56. Suppose most economists agree that the target rate of unemployment is between 4 and 7
percent. If the actual unemployment rate is 11 percent, then most economists would agree that:
A. both expansionary and contractionary policies are appropriate.
B. expansionary monetary and fiscal policies are appropriate.
C. contractionary monetary and fiscal policies are appropriate.
D. neither expansionary nor contractionary policies are appropriate.
57. Which of the following issues will economists likely agree about?
A. The long-run achievable target rate of unemployment
B. Estimates of potential income
C. The relationship between the level of economic activity and inflation
D. Outside of some range, too much spending causes inflation and too little causes a recession
58. Fiscal policy is typically:
A. extremely flexible because most government spending is discretionary.
B. extremely flexible provided policy lags are short.
C. flexible despite the presence of implementation problems.
D. difficult to implement quickly.
59. Most of the government budget is mandatory spending through programs like Medicare and
Social Security, and much of the rest is politically difficult to alter. Because of this:
A. fiscal policy is always undertaken only when there is a national crisis that motivates voters to
seek change.
B. fiscal policy that involves raising taxes is more likely to be implemented than fiscal policy that
involves borrowing money.
C. the amount of spending is unlikely to be implemented as economists suggest.
D. most spending is geared to perform as an automatic stabilizer, so that Congress is in fact largely
irrelevant when it comes to providing a fiscal response to a recession.
60. Activist fiscal policies:
A. generally produce balanced budgets.
B. usually produce budget surpluses.
C. usually produce budget deficits.
D. do not have any systematic effect on budget surpluses or deficits.
61. Because reducing both unemployment and inflation simultaneously are conflicting goals:
A. there is a policy that will allow policymakers to achieve either objective.
B. aggregate demand policy will allow policymakers to achieve one of these objectives, but not
both.
C. aggregate demand policy will allow policymakers to achieve both objectives, but only if it is
expansionary.
D. aggregate demand policy will allow policymakers to achieve both objectives, but only if it is
contractionary.
62. The crowding out effect would be lower if:
A. consumption was sensitive to changes in prices.
B. the government always ran budget deficits.
C. the interest rate was greatly affected by shifts in the demand of loanable funds.
D. investment was not sensitive to changes in the interest rates.
63. Generally speaking, the government implements fiscal policy in a:
A. fast and accurate manner.
B. slow and inaccurate manner.
C. fast but inaccurate manner.
D. slow but accurate manner.
64. Because automatic stabilizers lower transfer payments and raise tax receipts as an economy
recovers from a recession, they:
A. slow down the pace of an economic recovery.
B. increase the pace of an economic recovery.
C. do not affect the pace of an economic recovery.
D. accelerate the recovery from a recession until inflation starts to develop, at which point they
slow the recovery.
65. If the economy falls into a recession, automatic stabilizers will cause:
A. tax receipts to fall and government spending to rise.
B. tax receipts to rise and government spending to fall.
C. both tax receipts and government spending to rise.
D. both tax receipts and government spending to fall.
66. As the economy contracts, tax revenues:
A. fall and transfer payments rise, causing the economy to contract by less than it would in the
absence of automatic stabilizers.
B. rise and transfer payments rise, causing the economy to contract by more than it would in the
absence of automatic stabilizers.
C. fall and transfer payments fall, causing the economy to contract by more than it would in the
absence of automatic stabilizers.
D. rise and transfer payments fall, causing the economy to contract by less than it would in the
absence of automatic stabilizers.
67. As the economy expands, tax revenues:
A. fall and transfer payments rise, causing the economy to expand by less than it would in the
absence of automatic stabilizers.
B. rise and transfer payments rise, causing the economy to expand by more than it would in the
absence of automatic stabilizers.
C. fall and transfer payments fall, causing the economy to expand by more than it would in the
absence of automatic stabilizers.
D. rise and transfer payments fall, causing the economy to expand by less than it would in the
absence of automatic stabilizers.
68. Which of the following would not be considered an automatic stabilizer?
A. Welfare payments
B. Unemployment compensation
C. Income tax
D. Defense spending
69. Which of the following is an automatic stabilizer?
A. Military expenditures
B. Social Security benefits
C. Unemployment compensation
D. Property taxes
70. In terms of fiscal policy, which of the following is an example of a fiscal automatic stabilizer?
A. The reduction in the money supply that occurs as banks become less willing to make loans
during a recession
B. The reduction in wages that occurs as the economy goes into a recession
C. The increase in government spending that occurs as the result of new spending bills passed by
Congress
D. The rise in tax revenue that occurs as a result of growth in real GDP
71. Because automatic stabilizers increase government spending and decrease tax revenue during
a recession and have the opposite effect during a recovery, they tend to create budget:
A. deficits throughout the business cycle.
B. surpluses throughout the business cycle.
C. deficits during the recovery phase of the business cycle and budget surpluses during the
recession phase.
D. deficits during the recession phase of the business cycle and budget surpluses during the
recovery phase.
