Chapter 09 – Fiscal Policy
Chapter 9 Fiscal Policy
Multiple Choice
1. Fiscal Policy is controlled by
A) the Federal Reserve Board.
B) Congress and the President.
C) the Supreme Court.
D) private banks.
2. The purpose of fiscal policy is to
A) alter the direction of the economy.
B) change people’s attitudes toward government.
C) educate people as to the importance of economics.
D) offer insight into the way things work.
3. Fiscal policy is purposeful movements in ____________ designed to direct an economy.
A) interest rates
B) legal structures
C) government regulations
D) government spending and taxes
4. Discretionary Fiscal Policy differs from Nondiscretionary Fiscal Policy in that
A) the former deals with interest rates and the latter deals with tax policy.
B) the former is built into the system whereas the latter requires timely decisions.
C) the former requires timely decisions whereas the latter is built into the system.
D) the former deals with tax policy and the latter deals with interest rates.
5. Discretionary Fiscal Policy differs from Nondiscretionary Fiscal Policy in that
A) the former deals with government spending and the latter deals with tax policy.
B) the former is chosen by Congress while the latter is chosen by the President.
C) the former is always stabilizing, while the latter is never stabilizing.
D) the former often takes years to enact, while the latter takes effect automatically.
Chapter 09 – Fiscal Policy
6. Replacement of a progressive income tax system with a single income tax rate would be an
example of
A) nondiscretionary fiscal policy.
B) discretionary fiscal policy.
C) mandatory spending policy.
D) interest rate policy.
7. An example of discretionary fiscal policy would be
A) the operation of the welfare state.
B) the operation of the progressive federal income tax.
C) a tax cut adopted to stimulate consumption.
D) an interest rate cut implemented to stimulate consumption.
8. An example of discretionary fiscal policy would be
A) the operation of the welfare state.
B) the operation of the progressive federal income tax.
C) a tax increase adopted to control inflationary pressures.
D) an interest rate increase implemented to control inflationary pressures.
9. An example of discretionary fiscal policy would be
A) the existence of the welfare state.
B) the existence of the progressive federal income tax.
C) a federal jobs program adopted to stimulate consumption.
D) an interest rate cut implemented to stimulate consumption.
10. An example of nondiscretionary fiscal policy would be
A) the operation of the welfare state.
B) a federal jobs program adopted to stimulate consumption.
C) a tax cut adopted to stimulate consumption.
D) an interest rate cut implemented to stimulate consumption.
Chapter 09 – Fiscal Policy
11. An example of nondiscretionary fiscal policy would be
A) the existence of the progressive federal income tax.
B) a federal jobs program adopted to stimulate consumption.
C) a tax cut adopted to stimulate consumption.
D) an interest rate cut implemented to stimulate consumption.
12. Nondiscretionary Fiscal Policy works by having
A) progressive income tax rates take a portion of increased income thereby dampening
periods of growth.
B) Congress and the President agree upon a tax cut to stimulate growth.
C) welfare programs reduce spending on people when they have increased incomes thereby
dampening periods of economic growth.
D) both progressive income tax rates take a portion of increased income and welfare
programs reduce spending on people when they have increased incomes thereby
dampening periods of economic growth.
13. If you were to use an Aggregate Supply Aggregate Demand diagram to model
nondiscretionary and discretionary fiscal policy in reaction to a negative aggregate demand
shock, you would see the aggregate demand curve move
A) to the right as a result of the shock.
B) to the left as a result of the shock.
C) back toward its pre-shock position as a result of these policies.
D) to the left, back toward its pre-shock position as a result of these policies.
14. If you were to use an Aggregate Supply Aggregate Demand diagram to model
nondiscretionary and discretionary fiscal policy in reaction to a positive aggregate demand
shock, you would see the aggregate demand curve move
A) to the right as a result of the shock.
B) to the left as a result of the shock.
C) back toward its pre-shock position as a result of these policies.
D) to the right, back toward its pre-shock position as a result of these policies.
