Correct answers are indicated by
underlined letter.
All contents are ©2001 by Ray Bromley
14-1 A balanced budget means that
A. aggregate spending is in line with aggregate saving.
B. government spending is constant from year to year.
C. tax revenues are equal to government spending.
D. consumption is 100% of disposable income.
E. injections equal leakages.
14-2 If government spending exceeds government tax revenues, then
A. the government has a spending surplus.
B. the government is running a budget deficit.
C. the government is bankrupt.
D. the government is balancing the budget.
E. the government has a fiscal policy surplus.
14-3 If government spending is less than government tax revenues,
then
A. the government has a budget surplus.
B. the government is running a budget deficit.
C. the government is over-fiscal.
D. the government is balancing the budget.
E. the government has a fiscal policy over-account.
14-4 A government budget surplus means
A. government spending is too much, and such spending levels cannot
be continued.
B. government spending is more than private spending.
C. government spending is too much and inflation will result.
D. government spending is less than tax revenues.
E. government spending is more than tax revenues.
14-5 A government budget deficit means
A. government spending is too much, and such spending levels cannot
be continued.
B. government spending is more than private spending.
C. government spending is too much and inflation will result.
D. government spending is less than tax revenues.
E. government spending is more than tax revenues.
14-6 Government transfer payments
A. count as part of GDP and also count as part of government spending.
B. don't count as either part of GDP or part of government spending.
C. count as part of GDP but not part of government spending.
D. don't count as part of GDP but are part of government
spending.
E. are payments the government makes to itself, and thus may or
may not count in GDP.
14-7 Fiscal policy is defined as
A. changes in government expenditure to influence equilibrium
GDP.
B. changes in taxes to influence equilibrium GDP.
C. changes in the money supply to influence equilibrium GDP.
D. changes in investment intended to influence GDP.
E. A and B
14-8 Classical (19th century) economists had very definite ideas
about how the economy reached equilibrium. According to Keynes,
such thinking was incorrect because
A. Keynes assumed that wages and prices are inflexible
in the short run.
B. the interest rate adjusts so that planned saving an investment
are always equal.
C. saving and investment are done by different people and thus
need not be equal.
D. of the permanent income hypothesis.
E. income is not important in determining consumption.
14-9 In the Keynesian model, the primary determinant of consumer
spending is
A. the interest rate.
B. the price level.
C. income.
D. expected inflation.
E. the business cycle.
14-10 In the pure Keynesian model, which of the following would
be the most likely result of an autonomous increase in government
spending of $5 billion?
A. an increase in the cost of loans for investment.
B. an increase in consumer expenditures in the following
few months.
C. an increase in national income of exactly $5 billion.
D. an increase in national income of less than $5 billion
E. a decrease in investment to offset the increase in government
spending.
14-11 In the Keynesian model, which of the following is most likely
to increase the level of consumption?
A. an increase in taxes B. an increase in the level of
investment spending.
C. an increase in the interest rate. D. a decrease in government
spending.
E. a decrease in income (or expected income).
14-12 Which of the following is not a major insight or conclusion
of the Keynesian model?
A. Changes in output, as well as changes in prices, play a role
in the macroeconomic adjustment process, particularly in the short
run.
B. A general overproduction of goods relative to their
demand is impossible, since supply production will generate income
sufficient to create demand.
C. Fluctuations in aggregate demand are an important source of
economic instability.
D. Fiscal policy can be important in determining economic activity.
E. Autonomous changes in spending (such as government spending)
can have multiplied effects on GDP.
14-13 Which of the following is true?
A. In the Keynesian model, interest rates are very important in
increasing real output and reducing unemployment.
B. In the Keynesian model, changes in the price level help to
restore the economy to full employment after a recession.
C. In the Keynesian model, the multiplier effect makes it easier
to use fiscal policy to stabilize the economy.
D. In the Keynesian model, if the economy is operating
at less than full employment, some autonomous change in expenditure
is necessary to increase GDP.
E. In the Keynesian model, the only possible equilibrium for the
economy is one at which all resources, including labor, are being
fully used (that is, there is full employment).
14-14 "If there is unemployment, the average wage rate will
decline as the unemployed workers choose lower wages rather than
going without a job. More workers will be hired as the wages fall
(since the demand for labor slopes down), and full employment
will be restored." According to the Keynesian model, this
statement is
A. incorrect, because widespread unemployment causes wages to
rise, not fall.
B. incorrect, because the demand curve for labor slopes up, not
down.