72. Automatic stabilizers cause:
A. deeper recessions and more rapid expansions.
B. deeper recessions and slower expansions.
C. shallower recessions and slower expansions.
D. shallower recessions and more rapid expansions.
73. During an economic contraction, automatic stabilizers:
A. reduce both budget surpluses and deficits.
B. reduce a budget surplus or increase a deficit.
C. reduce a budget deficit or increase a surplus.
D. increase both budget surpluses and deficits.
74. During an economic expansion, automatic stabilizers:
A. reduce both budget surpluses and deficits.
B. reduce a budget surplus or increase a deficit.
C. reduce a budget deficit or increase a surplus.
D. increase both budget surpluses and deficits.
75. An example of a procyclical fiscal policy is:
A. an income tax.
B. unemployment compensation.
C. a balanced budget policy.
D. welfare payments.
76. In 2009, output was beneath potential. At the same time, the budget deficit hit a record high of
over $1 trillion. If President Obama were to have pursued budget cuts, given the state of the
economy, these spending cuts would have:
A. been procyclical.
B. been countercyclical.
C. increased interest rates.
D. crowded out investment.
77. Procyclical fiscal policies:
A. reduce cyclical fluctuations in the economy, but not as effectively as countercyclical fiscal
policies.
B. reduce cyclical fluctuations in the economy more effectively than countercyclical fiscal
policies.
C. reduce cyclical fluctuations in the economy about as effectively as countercyclical fiscal
policies.
D. increase cyclical fluctuations in the economy.
78. If output is falling, a procyclical fiscal policy will result in:
A. higher taxes and/or increased government spending.
B. higher taxes and/or decreased government spending.
C. lower taxes and/or increased government spending.
D. lower taxes and/or decreased government spending.
79. The introduction of “rainy-day funds” by states would:
A. decrease the procyclical nature of current state budgeting procedures.
B. increase the procyclical nature of current state budgeting procedures.
C. decrease the counter-cyclical nature of current state budgeting procedures.
D. increase the counter-cyclical nature of current state budgeting procedures.
80. Which of the following policies would reduce the procyclical nature of fiscal policy at the state
level?
A. The establishment of “rainy day funds”
B. The introduction of price controls
C. The institution of balanced budget requirements
D. The elimination of automatic stabilizers
81. If state governments began using a five-year rolling-average budgeting procedure as opposed
to the current practice of no rolling average, which would the likely result be?
A. State financing would become more procyclical
B. Balanced-budget requirements in state constitutions would be much less procyclical
C. The need for automatic stabilizers at the federal level would increase
D. State governments would run a greater risk of running short of funds during recessions
82. The income tax is:
A. an automatic stabilizer because income tax revenues rise as income increases, slowing an
economic expansion.
B. an automatic stabilizer because income tax revenues rise as income increases, accelerating an
economic expansion.
C. an automatic stabilizer because income tax revenues fall as income increases, accelerating an
economic expansion.
D. not an automatic stabilizer.
83. Unemployment compensation is:
A. an automatic stabilizer because it rises as income increases, slowing an economic expansion.
B. an automatic stabilizer because it falls as income increases, slowing an economic expansion.
C. an automatic stabilizer because it falls as income decreases, slowing an economic contraction.
D. not an automatic stabilizer.
84. If taxes and government expenses did not vary with income, then income would:
A. be more stable.
B. not be more or less stable.
C. be less stable.
D. be closer to potential income.
85. If income increases, a budget deficit will:
A. tend to increase.
B. tend to decrease.
C. change unpredictably.
D. not change.
86. Suppose the government never borrows, so that it always finances its expenditures with taxes.
Suppose further that government spending does not depend on income. In this case:
A. both government spending and taxes are automatic stabilizers.
B. government spending is an automatic stabilizer but taxes are not.
C. taxes are an automatic stabilizer but government spending is not .
D. neither government spending nor taxes are automatic stabilizers.
87. Property taxes are:
A. not an automatic stabilizer because they do not vary with income.
B. not an automatic stabilizer because they vary with income.
C. an automatic stabilizer because they do not vary with income.
D. an automatic stabilizer because they vary with income.
88. The provisions in state constitutions requiring them to balance their budgets mean that:
A. state governments often behave procyclically because lower revenues during recessions means
lower state spending.
B. state government spending acts as an automatic stabilizer for the national economy.
C. state governments can follow a functional finance approach with greater consistency than the
federal government, which has no such requirement.
D. state governments can only use monetary policy to affect their economies.
89. As income increases during the recovery from a recession, automatic stabilizers will:
A. increase taxes and increase government spending, increasing the overall size of the
government.
B. reduce taxes and increase government spending, accelerating the recovery.
C. increase taxes and decrease government spending, slowing the recovery.
D. reduce taxes on high-income individuals and raise taxes on the poor, increasing economic
inequality.