Chapter 09 – Fiscal Policy
15. The tax cuts of 2001 and 2003 that came in the form of tax rebate checks are good examples
of ______ fiscal policy
A) non-discretionary
B) non-conjunctive
C) discretionary
D) universally discredited
16. The tax cuts of 2001 and 2003 that came in the form of tax rebate checks are good examples
of
A) fiscal policy.
B) monetary policy.
C) the fallacy of composition.
D) the fallacy that causation and correlation are the same.
17. Using the aggregate supply – aggregate demand model, the tax cuts of 2001 and 2003 that
came in the form of tax rebate checks would cause
A) aggregate demand to shift to the right.
B) aggregate supply to shift to the right.
C) aggregate demand to shift to the left.
D) aggregate supply to shift to the left.
18. Short-run expansionary Fiscal Policy would result in
A) aggregate demand moving to the right.
B) aggregate supply moving to the right.
C) aggregate demand moving to the left.
D) aggregate supply moving to the left.
19. Short-run contractionary Fiscal Policy would result in
A) aggregate demand moving to the right.
B) aggregate supply moving to the right.
C) aggregate demand moving to the left.
D) aggregate supply moving to the left.
Chapter 09 – Fiscal Policy
20. Which of the following would qualify as an aggregate supply shock?
A) An unexpected increase in oil prices
B) A seasonally expected increase in oil prices
C) An unexpected reduction in consumer confidence
D) An anticipated tax cut
21. Which of the following would qualify as an aggregate supply shock?
A) An unexpected decrease in oil prices
B) A seasonally expected decrease in oil prices
C) An unexpected surge in consumer confidence
D) An anticipated tax cut
22. Which of the following would qualify as an aggregate demand shock?
A) An unexpected increase in oil prices
B) A seasonally expected increase in oil prices
C) An unexpected reduction in consumer confidence
D) An anticipated tax cut
23. The mistiming problem with discretionary fiscal policy results from
A) a delay in recognizing a recession.
B) a delay in agreeing on a solution to a recession.
C) a delay in getting a particular plan implemented with the money getting into peoples’
hands.
D) all of the options are correct.
24. Which of the following would be described as the administrative lag?
A) The time required to know that there is a recession.
B) The time required to agree upon a policy remedy for a recession.
C) The time required to get a particular plan implemented with the money put into peoples’
hands.
D) The time required to get the people to spend the money returned to them through tax cuts.
Chapter 09 – Fiscal Policy
25. Which of the following would be described as the recognition lag?
A) The time required to know that there is a recession.
B) The time required to agree upon a policy remedy for a recession.
C) The time required to get a particular plan implemented with the money getting into
peoples’ hands.
D) The time required by a President to sign legislation.
26. Which of the following would be described as the operational lag?
A) The time required to know that there is a recession.
B) The time required to agree upon a policy remedy for a recession.
C) The time required to get a particular plan implemented with the money getting into
peoples’ hands.
D) Both the time required to know that there is a recession and agree upon a policy remedy
for a recession.
27. A political problem with discretionary fiscal policy is the
A) contractionary bias.
B) big-state bias.
C) expansionary bias.
D) overreaction bias.
28. A political problem with discretionary fiscal policy is the
A) political business cycle.
B) split control of the legislative and judicial branches of government.
C) business cycle.
D) Federal Reserve.
29. Generally speaking the last two years of a President’s term are associated with
A) higher growth than the first two years.
B) the same growth as the first two years.
C) lower growth than the first two years.
D) higher unemployment than the first two years
Chapter 09 – Fiscal Policy
30. A recent example of the administrative lag came in the form of it taking
A) several months in 2003 for Congress to agree on a specific tax cut package even after
they had agreed on having one.
B) only a month or two from the passage of the 2003 tax cut to the issuance to rebate checks.
C) until Summer 2003 to recognize that the recession of 2001 ended in December of 2001.
