Question 1

New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will

Accepted Answer

A)  exert a strong expansionary impact on aggregate demand and real output.
B)  affect the timing of taxes but not their magnitude.
C)  lead to higher interest rates.
D)  undermine confidence and reduce the level of private saving.

Question 2

Diego's annual income increased from $20,000 to $25,000. If Diego faces a 40 percent effective marginal tax rate, the $5,000 increase in income will expand his disposable income by

Accepted Answer

A)  $2,000.
B)  $3,000.
C)  $3,600.
D)  $5,000.

Question 3

Both Keynesians and non-Keynesians now recognize

Accepted Answer

A)  the limitations of automatic stabilizers as a stabilization tool.
B)  the adverse effects of high marginal tax rates on economic growth.
C)  the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner.
D)  the highly expansionary impact of budget deficits.

Question 4

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Accepted Answer

According the new classical theory, a ta...

Question 5

The new classical model implies that a

Accepted Answer

A)  budget surplus will effectively retard inflation emanating from excess demand.
B)  budget deficit will increase the real interest rate.
C)  substitution of debt for tax financing will leave aggregate demand and real output unchanged.
D)  planned budget deficit will be a highly effective tool to combat a recession.

Question 6

The crowding-out effect implies that restrictive fiscal policy will

Accepted Answer

A)  increase aggregate demand and employment.
B)  lead to a significant increase in the natural rate of unemployment.
C)  be highly effective against inflation.
D)  reduce real interest rates.

Question 7

Expansionary fiscal policy during a recession is most effective when it

Accepted Answer

A)  creates jobs, even if they are on unproductive projects.
B)  directs the economy to full employment and resources into productive projects.
C)  substantially changes the composition of aggregate demand.
D)  provides members of Congress with large political contributions.

Question 8

From 1990 to the year 2000, real federal spending rose about 21 percent, while from 2000 to 2010, real federal spending rose by about

Accepted Answer

A)  17 percent.
B)  30 percent.
C)  59 percent.
D)  112 percent.

Question 9

Keynesian economists argue that during a recession

Accepted Answer

A)  private sector spending will rise and therefore government spending should be reduced in order to help maintain aggregate demand at or near the full employment level.
B)  private sector spending will decline, and therefore government spending should increase in order to help maintain a high level of aggregate demand.
C)  private sector spending will decline, and therefore government spending should be reduced in order to avoid the crowding out of still more private sector spending.
D)  private sector spending will rise and therefore government spending should be increased in order to provide more stimulus for the economy.

Question 10

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Accepted Answer

A)  Successful fiscal policy would be easy to achieve if Congress had greater access to forecasting tools.
B)  Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.
C)  Successful fiscal policy is easier to achieve today because econometric forecasting models are highly accurate.
D)  Congress and the President have persistently altered fiscal policy in a stabilizing manner.

Question 11

Which of the following best describes the crowding-out effect?

Accepted Answer

A)  An increase in government expenditures will cause taxes to rise, which will reduce both aggregate demand and output.
B)  An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
C)  An increase in borrowing by the government will decrease the money supply and, thereby, reduce aggregate demand.
D)  An increase in government expenditures will cause the general level of prices to fall and, thereby, reduce aggregate demand and output.

Question 12

Which of the following is a consensus view among economists with regard to fiscal policy?

Accepted Answer

A)  Changes in fiscal policy exert a strong influence on real output, just as the basic Keynesian model suggests.
B)  Expansionary fiscal policy will not help promote recovery from a recession.
C)  Restrictive fiscal policy is a potent anti-inflationary weapon.
D)  Since changes in discretionary policy are difficult to time correctly, fiscal policy should not be altered in response to each minor disturbance.

Question 13

Which of the following is true of government debt?

Accepted Answer

A)  The interest payments on federal bonds held by Americans will be paid to investors in other countries.
B)  The share of the federal debt held by foreigners has declined from 35 percent of GDP in 1990 to less than 10 percent of GDP in 2012.
C)  Between 2000 and 2012, federal debt owed to foreigners has risen from approximately 10 percent to 35 percent of GDP.
D)  Less than 5 percent of the federal debt is owed to foreigners.

