Global Macroeconomics
Weekly Quiz: Fiscal Policy
This is an ungraded quiz meant to test your understanding of the week’s major topics.
1. The following statements about government debt are likely to be true:
A. when the government cuts taxes and runs a budget deficit, liquidity-constrained consumers respond to their higher after-tax income by spending more
B. when the government cuts taxes and runs a budget deficit, consumers respond to their higher
after-tax income by spending less and saving more
C. consumers are forward-looking and base their spending decisions not only on their current income but also on their expected future income
D. a and c
2. High levels of debt incentivize a government to create inflation to lower the real debt burden. This
motive may be less powerful in advanced economies, because
A. governments can finance deficits by selling debt to the public
B. central banks are sufficiently independent to resist political pressures for expansionary monetary
policy
C. even moderately high inflation can be politically unpopular
D. all of the above
3. Warning signs of a public debt problem may include:
A. a surge in the interest rate on public debt
B. a sustained decline in nominal GDP
C. a very short duration of marketable debt
D. all of the above
4. The following institutions help address problems associated with debt governance:
A. a robust financial system
B. fiscal arrangements that limit debt accumulation or prevent its repudiation
C. a and b
D. a and b and an independent central bank
5. If the real interest rate r (equivalent to the gap between the nominal interest rate and the inflation
rate) is greater than the growth rate g, then stabilizing the ratio of public debt to GDP (d) requires
that a government run a
that is proportional to
.
A. total surplus; (r − g) times d
B. primary surplus; (r − g) times d
C. primary surplus; (r − d) times g
D. none of the above
Global Macroeconomics
Fiscal Policy
6. Suppose that a country wishes to raise revenue of $10 billion. Doing so efficiently involves which of
the following attributes?
A. taxing elastically demanded goods
B. a broad tax base
C. the minimum tax rate required to collect $10 billion
D. b and c
7. Economists often advocate broadening the tax base because
A. it helps the government to raise more revenue
B. it taxes elastically demanded goods
C. under a broad tax base, tax exemptions become a useful policy tool
D. low tax rates reduce deadweight loss
8. One example of a non-distortionary tax is:
A. ad valorem tax (proportional to value)
B. head tax (fixed tax per capita)
C. progressive income tax
D. none of the above
9. To minimize distortions, governments can:
A. tax goods for which supply or demand are inelastic
B. tax goods for which supply and demand are elastic
C. tax luxury goods
D. tax big-ticket items
10. In the context of taxation, the deadweight loss is
A. loss of consumer and producer surplus not made up by tax revenue
B. the surplus received by the government from the private sector
C. the loss to producers from a tax on elastically demanded goods
D. the loss to consumers from a tax on elastically demanded goods
Solutions: 1.D; 2. D; 3. D; 4. D; 5. B; 6. D; 7. D; 8. B; 9. A; 10. A
page 2 of 2