C. correct.
D. incorrect, rather, changes in interest rates will restore full
employment, by encouraging investment and business expansion.
E. incorrect, since wages and prices are inflexible, particularly
in the downward direction.
14-15 If the economy is in recession, the Keynesian model would
predict
A. that a self-correcting mechanism would restore full employment
eventually.
B. that wages and resource prices would fall, eventually restoring
full employment, but we cannot be sure how long this would take.
C. that businesses would not expand resource employment
unless aggregate demand is increased through use of fiscal policy.
D. that government spending would have to be reduced, so that
more money would be available to consumers and businesses to expand
the economy.
E. that a budget surplus would be needed to restore equilibrium.
14-16 A $5 billion tax cut was accompanied by an $8 billion increase
in consumer spending. From a Keynesian viewpoint,
A. additional spending by those with increased disposable
incomes led to increased incomes and additional spending by others.
B. lower taxes led to lower government spending, which induced
additional consumer spending.
C. the tax reduction caused interest rates to fall, inducing additional
consumer spending.
D. lower taxes increased investment by the same amount.
E. none of the above can explain the observation.
14-17 Based on the Keynesian model and class discussions, what
do you think would happen if government spending were increased
by $1 million at the same time as taxes were increased by $1 million
(assuming no crowding out)?
A. GDP would rise by exactly $1 million.
B. GDP would rise by more than $1 million, due to the multiplier
effect.
C. GDP would rise by less than $1 million, due to the marginal
propensity to consume.
D. GDP would not rise at all.
E. GDP would fall.
14-18 In the Keynesian version of the aggregate demand/aggregate
supply model, which of the following is most likely to lead to
inflation?
A. A reduction in investment at a time when businesses are operating
at less than full capacity.
B. An increase in government spending without a tax increase,
while the economy is at full employment.
C. An increase in government spending coupled with a larger tax
increase to eliminate the budget deficit.
D. A budget surplus during a period of full employment.
E. Increases in taxes during a recession.
14-19 If the economy were experiencing a recession, the Keynesian
model would support
A. balancing the government budget.
B. increasing taxes or reducing government spending to achieve
a government budget surplus.
C. leaving the economy alone, since the self-correcting mechanism
would eventually restore full employment equilibrium.
D. creating a government budget deficit (or increasing
it).
E. doing nothing, since any attempt to use fiscal policy will
fail because increased deficits will reduce consumption.
14-20 If the economy were experiencing inflation, the Keynesian
model would support
A. balancing the government budget.
B. increasing taxes or reducing government spending to
achieve a government budget surplus.
C. leaving the economy alone, since the self-correcting mechanism
would eventually restore full employment equilibrium.
D. creating a government budget deficit (or increasing it).
E. doing nothing, since any attempt to use fiscal policy will
fail because increased deficits will reduce consumption.
14-21 The Keynesian model focuses mostly on
A. the interest rate effect of large government deficits.
B. the aggregate demand effects of government deficits
and surpluses.
C. the effects that taxes have on aggregate supply.
D. the inability of deficits to increase aggregate demand due
to reductions in current consumption that accompanies deficits.
E. the self-correcting mechanism of falling wages and resource
prices.
14-22 Which of the following would be an example of expansionary
fiscal policy?
A. Increase in the tax rate.
B. Reduction in the government budget deficit.
C. Reduction in interest rates.
D. Increase in government spending.
E. Increase in the money supply.
14-23 Which of the following would be an example of restrictive
fiscal policy?
A. Increase in the tax rate.
B. Increase in the government budget deficit.
C. Reduction in interest rates.
D. Increase in government spending.
E. Increase in the money supply.
14-24 The Keynesian model would suggest that restrictive fiscal
policy should be pursued when
A. the economy is in recession.
B. inflation is becoming a problem.
C. unemployment is rising.
D. interest rates are too high.
E. the economy is at full employment and there is little or no
inflation.
14-25 The Keynesian model would suggest that expansionary fiscal
policy should be pursued when
A. the economy is in recession.
B. inflation is becoming a problem.
C. unemployment is falling.
D. interest rates are too low.
E. the economy is at full employment and there is little or no
inflation.
14-26 Expansionary fiscal policy during recessions and restrictive
fiscal policy to combat inflation is called
A. crowding out policy.
B. new classical policy.
C. counter-cyclical policy.
D. supply side policy.
E. progressive policy.
14-27 A policy that tends to move the economy in a direction opposite
of the business cycle fluctuations in the economy is called
A. a crowding out policy.
B. a new classical policy.
C. a counter-cyclical policy.
D. a supply side policy.
E. a progressive policy.
14-28 The "crowding-out effect" suggests that
A. expansionary fiscal policy causes inflation.
B. restrictive fiscal policy is a useful weapon against inflation.
C. the reduction in private spending resulting from higher
interest rates caused by a budget deficit will partially offset
the expansionary impact of an increase in government spending.