90. When inflation and unemployment are both higher than desired, most economists believe that
the government should:
A. adopt contractionary monetary policies that reduce both inflation and unemployment.
B. adopt expansionary fiscal policies that reduce both inflation and unemployment.
C. determine whether reducing inflation is more or less important than reducing unemployment
and adopt a policy that targets the more important goal.
D. not act as it is impossible to reduce either inflation or unemployment under these
circumstances.
91. It is generally true that elected officials find it easier to:
A. cut taxes.
B. cut government spending.
C. raise taxes and cut government spending.
D. raise both taxes and government spending.
92. What did the sound finance approach to fiscal policy use to support its view?
A. Keynesian economics
B. A history of successful procyclical fiscal policy
C. The functional finance view
D. The Ricardian equivalence theorem
93. In contrast to the functional finance view, Classical sound finance macroeconomics assumes
that individuals:
A. do not adjust their spending to account for future tax payments.
B. adjust their spending to account for future tax payments.
C. do not adjust their spending to account for future incomes.
D. adjust their spending to account for future incomes.
94. According to the Classical advocates of sound finance, if an economy is in a recession, the
government should run:
A. a budget deficit and increase spending, which will increase output.
B. a budget surplus and decrease spending, which will increase output.
C. neither a surplus nor a deficit since changes in deficit spending do not affect output.
D. neither a surplus nor a deficit since changes in spending affect output.
95. According to a Classical, sound finance perspective on macroeconomics, if an economy is on
an inflationary path, the government should run:
A. a budget deficit and increase spending, which will reduce output.
B. a budget surplus and decrease spending, which will reduce output.
C. neither a surplus nor a deficit since changes in deficit spending do not affect output.
D. neither a surplus nor a deficit since changes in spending affect output.
96. Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below
potential output. The government opts for an expansionary fiscal policy in an attempt to pull the
economy out of the recession. An economist with a Classical view holding the Ricardian
equivalence theorem to be practically true would conclude that the economy will most likely end
up at point:
A. A.
B. B.
C. C.
D. D.
97. Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below
potential output. The government opts for an expansionary fiscal policy that shifts the AD curve
from AD0 to AD1 in an attempt to pull the economy out of the recession. An economist with a
functional finance view who also recognizes that there will be a certain degree of crowding out
would conclude that the economy will likely end up at point:
A. A.
B. B.
C. C.
D. D.
98. Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below
potential output. The government opts for an expansionary fiscal policy in an attempt to pull the
economy out of the recession. Not taking into account shifts in aggregate supply, an economist
with a functional finance view who also believes in a full crowding out effect would conclude that
the economy will end up at point:
A. A.
B. B.
C. C.
D. D.
99. Refer to the graph shown. Assume the economy is in short-run equilibrium at point A below
potential output. The government opts for an expansionary fiscal policy that shifts the AD curve
from AD0 to AD1 in an attempt to pull the economy out of the recession. Not taking into account
shifts in aggregate supply, an economist with a functional finance view who believes there will be
no crowding out effect would conclude that the economy will end up at point:
A. A.
B. B.
C. C.
D. D.
100. If an economy is in a recession and the government opts for an expansionary fiscal policy to
shift AD closer to the potential output, a sound finance economist with a Classical view who holds
the Ricardian equivalence theorem to be practically true would conclude that AD:
A. shifts to the right due to higher government spending.
B. shifts to the left due to higher government spending.
C. does not shift since the higher government spending is offset by higher private consumption.
D. does not shift since the higher government spending is offset by lower private consumption.
101. If an economy is above potential output and the government opts for a contractionary fiscal
policy (running surpluses) to shift AD, an economist with a Classical view who holds the
Ricardian equivalence theorem to be practically true would conclude that AD:
A. shifts to the right due to lower government spending.
B. shifts to the left due to lower government spending.
C. does not shift since the lower government spending is offset by higher private consumption.
D. does not shift since the lower government spending is offset by lower private consumption.
102. If an economy is in a recession and the government opts for an expansionary fiscal policy to
shift AD closer to potential output, an economist with a typical functional finance view who
acknowledges partial crowding out would conclude that the AD:
A. shifts to the right due to higher government spending.
B. shifts to the left due to higher government spending.
C. does not shift since the higher government spending is offset by higher private consumption.
D. does not shift since the higher government spending is offset by lower private consumption.
102. According to Ricardian equivalence advocates, if the government announces a plan to
balance the budget by reducing its deficits to zero, then the private sector will:
A. decrease consumption.
B. decrease savings.
C. decrease investment.
D. increase savings.
104. When the economy entered a serious recession in 2008, the response of the U.S. government
was to institute a $700 billion bailout plan, pursue other heavy deficit spending, and take on
unusually large liabilities through bond and money market fund guarantees. This is an example of:
A. sound finance as fiscal policy.
B. functional finance and expansionary fiscal policy.
C. fiscal policy that employs automatic stabilizers as the primary means of economic stabilization.
D. procyclical fiscal policy.