D) very little time for the effects of the 2003 rebate checks to have an effect on the economy.
31. A recent example of the recognition lag came in the form of it taking
A) several months in 2003 for Congress to agree on a tax cut package even after they had
agreed on having one.
B) only a month or two from the passage of the 2003 tax cut to the issuance to rebate checks.
C) until Fall 2001 to recognize that the recession of 2001 had started in January 2001.
D) very little time for the effects of the 2003 rebate checks to have an effect on the economy.
32. The operational lag seemingly did not apply in the case of the 2003 tax cut because it took
A) several months in 2003 for Congress to agree on a tax cut package even after they had
agreed on having one.
B) only a month or two from the passage of the 2003 tax cut to the issuance to rebate checks.
C) until Fall 2001 to recognize that the recession of 2001 had started January 2001.
D) until Summer 2003 to recognize that the recession of 2001 ended in December of 2001.
33. Which of the following would be an example of non-discretionary fiscal policy at work in
2001 through 2003
A) The tax cuts of 2001 and 2003.
B) The 12 separate cuts in interest rates beginning in January 2001.
C) The reduction in tax liabilities attributable to stock market losses in 2001 and 2002.
D) Increases in defense spending.
34. Which of the following would be an example of non-discretionary fiscal policy at work in
2001 through 2003
A) The tax cuts of 2001 and 2003.
B) The 12 separate cuts in interest rates beginning in January 2001.
C) The increase in unemployment compensation payments in 2001 through 2003.
D) The increases in defense spending.
Chapter 09 – Fiscal Policy
35. Which of the following would be an example of discretionary fiscal policy at work in 2001
through 2003
A) the tax cuts of 2001 and 2003.
B) the 12 separate cuts in interest rates beginning in January 2001.
C) the increase in unemployment compensation payments in 2001 through 2003.
D) the increases in Medicare spending attributable to the aging population.
36. The 2003 tax rebate is an example of
A) nondiscretionary fiscal policy.
B) monetary policy.
C) discretionary fiscal policy.
D) nondiscretionary trade policy.
37. In terms of timing, the 2003 tax rebate
A) clearly arrived too late.
B) was enacted and implemented in a relatively short period of time.
C) was extremely poor in that it rapidly overheated the economy at the wrong time.
D) was perfect because it unambiguously ended a recession.
38. In terms of timing, the 2003 rebate was
A) proposed at a time the economy needed a boost.
B) proposed at a time the economy was doing fine without it.
C) exactly the wrong policy in that the economy was on the verge of overheating.
D) unfortunate in that it stalled the economy.
39. Tax rebates such as those approved in 2003 might be
A) spent on consumption goods.
B) saved in the form of increased bank account balances.
C) used to pay down existing consumer debt.
D) all of the options are correct.
Chapter 09 – Fiscal Policy
40. Real economic growth during the first two years of President George W. Bush’s second term
was
A) approximately 8.7% per year.
B) higher than real economic growth during the first two years of President Bill Clinton’s
second term.
C) approximately 3.2% per year.
D) negative because of the 2001 recession.
41. Real economic growth during the first two years of President George W. Bush’s second term
was
A) approximately 8.7% per year.
B) lower than real economic growth during the first two years of President Bill Clinton’s
second term.
C) approximately 6.4% per year.
D) negative because of the 2001 recession.
42. The tax cuts included in President Obama’s 2009 fiscal stimulus package
A) were implemented through short-term changes in withholding tables.
B) went primarily to families earning more than $250,000 per year.
C) were matched by equal reductions in individual state income tax rates.
D) all of the options are correct.
43. President Obama’s 2009 fiscal stimulus package included
A) tax increases for individuals.
B) a reduction in unemployment benefits.
C) increased federal borrowing from state and local governments.
D) increased spending on “shovel–ready” infrastructure projects.
44. A significant adverse supply-side shock to the U.S. economy in mid-2008 came from
A) a tripling of world crude oil prices.
B) the plummeting world price of crude oil.