D. a budget deficit will cause the private demand for loanable
funds to fall, and thus will raise interest rates.
E. any increase in government spending will have a multiplied
effect.
14-29 The "crowding-out effect" refers to
A. the reduction in private spending that a deficit will cause
as consumers anticipate higher future taxes.
B. the reduction in private spending that a deficit will
cause as government borrowing increases real interest rates.
C. the increase in private spending that will be pushed through
the economy as government spending increases incomes of consumers
and thus stimulates buying.
D. the increase in private spending that a deficit will cause
as interest rates fall due to increased government spending and
reduced taxation.
E. the reduction in private spending that a deficit will cause
as the economy becomes less stable and more uncertain.
14-30 If expansionary fiscal policy is accompanied by increased
government borrowing,
A. interest rates are likely to fall, thus increasing the impact
of the deficit on the economy.
B. interest rates are likely to rise, thus reducing consumption
and investment spending.
C. saving is likely to fall, thus increasing private spending.
D. the "crowding-out" theory predicts that there will
be no impact on interest rates.
E. resource prices will fall, thus further increasing aggregate
demand.
14-31 The "crowding-out effect" suggests that
A. fiscal policy will be very effective in correcting both recessions
and inflation.
B. fiscal policy will be very effective in correcting recessions,
but may not be as effective in combatting inflation.
C. fiscal policy may not be very effective in correcting recessions,
but will be effective in combatting inflation.
D. fiscal policy may not be very effective in correcting
either recessions or inflation.
E. fiscal policy will only be effective in correcting recessions
if taxes are not raised, but will only be effective in combatting
inflation if taxes are raised.
14-32 The "crowding-out effect" stresses the impact
of fiscal policy on
A. inflation.
B. unemployment.
C. real GDP growth.
D. the money supply.
E. the interest rate.
14-33 "Government deficits simply increase future taxes,
and thus will reduce current consumption." This argument
against the effectiveness of fiscal policy summarizes the view
of
A. new classical economics.
B. Keynesian economics.
C. supply-side economics.
D. the "crowding-out" effect.
E. the Laffer curve.
14-34 New classical economists would say that the effect of an
increase in government spending combined with an increase in the
deficit would be
A. an increase in aggregate demand.
B. no change in aggregate demand.
C. a decrease in aggregate demand.
D. an increase in long run aggregate supply.
E. a decrease in long run aggregate supply.
14-35 New classical economists would say that the effect a decrease
in taxes combined with an increase in the deficit would be
A. an increase in aggregate demand.
B. no change in aggregate demand.
C. a decrease in aggregate demand.
D. an increase in long run aggregate supply.
E. a decrease in long run aggregate supply.
14- 36 According to new classical economic theory,
A. increased government spending (with an increase in the deficit)
is the best way to increase aggregate demand.
B. reduced taxation with an increase in the deficit is the best
way to increase aggregate demand.
C. increased government spending with an increase in taxes is
the best way to increase aggregate demand.
D. reduced government spending with a reduction in taxes is the
best way to increase aggregate demand.
E. no fiscal policy would be effective in increasing aggregate
demand.
14-37 The new classical view of the economy stresses the effect
of
A. expected higher future tax rates on current consumption
and savings.
B. interest rates on current consumption.
C. deficits on the interest rate.
D. interest rates on aggregate supply.
E. tax rates on aggregate supply.
14-38 If fiscal policy is going to be used to reduce the ups and
downs of the economy, timing
A. is not particularly important, due to the "self-correcting
mechanism."
B. is important, since the lags involved in enacting fiscal
policy might actually de-stabilize the economy.
C. is always done automatically.
D. is not important, since the economy will not respond to fiscal
policy that is not needed.
E. is only important if there is inflation.
14-39 Which of the following statements is not true of "automatic
stabilizers"?
A. They must be approved by Congress every time they are
used to boost the economy.
B. They are a form of fiscal policy stimulus (or restraint) on
the economy.
C. They include corporate profit tax, and the progressive income
tax.
D. Among them are such "entitlement programs" as unemployment
insurance.
E.They automatically tend to produce a budget deficit when the
economy is sluggish, and produce budget surpluses (or smaller
deficits) when the economy is growing quickly.
