Question 1

The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be:

Accepted Answer

A)   Balanced
B)   In deficit
C)   In surplus
D)   ExpandingE) A) and C)
F) A) and D)

Question 2

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.

Accepted Answer

A) True 
 B)False

Question 3

As of 2012, more than half of the total debt of the U.S. government was owed to foreigners.

Accepted Answer

A) True 
 B)False

Question 4

In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2:

Accepted Answer

A)   Real GDP decreased
B)   Real GDP increased
C)   Full employment was attained
D)   Fiscal policy became less expansionaryE) B) and C)
F) A) and C)

Question 5

You are given the following information about aggregate demand at the existing price level for an economy: (1)  consumption = $500 billion; (2)  investment = $50 billion; (3)  government purchases = $100 billion; and (4)  net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Accepted Answer

A)   Increase government spending and taxes
B)   Decrease government spending and taxes
C)   Decrease government spending and increase taxes
D)   Increase government spending and decrease taxesE) A) and C)
F) C) and D)

Question 6

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be:

Accepted Answer

A)   Expansionary and worsen the effects of the recession
B)   Contractionary and worsen the effects of the recession
C)   Contractionary and counter the effects of the recession
D)   Expansionary and counter the effects of the recessionE) A) and B)
F) A) and C)

Question 7

The following is budget information for a hypothetical economy. All data are in billions of dollars.  Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?

Accepted Answer

A)   $25 billion
B)   $75 billion
C)   $125 billion
D)   $925 billionE) A) and B)
F) B) and C)

Question 8

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:

Accepted Answer

A)   Cause aggregate demand and GDP to increase
B)   Cause aggregate demand and GDP to decrease
C)   Not affect aggregate demand and GDP
D)   Not cause the budget deficit to increaseE) A) and B)
F) A) and C)

Question 9

Refer to the above graph. If the economy was initially in equilibrium at point 3 and a government deficit makes interest rates increase by 4 percentage points, then the crowding-out effect would be a reduction of:

Accepted Answer

A)   $10 billion in investment
B)   $20 billion in investment
C)   $30 billion in investment
D)   $6 billion in investmentE) A) and D)
F) B) and D)

Question 10

From 1995 to 2001, the U.S. public debt relative to GDP:

Accepted Answer

A)   Increased, and fell since then
B)   Decreased, and increased since then
C)   Increased steadily and continued to increase since then
D)   Was roughly constant, but has increased sinceE) A) and B)
F) A) and C)

Question 11

Transfer payments that increase as GDP falls are a type of automatic stabilizer in the economy.

Accepted Answer

A) True 
 B)False

Question 12

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

Accepted Answer

A)   The opportunity cost of wartime expenditures was borne by the generation that lived during the war
B)   The Federal government can shift expenditures from military goods to the production of other public goods
C)   The Federal government has the power to levy taxes to pay its debts
D)   Wartime inflation reduces the relative size of the public debtE) A) and B)
F) A) and C)

Question 13

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy:

Accepted Answer

A)   Cyclical
B)   Implicit
C)   Discretionary
D)   NondiscretionaryE) A) and B)
F) None of the above

Question 14

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Accepted Answer

A)   Makes the actual budget a better reflection of the condition of the economy than the Standardized budget
B)   Does not produce a cyclical deficit as discretionary policy does
C)   Is not subject to the timing problems of discretionary policy
D)   Has a greater multiplier effect than discretionary policyE) A) and C)
F) C) and D)

Question 15

Refer to the graph above. A budget surplus would be associated with GDP level:

Accepted Answer

A)   H
B)   J
C)   K
D)   LE) B) and C)
F) All of the above

Question 16

One of the potential consequences of the public debt is that it may:

Accepted Answer

A)   Make income distribution more equitable
B)   Increase the debt burden of foreign creditors
C)   Lead to additional future taxes that reduce economic incentives
D)   Decrease interest rates and increase investment spendingE) A) and C)
F) B) and D)

Question 17

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

Accepted Answer

A)   Start of the recession and the time it takes to recognize that the recession has started
B)   Start of a predicted recession and the actual start of the recession
C)   Time fiscal action is taken and the time that the action has its effect on the economy
D)   Time the need for the fiscal action is recognized and the time that the action is takenE) None of the above
F) A) and B)

Question 18

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.

Accepted Answer

A) True 
 B)False

Question 19

The goal of expansionary fiscal policy is to rein in inflation.

Accepted Answer

A) True 
 B)False

Question 20

In 2012, the public debt in the U.S. on a per capita basis was about:

Accepted Answer

A)   $100,000
B)   $38,000
C)   $75,000
D)   $52,000E) B) and C)
F) All of the above

Exam 13: Fiscal Policy, Deficits, and Debt

Refer to the graph above. A budget surplus would be associated with GDP level:

Correct Answer
verified

In 2012, the public debt in the U.S. on a per capita basis was about:

Correct Answer
verified

The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be:

Correct Answer
verified

Correct Answer
verified

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?

Correct Answer
verified

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be:

Correct Answer
verified

As of 2012, more than half of the total debt of the U.S. government was owed to foreigners.

Correct Answer
verified

The goal of expansionary fiscal policy is to rein in inflation.

Correct Answer
verified

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

Correct Answer
verified

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.

Correct Answer
verified

From 1995 to 2001, the U.S. public debt relative to GDP:

Correct Answer
verified

Refer to the above graph. If the economy was initially in equilibrium at point 3 and a government deficit makes interest rates increase by 4 percentage points, then the crowding-out effect would be a reduction of:

Correct Answer
verified

In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2:

Correct Answer
verified

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Correct Answer
verified

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.

Correct Answer
verified

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

Correct Answer
verified

One of the potential consequences of the public debt is that it may:

Correct Answer
verified

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy:

Correct Answer
verified

Transfer payments that increase as GDP falls are a type of automatic stabilizer in the economy.

Correct Answer
verified

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:

Correct Answer
verified

Exam 13: Fiscal Policy, Deficits, and Debt

Refer to the graph above. A budget surplus would be associated with GDP level:

Correct AnswerverifiedShow Answer

In 2012, the public debt in the U.S. on a per capita basis was about:

Correct AnswerverifiedShow Answer

The cyclically-adjusted budget deficit in an economy is zero. If this economy goes into recession, then the actual government budget will be:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The following is budget information for a hypothetical economy. All data are in billions of dollars. Refer to the above table. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5?

Correct AnswerverifiedShow Answer

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require the Federal government to balance its budget during a recession would be:

Correct AnswerverifiedShow Answer

As of 2012, more than half of the total debt of the U.S. government was owed to foreigners.

Correct AnswerverifiedShow Answer

The goal of expansionary fiscal policy is to rein in inflation.

Correct AnswerverifiedShow Answer

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because:

Correct AnswerverifiedShow Answer

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.

Correct AnswerverifiedShow Answer

From 1995 to 2001, the U.S. public debt relative to GDP:

Correct AnswerverifiedShow Answer

Refer to the above graph. If the economy was initially in equilibrium at point 3 and a government deficit makes interest rates increase by 4 percentage points, then the crowding-out effect would be a reduction of:

Correct AnswerverifiedShow Answer

In Year 1, the actual budget deficit was $150 billion and the cyclically-adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically-adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2:

Correct AnswerverifiedShow Answer

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy:

Correct AnswerverifiedShow Answer

A decrease in government spending and a cut in taxes would be a pair of fiscal policies that reinforce each other.

Correct AnswerverifiedShow Answer

One timing problem in using fiscal policy to counter a recession is the "administrative lag" that occurs between the:

Correct AnswerverifiedShow Answer

One of the potential consequences of the public debt is that it may:

Correct AnswerverifiedShow Answer

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy:

Correct AnswerverifiedShow Answer

Transfer payments that increase as GDP falls are a type of automatic stabilizer in the economy.

Correct AnswerverifiedShow Answer

If the crowding-out effect is at its maximum strength, it follows that an increase in government spending would:

Correct AnswerverifiedShow Answer

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