Question 1

Expansionary fiscal policy today might mean:

Accepted Answer

A)   increased taxes in the future.
B)   contractionary fiscal policy in the future.
C)   increased public borrowing in the future.
D)   increased taxes, contractionary fiscal policy, and increased public borrowing in the future.

Question 2

Fiscal policy is especially effective when used to combat real shocks.

Accepted Answer

A) True 
 B)False

Question 3

Is fiscal policy effective in reducing both inflation and unemployment at the same time?

Accepted Answer

Generally not. Fiscal policy is primaril...

Question 4

Government spending is a more effective policy tool when:

Accepted Answer

A)   the economy is above the LRAS curve.
B)   the government raises taxes to finance spending.
C)   consumers are pessimistic and not spending.
D)   interest rates in the economy are rising simultaneously.

Question 5

Explain the multiplier effect.

Accepted Answer

The multiplier effect refers to a situat...

Question 6

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

Accepted Answer

A)   cut taxes
B)   raise taxes
C)   increase government spending
D)   No government action can achieve those goals.

Question 7

The crowding out effect reduces the effectiveness of fiscal policy in combating economic shocks.

Accepted Answer

A) True 
 B)False

Question 8

When expansionary fiscal policy subsequently increases income and consumer spending, the subsequent increase in AD is called the _____ effect.

Accepted Answer

A)   expansionary
B)   secondary
C)   multiplier
D)   crowding out

Question 9

In order for fiscal policy to effectively offset a $1 million decrease in consumer spending, the government would MOST likely have to:

Accepted Answer

A)   keep a balanced budget.
B)   increase spending by $1 million.
C)   increase spending by more than $1 million.
D)   increase spending by less than $1 million.

Question 10

Fiscal policy under the 2009 American Recovery and Reinvestment Act took the form of:

Accepted Answer

A)   government spending alone.
B)   tax cuts alone.
C)   a mix of government spending and tax cuts.
D)   neither government spending nor tax cuts.

Question 11

Under which circumstance should an economic advisor for a small economy recommend a large increase in government spending?

Accepted Answer

A)   The country is in a recession that seems to be turning into a depression.
B)   The government has a record high budget deficit.
C)   It has become more difficult for the government to sell bonds.
D)   The economy is struggling primarily because of high oil prices.

Question 12

A problem that makes fiscal policy less effective is that:

Accepted Answer

A)   fiscal policy must be offset by monetary policy.
B)   government spending is a relatively small portion of GDP.
C)   government spending does not directly affect aggregate demand.
D)   higher taxes or increased borrowing to fund government spending can reduce aggregate demand.

Question 13

Tax cuts often have an immediate impact on redirecting an economic downturn.

Accepted Answer

A) True 
 B)False

Question 14

In a typical year, changes in government spending compared to overall spending are relatively:

Accepted Answer

A)   small.
B)   large.
C)   unpredictable.
D)   well-timed.

Question 15

Which is the MOST effective fiscal policy to fight a recession if people react to uncertainty by saving all additional money that they earn or receive?

Accepted Answer

A)   a tax cut
B)   a tax rebate
C)   an increase in government spending
D)   a do-nothing strategy that relies on automatic stabilizers

Question 16

Monetary policy lags are generally shorter than fiscal policy lags.

Accepted Answer

A) True 
 B)False

Question 17

Automatic stabilizers are:

Accepted Answer

A)   changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers.
B)   subject to significant lags.
C)   a result of the United States' regressive tax system.
D)   not very effective fiscal policy.

Question 18

Ricardian equivalence occurs when:

Accepted Answer

A)   the amount of tax increase is equivalent to the amount of private spending decrease.
B)   a tax cut now is equivalent to a tax cut in the future.
C)   people see that lower taxes today means higher taxes in the future.
D)   the amount of tax cut is equivalent to the amount of government spending reduction.

Question 19

A temporary investment tax credit tends to:

Accepted Answer

A)   make investments that would have happened anyway happen earlier.
B)   make investments that would have happened anyway happen later.
C)   permanently reduce investment.
D)   lead to crowding out.

Question 20

A decrease in consumption growth will cause:

Accepted Answer

A)   AD to shift to the left.
B)   SRAS to shift to the left.
C)   LRAS to shift to the left.
D)   AD, SRAS, and LRAS to shift to the left.

Exam 18: Fiscal Policy

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

Correct AnswerverifiedShow Answer

When expansionary fiscal policy subsequently increases income and consumer spending, the subsequent increase in AD is called the _____ effect.

Correct AnswerverifiedShow Answer

A decrease in consumption growth will cause:

Correct AnswerverifiedShow Answer

A problem that makes fiscal policy less effective is that:

Correct AnswerverifiedShow Answer

Expansionary fiscal policy today might mean:

Correct AnswerverifiedShow Answer

Fiscal policy is especially effective when used to combat real shocks.

Correct AnswerverifiedShow Answer

The crowding out effect reduces the effectiveness of fiscal policy in combating economic shocks.

Correct AnswerverifiedShow Answer

Monetary policy lags are generally shorter than fiscal policy lags.

Correct AnswerverifiedShow Answer

Government spending is a more effective policy tool when:

Correct AnswerverifiedShow Answer

Explain the multiplier effect.

Correct AnswerverifiedThe multiplier effect refers to a situat...View AnswerShow Answer

In a typical year, changes in government spending compared to overall spending are relatively:

Correct AnswerverifiedShow Answer

Tax cuts often have an immediate impact on redirecting an economic downturn.

Correct AnswerverifiedShow Answer

A temporary investment tax credit tends to:

Correct AnswerverifiedShow Answer

Which is the MOST effective fiscal policy to fight a recession if people react to uncertainty by saving all additional money that they earn or receive?

Correct AnswerverifiedShow Answer

Automatic stabilizers are:

Correct AnswerverifiedShow Answer

Fiscal policy under the 2009 American Recovery and Reinvestment Act took the form of:

Correct AnswerverifiedShow Answer

Is fiscal policy effective in reducing both inflation and unemployment at the same time?

Correct AnswerverifiedGenerally not. Fiscal policy is primaril...View AnswerShow Answer

In order for fiscal policy to effectively offset a $1 million decrease in consumer spending, the government would MOST likely have to:

Correct AnswerverifiedShow Answer

Ricardian equivalence occurs when:

Correct AnswerverifiedShow Answer

Under which circumstance should an economic advisor for a small economy recommend a large increase in government spending?

Correct AnswerverifiedShow Answer

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The multiplier effect refers to a situat...
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Generally not. Fiscal policy is primaril...
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