14-40 During the 1980's, there was virtually no inflation, even
though unemployment was at unprecedentedly low levels, and the
economy was growing vigorously. Some people argue that the growth
of output and employment during the 1980's was the result of large
budget deficits. Which statement is consistent with the facts?
A. Deficits explain the growth of the 1980's, but fail to explain
the slowdown of the 1990's.
B. Since inflation was so low, other factors are necessary
to explain the growth of the 1980's. This is verified by the observation
that even bigger deficits in the early 1990's were not accompanied
by as vigorous an economy.
C. Large deficits must have caused the growth of the 1980's, and
the even bigger deficits in the early 1990's obviously explain
the even faster growth of that period.
D. The explanation is correct; high deficits always increase growth.
E. None of the above is correct.
14-41 From 1983 to 1989, the Federal government deficit was increasing
and the economy was growing very quickly (in both nominal and
real terms). From 1990 to 1992, the Federal government deficit
was growing even faster than it had in the 1980's, and
yet the economy was growing very slowly. From this evidence
(and class discussions) it appears that
A. fiscal policy is the only influence on the economy.
B. deficits always actually work to stimulate the economy
to grow.
C. other factors besides government spending and taxing
must influence the economy.
D. that Keynesian economic theories completely describe the workings
of our economy.
E. that a stimulus package combining a large increase in government
spending with a large tax increase is likely to make the economy
grow.
14-42 Supply side economics stresses the effect of
A. tax rates on aggregate demand.
B. tax rates on aggregate supply.
C. deficits on aggregate supply.
D. interest rates on aggregate supply.
E. deficits on aggregate demand.
14-43 Supply side economic theory would predict that a long term
reduction in marginal tax rates will
A. have no effect on aggregate demand, due to the expected increase
in future taxes.
B. increase interest rates and offset any aggregate demand increases,
if the tax cuts were accompanied by higher deficits.
C. increase aggregate supply in the short run and in the
long run.
D. reduce aggregate demand, due to the effects on interest rates
and expected future taxes.
E. increase aggregate supply in the short run, but not in the
long run.
14-44 The Laffer curve emphasizes that
A. aggregate demand depends on the tax rate.
B. the size of the tax base depends on the tax rate.
C. raising tax rates increase tax revenues.
D. progressive taxes take a larger proportion of income as income
rises.
E. deficits may affect interest rates.
14-45 Which statement is false?
A. As marginal tax rates increase, the percentage of each additional
dollar earned that the taxpayer is permitted to keep will decline.
B.A tax that takes the same number of dollars from each taxpayer
is regressive.
C. A tax that takes more money (in dollars) from a low-income
taxpayer than it does from a High-income taxpayer must be regressive.
D. A tax that takes the same proportion of a low-income
taxpayer's earnings as it takes of a high-income taxpayer's earning
is progressive.
E. It is possible for a tax to be regressive, even if it takes
more dollars from wealthy taxpayers than it takes from poor ones.
14-46 Suppose that all families buy about the same amount of gasoline
every year, regardless of their income level. Gasoline excise
taxes would then be
A. normative.
B. progressive.
C. regressive.
D. proportional.
E. incidental.
14-47 A progressive tax
A. takes the same percentage from persons of all income levels.
B. takes a higher percentage of income from people of higher
income levels.
C. takes a smaller percentage of income from people of higher
income levels.
D. does not impede progress.
E. is the opposite of a Congressive tax.
14-48 Which of the following would be a regressive tax?
A. One that takes a larger amount of money from the rich than
from the poor.
B. One that takes the same number of dollars from each
person, regardless of income.
C. One that takes the same proportion of each person's income
from him or her.
D. One that takes a larger proportion of a person's income as
his or her income rises.
E. One that fights progress and wants to return to the "good
old days."
14-49 Income tax rate rise as income goes up. Social Security
tax rates are a percentage of a person's salary (the percentage
does not go up as income rises) up to a certain income. Any money
earned above that "cut-off" income is not charged Social
Security taxes at all. Thus,
A.in come taxes are regressive.
B. Social Security taxes are proportional.
C. Social Security taxes are regressive for those above
the "cut-off" income.
D. income taxes are proportional for everybody.
E. Social Security taxes are progressive.
14-50 A flat-rate tax which taxes everyone 17% of the amount by
which his or her income is over $25,000 would be
A. proportional B. regressive
C. progressive D. recessive
E. congressive
All content on this page is ©2001 by Ray Bromley
Chapter 14 Questions