Question 1

According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?

Accepted Answer

A)   Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery.
B)   Repayment of the debt can always be shifted to the future, making it possible to keep tax rates low and thereby strengthen the recovery.
C)   Higher interest payments will increase future government spending, and thereby promote a stronger the recovery.
D)   The increase in government spending will exert a multiplier effect on the economy, leading to a stronger recovery.E) B) and D)
F) C) and D)

Question 2

If policymakers cut taxes because they perceive that recession is a major threat, a proponent of the new classical view will be most likely to argue that the tax cut is

Accepted Answer

A)   highly appropriate because it will stimulate aggregate demand and, thereby, help to strengthen the economy.
B)   highly inappropriate because it will exert a restrictive impact on aggregate demand, output, and employment.
C)   not very important because the "demand stimulus effects" of the tax cut will be largely offset by additional borrowing and higher interest rates.
D)   not very important because the "demand stimulus effects" of lower current taxes will be largely offset by the expectation of higher taxes in the future.E) B) and D)
F) A) and C)

Question 3

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Accepted Answer

Crowding out refers to the relationship ...

Question 4

Kimani sells life insurance and is considering buying a $50,000 Cadillac for business purposes (thus, the expense reduces her taxable income) . If Kimani is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Cadillac?

Accepted Answer

A)   $20,000
B)   $30,000
C)   $25,000
D)   $70,000E) B) and D)
F) C) and D)

Question 5

Which of the following is true of debt financing?

Accepted Answer

A)   Elected political officials will find debt financing attractive because it allows them to provide voters with visible current benefits while pushing the more visible costs into the future.
B)   Debt financing is unattractive to elected political officials because voters recognize that excessive debt will lead to the future collapse of the economy.
C)   Debt financing is attractive to elected political officials because countries with a higher debt to GDP ratio generally grow more rapidly.
D)   Elected political officials will be reluctant to run budget deficits  because they recognize that taxes will have to be raised in the future to pay the interest on the larger amount of outstanding debt.E) A) and B)
F) A) and D)

Question 6

Which of the following helped transform the budget deficits of the early 1990s into surpluses later in the decade?

Accepted Answer

A)   Rapid growth in the number of persons moving into the retirement phase of life during the 1990s
B)   A reduction in defense expenditures following the end of the Cold War
C)   A 1997 increase in the tax rate imposed on income derived from capital gains
D)   A reduction in Social Security and health-care benefits during the 1990sE) A) and D)
F) B) and C)

Question 7

The political incentive structure tends to

Accepted Answer

A)   encourage a balanced budget regardless of economic conditions.
B)   discourage budget deficits during recessions.
C)   encourage budget surpluses during both recessions and expansions.
D)   encourage budget deficits during both recessions and expansions.E) A) and D)
F) B) and C)

Question 8

Supply-side economics stresses that high marginal tax rates

Accepted Answer

A)   are the key to maintaining a balanced budget.
B)   are an effective short-run countercyclical tool to promote recovery from a recession.
C)   discourage people from working harder and using their resources productively.
D)   encourage people to work, supply resources, and use them more efficiently.E) None of the above
F) B) and C)

Question 9

Which of the following most clearly indicates that fiscal policy is becoming more restrictive?

Accepted Answer

A)   An increase in the budget deficit relative to GDP
B)   A reduction in the budget deficit relative to GDP
C)   An increase in government expenditures as a share of GDP
D)   A reduction in tax revenues as a share of GDPE) None of the above
F) A) and C)

Question 10

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.E) B) and D)
F) B) and C)

Question 11

The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of

Accepted Answer

A)   expansionary fiscal policy.
B)   the crowding-out effect.
C)   restrictive fiscal policy.
D)   the paradox of thrift.E) A) and B)
F) B) and D)

Question 12

Use the figure below to answer the following question(s) . Figure 12-2
 Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a?

Accepted Answer

A)   a balanced budget
B)   restrictive fiscal policy
C)   expansionary fiscal policy
D)   continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment) E) C) and D)
F) B) and D)

Question 13

Government spending programs that create jobs are often popular because

Accepted Answer

A)   the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
B)   if a spending program is approved by Congress, it means that the value of what is produced is greater than the value of the resources used to produce it.
C)   the  benefits of job creation are always greater than the costs.  Jobs are the key to economic progress.
D)   when spending programs are funded by the government there are no secondary effects.E) A) and C)
F) B) and D)

Question 14

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

Accepted Answer

A)   exert a larger impact on output and employment because its effects are immediate, long-lasting, and do not add much to the national debt.
B)   exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn.
C)   exert a larger impact on output and employment because the temporary tax cut will lead to a larger budget deficit.
D)   exert an identical impact on output and employment because the incentive effects will be the same regardless of whether the tax cut is temporary or permanent.E) B) and C)
F) A) and B)

Exam 12: Fiscal Policy: Incentives, and Secondary Effects

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Correct Answer
verified
Crowding out refers to the relationship ...
View Answer

Supply-side economics stresses that high marginal tax rates

Correct Answer
verified

According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?

Correct Answer
verified

The political incentive structure tends to

Correct Answer
verified

Use the figure below to answer the following question(s) . Figure 12-2 Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a?

Correct Answer
verified

Which of the following helped transform the budget deficits of the early 1990s into surpluses later in the decade?

Correct Answer
verified

Which of the following most clearly indicates that fiscal policy is becoming more restrictive?

Correct Answer
verified

Government spending programs that create jobs are often popular because

Correct Answer
verified

Kimani sells life insurance and is considering buying a $50,000 Cadillac for business purposes (thus, the expense reduces her taxable income) . If Kimani is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Cadillac?

Correct Answer
verified

If policymakers cut taxes because they perceive that recession is a major threat, a proponent of the new classical view will be most likely to argue that the tax cut is

Correct Answer
verified

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

Correct Answer
verified

Which of the following is true of debt financing?

Correct Answer
verified

The crowding-out effect implies that restrictive fiscal policy will

Correct Answer
verified

The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of

Correct Answer
verified

Exam 12: Fiscal Policy: Incentives, and Secondary Effects

What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?

Correct AnswerverifiedCrowding out refers to the relationship ...View AnswerShow Answer

Supply-side economics stresses that high marginal tax rates

Correct AnswerverifiedShow Answer

According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?

Correct AnswerverifiedShow Answer

The political incentive structure tends to

Correct AnswerverifiedShow Answer

Use the figure below to answer the following question(s) . Figure 12-2 Refer to Figure 12-2. Which of the following will most likely be favored by a Keynesian economist if the economy is operating at point a?

Correct AnswerverifiedShow Answer

Which of the following helped transform the budget deficits of the early 1990s into surpluses later in the decade?

Correct AnswerverifiedShow Answer

Which of the following most clearly indicates that fiscal policy is becoming more restrictive?

Correct AnswerverifiedShow Answer

Government spending programs that create jobs are often popular because

Correct AnswerverifiedShow Answer

Kimani sells life insurance and is considering buying a $50,000 Cadillac for business purposes (thus, the expense reduces her taxable income) . If Kimani is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Cadillac?

Correct AnswerverifiedShow Answer

If policymakers cut taxes because they perceive that recession is a major threat, a proponent of the new classical view will be most likely to argue that the tax cut is

Correct AnswerverifiedShow Answer

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

Correct AnswerverifiedShow Answer

Which of the following is true of debt financing?

Correct AnswerverifiedShow Answer

The crowding-out effect implies that restrictive fiscal policy will

Correct AnswerverifiedShow Answer

The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of

Correct AnswerverifiedShow Answer

Correct Answer
verified
Crowding out refers to the relationship ...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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