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Fiscal Policy
True or False :
1) Expansionary fiscal policy during a recession means cutting taxes, increasing
government spending, or taking both actions.
2) An increase in taxes and a decrease in government spending would be
characteristic of a contractionary fiscal policy.
3) The creation of new money is less expansionary than borrowing from the public as
a way of financing deficit spending.
4) An increase in taxes would be an expansionary fiscal policy.
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5) A decrease in government spending and taxes would be an example of fiscal
policies that reinforce each other.
6) Automatic stabilizers will reduce tax revenues during recessions and increase tax
revenues during periods of strong economic growth.
7) The impact of an expansionary fiscal policy may be strengthened if it crowds out
some private investment spending.
8) The crowding-out effect occurs when an expansionary fiscal policy increases the
interest rate, decreases investment spending, and weakens fiscal policy.
9) The crowding-out of investment may be avoided if a budget deficit is financed by
issuing new money.
Multiple choice :
(1) Fiscal policy is enacted through changes in :
A)
interest rates .
B)
the supply of money .
C)
unemployment and inflation .
D)
taxation and government spending.
(2) Which are contractionary fiscal policies ?
A)
increased taxation and increased government spending
B)
increased taxation and decreased government spending
C)
decreased taxation and no change in government spending
D)
no change in taxation and increased government spending
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(3) If government spending increases so as to counter the effects of a recession, then
this would be an example of a(n) :
A)
supply-side fiscal policy.
B)
expansionary fiscal policy.
C)
contractionary fiscal policy.
D)
nondiscretionary fiscal policy.
(4) The combination of fiscal policies that would reinforce each other and be most
expansionary would be a(n) :
A)
increase in government spending and taxes .
B)
decrease in government spending and taxes .
C)
decrease in government spending and an increase in taxes .
D)
increase in government spending and a decrease in taxes.
(5) A contractionary fiscal policy can be illustrated by a(n) :
A)
increase in aggregate demand .
B)
decrease in aggregate demand .
C)
increase in aggregate supply .
D)
change in the price level.
(6) An expansionary fiscal policy can be illustrated by a(n) :
A)
change in the price level .
B)
increase in aggregate supply .
C)
increase in aggregate demand .
D)
decrease in aggregate demand.
(7) Which combination of fiscal policy actions would most likely be offsetting ?
A)
increase taxes and government spending
B)
decrease taxes and increase government spending
C)
increase taxes, but make no change in government spending
D)
decrease taxes, but make no change in government spending
(8) In an aggregate demand and aggregate supply graph, an expansionary fiscal
policy can be illustrated by a :
A)
leftward shift in the aggregate demand curve .
B)
rightward shift in the aggregate demand curve .
C)
leftward shift in the aggregate supply curve .
D)
change in the price level.
P
AS
4
AD3
P1
AD2
AD1
0
Q1
Q2 Q3
Q
(9) Refer to the above diagram. If aggregate demand curve AD3 describes the current
situation, appropriate fiscal policy would be to :
A)
do nothing since the economy appears to be achieving fullemployment real output .
B)
increase taxes and reduce government spending to shift the aggregate
demand curve leftward from AD3 to AD2 .
C)
increase taxes on businesses to shift the aggregate supply curve
rightward to reduce the price level .
D)
increase taxes and reduce government spending to shift the aggregate
demand curve from AD3 to AD1.
(10) A tax reduction of a specific amount will be more expansionary the :
A)
smaller is the economy's MPC .
B)
larger is the economy's MPC .
C)
smaller is the economy's multiplier .
D)
less the economy's built-in stability.
(11) Which fiscal policy would be the most expansionary ?
A)
a 40 million increase in government spending
B)
a 20 million tax cut and 20 million increase in government spending
C)
a 10 million tax cut and 30 million increase in government spending
D)
a 40 million tax cut
(12) In an economy, the government wants to increase aggregate demand by kd 36
billion at each price level to increase real GDP and reduce unemployment. If the MPC
is 0.75, then it could:
A)
reduce taxes by kd 10 billion.
B)
reduce taxes by kd 12 billion.
C)
increase government spending by kd 12 billion.
D)
increase government spending by kd 18 billion.
(13) In an economy, the government wants to decrease aggregate demand by kd 48
billion at each price level to decrease real GDP and control demand-pull inflation. If
the MPS is 0.25, then it could:
A)
increase taxes by kd 16 billion.
B)
increase taxes by kd 24 billion.
C)
decrease government spending by kd 10 billion.
D)
decrease government spending by kd 16 billion.
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(14) The economy is in a recession. The government enacts a policy to increase
spending by kd 2 billion. The MPS is 0.2. What would be the full increase in real
GDP from the change in government spending assuming the increase would be in the
horizontal range of the aggregate supply curve ?
A)
6 billion
B)
8 billion
C)
10 billion
D)
16 billion
(15) If the government wants to finance a budget deficit in the least expansionary
way, which action would be most appropriate?
A)
issuing new money
B)
reducing taxation
C)
increasing government spending
D)
borrowing from the money market
(16) In an economy, the government wants to increase aggregate demand by 60
billion at each price level to increase real GDP and reduce unemployment. If the MPC
is 0.9, then it could :
A)
decrease taxes by 6 billion .
B)
decrease taxes by 12 billion .
C)
increase government spending by 6 billion .
D)
increase government spending by 12 billion.
(17) The most expansionary way for government to finance a budget deficit is by:
A)
increasing tax rates.
B)
creating new money.
C)
cutting government spending.
D)
borrowing funds in the money market.
(18) Which is an example of an automatic stabilizer? As real GDP decreases, income
tax revenues :
A)
increase and transfer payments decrease .
B)
decrease and transfer payments increase .
C)
and transfer payments decrease .
D)
and transfer payments increase.
(19) If the economy is to have automatic stabilizers, when real GDP rises:,
A)
tax revenues should fall.
B)
tax revenues should rise.
C)
government spending should rise.
D)
government spending should fall.
(20) The crowding-out effect suggests that :
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A)
increases in consumption are always at the expense of saving .
B)
increases in government spending will close a recessionary gap .
C)
increases in government spending may raise the interest rate and
thereby reduce investment .
D)
high taxes reduce both consumption and saving.