Question 14

Increases in government expenditures and large budget deficits are projected for 2014-2020. If strong growth is observed during this decade, this would be most consistent with

Accepted Answer

A)  the Keynesian view.
B)  the supply-side view.
C)  the crowding-out effect.
D)  the new classical theory.

Question 15

The crowding-out effect implies that a

Accepted Answer

A)  budget surplus will be highly effective against inflation.
B)  budget deficit is likely to stimulate aggregate demand and cause inflation.
C)  budget deficit will increase real interest rates and, thereby, retard private spending.
D)  budget surplus will retard aggregate demand and throw the economy into a downward spiral.

Question 16

If decreased government borrowing drives down real interest rates in the United States,

Accepted Answer

A)  private investment will tend to decline.
B)  the dollar will depreciate leading to an increase in net exports.
C)  an inflow of capital will cause the dollar to depreciate.
D)  All of the above are true.

Question 17

According to the new classical view, budget deficits will

Accepted Answer

A)  cause real interest rates to rise, which will decrease aggregate demand, output, and employment.
B)  lead to an expansion in spending, which will stimulate both real output and employment.
C)  fail to stimulate aggregate demand because people will save more in order to pay the higher future taxes implied by the expansion in government debt.
D)  lead to inflation because the deficits expand the money supply.

Question 18

Increases in government expenditures and large budget deficits are projected for 2014-2020. If the economic recovery is weak and growth is sluggish during this decade, this will be

Accepted Answer

A)  supportive of the Keynesian view, but inconsistent with the crowding-out, new classical, and supply-side theories.
B)  inconsistent with the Keynesian view, but supportive of the crowding-out, new classical, and supply-side theories.
C)  inconsistent with both Keynesian and non-Keynesian theories.
D)  supportive of both Keynesian and non-Keynesian theories.

Question 19

If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?

Accepted Answer

A)  It will make fiscal policy more potent.
B)  It will make fiscal policy less potent.
C)  The potency of fiscal policy will be unaffected.
D)  The potency of expansionary fiscal policy will be reduced, but that of restrictive fiscal policy will be enhanced.

Question 20

If the government cuts the tax rate, workers get to keep

Accepted Answer

A)  less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)  less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)  more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)  more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Exam 12: Fiscal Policy, Incentives, and Secondary Effects

Increases in government expenditures and large budget deficits are projected for 2014-2020. If the economic recovery is weak and growth is sluggish during this decade, this will be

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The new classical model implies that a

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What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Correct AnswerverifiedAccording the new classical theory, a ta...View AnswerShow Answer

Keynesian economists argue that during a recession

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The crowding-out effect implies that restrictive fiscal policy will

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Which of the following best describes the crowding-out effect?

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Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Correct AnswerverifiedShow Answer

If the government cuts the tax rate, workers get to keep

Correct AnswerverifiedShow Answer

New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will

Correct AnswerverifiedShow Answer

Which of the following is a consensus view among economists with regard to fiscal policy?

Correct AnswerverifiedShow Answer

If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?

Correct AnswerverifiedShow Answer

Expansionary fiscal policy during a recession is most effective when it

Correct AnswerverifiedShow Answer

The crowding-out effect implies that a

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From 1990 to the year 2000, real federal spending rose about 21 percent, while from 2000 to 2010, real federal spending rose by about

Correct AnswerverifiedShow Answer

If decreased government borrowing drives down real interest rates in the United States,

Correct AnswerverifiedShow Answer

Increases in government expenditures and large budget deficits are projected for 2014-2020. If strong growth is observed during this decade, this would be most consistent with

Correct AnswerverifiedShow Answer

Both Keynesians and non-Keynesians now recognize

Correct AnswerverifiedShow Answer

According to the new classical view, budget deficits will

Correct AnswerverifiedShow Answer

Diego's annual income increased from $20,000 to $25,000. If Diego faces a 40 percent effective marginal tax rate, the $5,000 increase in income will expand his disposable income by

Correct AnswerverifiedShow Answer

Which of the following is true of government debt?

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According the new classical theory, a ta...
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