C) increased federal spending on “shovel–ready” infrastructure projects.
D) all of the options are correct.
Chapter 09 – Fiscal Policy
45. The recession that began in late 2007 was actually identified by the National Bureau of
Economic Research Business Cycle Dating Committee in
A) late 2007.
B) early 2008.
C) late 2008.
D) early 2009.
46. The Obama stimulus plan’s requirement that projects be “shovel–ready” was designed to
combat which of these
A) The operational lag.
B) The administrative lag.
C) The recognition lag.
D) The political business cycle.
47. A political problem with discretionary fiscal policy is the
A) contractionary bias.
B) expansionary bias.
C) big-state bias.
D) overreaction bias.
48. A political problem with discretionary fiscal policy is the
A) political business cycle.
B) split control of the legislative and judicial branches of government.
C) business cycle.
D) Federal Reserve.
49. A political problem with discretionary fiscal policy is the
A) the ability of powerful politicians to direct government spending to their favored causes.
B) split control of the legislative and judicial branches of government.
C) business cycle.
D) Federal Reserve.
50. The Bush tax cuts of 2001 are an example of
A) nondiscretionary fiscal policy
B) discretionary (and expansionary) fiscal policy
C) discretionary (and contractionary) fiscal policy
D) monetary policy
Chapter 09 – Fiscal Policy
51. The Bush tax cuts of 2003 are an example of
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
52. The Bush tax cuts of 2008 are an example of
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
53. The late 1960’s era Johnson 10% tax surcharge designed to curb inflation is an example of
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
54. The portion of the Obama stimulus package that provided unemployment benefits for longer
than the usual 26 weeks is best thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
55. The portion of the Obama stimulus package that provided more money (a $25 per week
increase) to those who were unemployed is best thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
56. The portion of the Obama stimulus package that bolstered state unemployment plans is best
thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
Chapter 09 – Fiscal Policy
57. The portion of the Obama stimulus package that bolstered state Medicaid plans is best
thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
58. The portion of the Obama stimulus package that bolstered state welfare plans is best thought
of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
59. The portion of the Obama stimulus package that cut taxes is best thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
60. The portion of the Obama stimulus package that increased spending is best thought of as
A) nondiscretionary fiscal policy.
B) discretionary (and expansionary) fiscal policy.
C) discretionary (and contractionary) fiscal policy.
D) monetary policy.
61. The arguments that the Obama administration used to justify the stimulus plan are
A) consistent with the theory expressed in the chapter’s discussion of discretionary fiscal
policy.
B) inconsistent with the theory expressed in the chapter’s discussion of discretionary fiscal
policy.
C) consistent with the discussion of expansionary bias.
D) consistent with the discussion of politically-motivated actions taken by the powerful.
Chapter 09 – Fiscal Policy
62. The predictions that the Obama administration used to justify the stimulus plan have been
shown to be (according to most economists)
A) wrong; the plan worked much better than their predictions suggested it would.
B) wrong; the plan did not work as well as their predictions suggested it would, but did have
some positive impact.
C) wrong; the plan had no positive impact and has been credited with extending the
recession of 2007-2009.
D) right on the mark.
63. Critics of the Obama stimulus plan were
A) entirely from conservatives.
B) entirely from liberals.
C) from both conservatives and liberals.
D) hard to find at the time.
64. Liberal critics of the Obama stimulus plan focused their concern on
A) their belief that the package was too large and created a threat of inflation.
B) their belief that the package was too small and therefore insufficient to the task.
C) the plan’s requirement that plans be shovel ready.
D) the fact that there were too few tax cuts in the plan.
65. Authorization in 2009 of increased federal spending on “shovel–ready” infrastructure projects
was intended to speed up the macroeconomic impact of the deficit spending by
A) carefully designing the projects to save or create the largest possible number of jobs.
B) avoiding the lengthy design phase of the projects.
C) paying the entire contracted amount up front.
D) paying for the projects with new taxes approved by Congress.