD curve to the left.
D) due to the Ricardian equivalence, has no impact on the economy.
