Chapter 13 – Fiscal Policy, Deficits, and Debt
1. When the Federal government uses taxation and spending actions to stimulate the economy
it is conducting:
2. When the Federal government takes budgetary action to stimulate the economy or rein in
inflation, such policy is:
Chapter 13 – Fiscal Policy, Deficits, and Debt
3. When changes in taxes and government spending occur in the economy without explicit
action by Congress, such policy is:
4. When the Federal government cut taxes and increases spending to stimulate the economy
during a period of recession, such actions are designed to be:
5. Fiscal policy is enacted through changes in:
Chapter 13 – Fiscal Policy, Deficits, and Debt
6. The group that often initiates changes in fiscal policy is the:
7. If Congress passes legislation to increase government spending to counter the effects of a
recession, then this would be an example of a(n):
8. If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then
this would be an example of a(n):
Chapter 13 – Fiscal Policy, Deficits, and Debt
9. The set of fiscal policies that would be most contractionary would be a(n):
10. The intent of contractionary fiscal policy is to:
11. The goal of expansionary fiscal policy is to increase:
Chapter 13 – Fiscal Policy, Deficits, and Debt
12. If the government wishes to increase the level of real GDP, it might reduce:
13. Refer to the above graph. What combination would most likely cause a shift from AD1 to
AD2?
Chapter 13 – Fiscal Policy, Deficits, and Debt
14. Refer to the above graph. What combination would most likely cause a shift from AD1 to
AD3?
15. Which combination of fiscal policy actions would most likely be offsetting?
16. An expansionary fiscal policy can be illustrated by a:
Chapter 13 – Fiscal Policy, Deficits, and Debt
17. Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy
would be most appropriate to control demand-pull inflation?
18. Refer to the figure above. The economy is at equilibrium at point B. What would
expansionary fiscal policy do?
Chapter 13 – Fiscal Policy, Deficits, and Debt
19. Refer to the figure above. The economy is at equilibrium at point C which is below
potential output. What fiscal policy would increase real GDP?
20. If the economy is in a recession and prices are relatively stable, then the discretionary
fiscal policy or policies that would most likely be recommended to correct this
macroeconomic problem would be:
21. The economy starts out with a balanced Federal budget. If the government then
implements expansionary fiscal policy, then there will be a:
Chapter 13 – Fiscal Policy, Deficits, and Debt
22. Contractionary fiscal policy would tend to make a budget deficit become:
23. Refer to the above graph. Assume that the economy is in a recession with a price level of
P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy.
What will be the most likely new equilibrium price level and output?
Chapter 13 – Fiscal Policy, Deficits, and Debt
24. Refer to the above graph. Assume that the economy initially has a price level of P1 and
output level Q1. If the government implements expansionary fiscal policy, and the full
multiplier effect was felt, it would bring the economy to:
25. You are given the following information about aggregate demand at the existing price
level for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3)
government purchases = $100 billion; and (4) net export = $20 billion. If the full-employment
level of GDP for this economy is $620 billion, then what combination of actions would be
most consistent with closing the GDP-gap here?
Chapter 13 – Fiscal Policy, Deficits, and Debt
26. You are given the following information about aggregate demand at the existing price
level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3)
government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment
level of GDP for this economy is $600 billion, then what combination of actions would be
most consistent with closing the GDP-gap here?
27. When government spending is increased, the amount of the increase in aggregate demand
primarily depends on:
28. If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain
size will be more expansionary when the:
Chapter 13 – Fiscal Policy, Deficits, and Debt
29. A given reduction in government spending will dampen demand-pull inflation by a greater
amount when the:
30. Which of the following fiscal policy changes would be the most expansionary?
31. Which of the following fiscal policy changes would be the most contractionary?
Chapter 13 – Fiscal Policy, Deficits, and Debt
32. An economy is experiencing a high rate of inflation. The government wants to reduce
consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much
should the government raise taxes to achieve its objective?
33. The economy is in a recession. The government enacts a policy to increase spending by $2
billion. The MPS is 0.2. What would be the full increase in real GDP from the change in
government spending assuming that the aggregate supply curve is horizontal across the range
of GDP being considered?
34. In an economy, the government wants to increase aggregate demand by $50 billion at each
price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could
increase government spending by:
Chapter 13 – Fiscal Policy, Deficits, and Debt
35. In an economy, the government wants to increase aggregate demand by $60 billion at each
price level to increase real GDP and reduce unemployment. If the MPC is 0.9, then it could:
36. In an economy, the government wants to decrease aggregate demand by $48 billion at
each price level to decrease real GDP and control demand-pull inflation. If the MPS is 0.25,
then it could:
37. As the economy declines into recession, the collection of personal income tax revenues
automatically falls. This relationship best describes how the progressive income tax system:
Chapter 13 – Fiscal Policy, Deficits, and Debt
38. Which of the following is an example of built-in stability? As real GDP decreases, income
tax revenues:
39. If government tax revenues automatically change in a countercyclical direction over the
course of the business cycle, this would be called a(n):
40. The so-called “negative taxes” are better known as:
Chapter 13 – Fiscal Policy, Deficits, and Debt
41. Due to automatic stabilizers, when income rises, government transfer spending:
42. Automatic stabilizers smooth fluctuations in the economy because they produce changes
in the government’s budget that:
43. One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic
fiscal policy:
Chapter 13 – Fiscal Policy, Deficits, and Debt
44. If the economy is to have significant built-in stability, then when real GDP increases, the
tax revenues should:
45. Refer to the above graph. A budget surplus would be associated with GDP level:
Chapter 13 – Fiscal Policy, Deficits, and Debt
46. In the above graph, tax revenues vary:
47. Refer to the above graph. Automatic stability in this economy could be enhanced by:
48. The more progressive the tax system, the:
Chapter 13 – Fiscal Policy, Deficits, and Debt
49. Actions by the Federal government that decrease the progressivity of the tax system:
50. The built-in stabilizers in the economy tend to:
51. Which of the following serves as an automatic stabilizer in the economy?
Chapter 13 – Fiscal Policy, Deficits, and Debt
52. Built-in stabilizers:
53. The cyclically-adjusted budget measures the Federal budget deficit or surplus if:
54. The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into
recession, then the actual government budget will be: