Chapter 12: Fiscal Policy
2) The major source of federal tax receipts is
A) personal income taxes.
B) corporate income taxes.
C) social insurance taxes.
D) excise taxes.
E) estate and gift taxes.
Answer: A
3) The largest category of government expenditures is
A) purchases of goods and services.
B) transfer payments.
C) the salaries of government economists.
D) debt interest.
E) defense spending.
Answer: B
4) The classical economists believed that unemployment could not persist because
A) the government would step in and stimulate the economy by increasing government
spending.
B) rising prices would make up for any deficiency in spending and make it profitable to
rehire workers.
C) falling wages would cause businesses to expand employment.
D) unemployment benefits would eventually run out, and voluntarily unemployed
workers would return to their jobs.
E) workers would move abroad, reducing the unemployment ranks.
Answer: C
6) Keynes believed that if unemployment existed,
A) it could not persist for very long.
B) it would be automatically eliminated.
C) it could be reduced by increasing the level of government spending.
D) taxes should be increased in order to reduce the amount of spending in the economy.
E) it was voluntary.
Answer: C
7) Keynesians are considered ________ economists, whereas the classical economists are
considered ________ economists.
A) nonactivist; activist
B) conservative; liberal
C) laissez-faire; activist
D) activist; nonactivist
E) nonactivist; laissez-faire
Answer: D
8) If potential GDP is $2,000 billion and equilibrium GDP is $1,600 billion,
A) an inflationary gap exists.
B) activists would propose a tax increase.
C) activists would propose a cut in government spending.
D) a recessionary gap exists.
E) Both A and B are true.
Answer: D
9) According to activists, if the economy were experiencing unemployment, which of the
following would be most appropriate?
A) an increase in government spending with no change in the level of taxation
B) a reduction in government spending coupled with a tax increase
C) a balanced federal budget
D) a tax reduction, coupled with a decrease in government spending of the same amount
E) an increase in taxes
Answer: A
10) If the economy were experiencing high unemployment, which of the following would
an activist favor?
A) an increase in taxes to help pay the increased claims for unemployment compensation
B) an increase in government spending for interstate highways
C) a reduction in federal spending for space exploration
D) an increase in the tax rates on corporate income
E) a reduction in welfare payments in order to reduce voluntary unemployment
Answer: B
11) When an economic expansion has resulted in substantial inflationary pressures, the
proper activist fiscal policy would be to
A) reduce taxes.
B) increase the size of the government's budget deficit.
C) increase spending by the federal government.
D) reduce the size of the government's budget deficit.
E) reduce taxes but increase government spending.
Answer: D
12) If a recessionary gap exists, which of the following policies would an activist
support?
A) an increase in personal tax rates
B) an increase in interest rates
C) a reduction in the level of government spending
D) an increase in government spending
E) an increase in corporate tax rates
Answer: D
14) If rapid economic growth resulted in substantial inflation, which of the following
policies would be appropriate, according to the Keynesian or activist model?
A) an increase in government spending
B) a reduction in the tax rates on corporate income
C) an increase in personal income tax rates
D) a program of more aggressive antitrust enforcement against firms with substantial
market power
E) policies designed to increase the size of the economy's multiplier
Answer: C
15) A decision by policymakers to alter taxes in order to influence the level of economic
activity is an example of
A) automatic stabilizers in action.
B) expansionary bias.
C) crowding out.
D) discretionary fiscal policy.
E) transfer payments.
Answer: D
19) According to the Keynesian (activist) model, the federal government
A) should balance its budget annually.
B) should incur deficits during periods of inflation and surpluses during periods of
unemployment.
C) should always incur budget deficits.
D) should incur surpluses during periods of inflation and deficits during periods of
unemployment.
E) should always incur budget surpluses.
Answer: D
20) Deficit spending exists when
A) government tax revenues exceed government spending.
B) government tax revenues are declining.
C) government spending exceeds government revenue.
D) the government fails to earn enough tax revenue to pay off the public debt.
E) government revenue exceeds government spending.
Answer: C
21) If the federal government spends more than it collects in tax revenue,
A) it will have a balanced budget.
B) it will incur a budget deficit, and the public debt will decline.
C) it will have a surplus budget.
D) it will incur a budget deficit, and the public debt will increase.
E) the public debt will decline.
Answer: D
22) An unplanned budget deficit might result from
A) the use of discretionary fiscal policy to combat unemployment.
B) the use of discretionary fiscal policy to combat inflation.
C) a reduction in the unemployment rate.
D) a downturn in the economy.
E) an unexpectedly strong upturn in the economy.
Answer: D
23) According to the Keynesian (activist) model, an attempt to balance the budget during
a period of unemployment
A) would be consistent with sound economic policy.
B) would tend to intensify the unemployment problem.
C) would lead to stagflation--simultaneous unemployment and inflation.
D) would lead to inflation.
E) would shift the aggregate demand curve upward.
Answer: B
24) According to the Keynesian (activist) model, a planned budget deficit
A) is always desirable.
B) is desirable if the economy is experiencing inflation but undesirable if it is
experiencing unemployment.
C) is always undesirable.
D) is inappropriate if the economy is operating at full employment.
E) is appropriate only if the economy is operating at full employment.
Answer: D
25) If the economy were in the midst of a severe recession, an activist would support a
policy decision to
A) balance the federal budget.
B) deliberately incur a deficit in the federal budget.
C) plan for a surplus in the federal budget.
D) reduce the money supply in order to slow spending.
E) increase taxes.
Answer: B
31) The "crowding out" phenomenon refers to the fact that
A) increased government spending can lead to higher interest rates and thereby reduce
investment.
B) higher tax rates can lead to lower consumption spending by households and a lower
level of equilibrium income.
C) increases in government spending tend to have a larger impact on equilibrium GDP
than similar-sized increases in consumption spending by households.
D) businesses now provide many of the services households once provided for
themselves.
E) every crowd has a silver lining.
Answer: A
32) If "crowding out" occurs,
A) the economy remains in disequilibrium.
B) private investment is reduced.
C) government spending is reduced.
D) the income distribution becomes more unequal.
E) the economy's expansion will be greater than it would have been without "crowding
out."
Answer: B
36) The lags in discretionary fiscal policy
A) are desirable because they provide time for the economy to adjust to the policy.
B) are desirable because they result in a larger effect on the economy.
C) are undesirable because they reduce the size of the effect on the economy.
D) are undesirable because the policy action may be inappropriate by the time its impact
is felt.
E) are desirable because they provide time for the expansionary or contractionary effect
to fully develop.
Answer: D
37) Which of the following is most likely to impose a burden on future taxpayers?
A) deficit spending to finance higher social security benefits for retirees
B) deficit financed increases in spending for education
C) deficit financed increases in spending for scientific research
D) deficit spending to improve prenatal care
E) deficit spending to improve the interstate highway system
Answer: A
38) A deficit financed increase in spending for education may be less burdensome to
taxpayers than an equal-sized increase in spending for higher Social Security benefits.
This is because
A) the increase in education spending may help to boost future incomes and the capacity
to pay future taxes.
B) the increase in social security benefits is likely to be saved so it won't stimulate the
economy.
C) deficit-financed education spending does not add to the public debt.
D) everyone loves school teachers and children.
E) crowding out tends to dampen the expansionary effect of education spending.
Answer: A