Question 1

Which of the following most clearly states the "paradox of thrift"?

Accepted Answer

A)   If households simultaneously attempt to increase their savings, the result may be a reduction in demand, output, and total savings.
B)   A strong, healthy economy can be achieved if most households are heavily in debt.
C)   A high savings rate will provide the funds for investment, which is a driving force of long-term economic growth.
D)   A reduction in savings and an increase in consumption will expand output and employment.E) A) and B)
F) B) and C)

Question 2

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Accepted Answer

A)   Both an increase in government expenditures and a reduction in taxes will provide a substantial stimulus for aggregate demand.
B)   When additional debt is used to finance a tax cut, the lower taxes and higher interest rates will exert an equivalent impact on aggregate demand.
C)   The finance of government spending with additional debt is essentially the same thing as finance with higher taxes because the larger debt implies higher taxes in the future.
D)   A 10 percent reduction in tax rates will reduce tax revenues by 10 percent.E) C) and D)
F) A) and C)

Question 3

Which of the following best describes the crowding-out effect?

Accepted Answer

A)   An increase in government expenditures will cause taxes to rise, which will reduce both aggregate demand and output.
B)   An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
C)   An increase in borrowing by the government will decrease the money supply and, thereby, reduce aggregate demand.
D)   An increase in government expenditures will cause the general level of prices to fall and, thereby, reduce aggregate demand and output.E) B) and D)
F) None of the above

Question 4

The new classical model implies that substitution of debt for tax financing

Accepted Answer

A)   increases aggregate demand and exerts an expansionary effect on real output.
B)   is highly effective against inflation.
C)   reduces savings because it increases both the current and future tax liability of households.
D)   leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.E) A) and B)
F) A) and D)

Question 5

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) A) and D)
F) B) and C)

Question 6

Public choice analysis indicates that politicians will find

Accepted Answer

A)   budget deficits more attractive than budget surpluses.
B)   budget surpluses more attractive than budget deficits.
C)   budget deficits attractive during an economic boom, but surpluses attractive during a recession.
D)   tax increases more attractive than increases in government spending.E) A) and B)
F) None of the above

Question 7

The crowding-out effect suggests that

Accepted Answer

A)   expansionary fiscal policy causes inflation.
B)   restrictive fiscal policy is an effective weapon against inflation.
C)   a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.
D)   a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.E) None of the above
F) A) and D)

Question 8

Expansionary fiscal policy during a recession is most effective when it

Accepted Answer

A)   creates jobs, even if they are on unproductive projects.
B)   directs the economy to full employment and resources into productive projects.
C)   substantially changes the composition of aggregate demand.
D)   provides members of Congress with large political contributions.E) B) and C)
F) None of the above

Question 9

Supply-side economics concentrates on the benefits of reducing marginal tax rates. Describe three ways that high marginal tax rates are likely to retard output growth.

Accepted Answer

The most direct way that high tax rates ...

Question 10

Both the crowding-out effect and new classical model indicate that

Accepted Answer

A)   expansionary fiscal policy is a highly effective weapon with which to fight an economic downturn.
B)   restrictive fiscal policy is a highly effective weapon with which to control inflation caused by excess demand.
C)   there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand.
D)   fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a weapon against recession.E) A) and B)
F) A) and C)

Question 11

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

Accepted Answer

A)   increase the real interest rate, which will crowd out private spending.
B)   lead to a $100 billion increase in real GDP.
C)   lead to a $400 billion increase in real GDP if the marginal propensity to consume is three-fourths.
D)   leave the interest rate, aggregate demand, and real output unchanged.E) B) and C)
F) A) and B)

Question 12

Which of the following is the best test of whether a government program should be undertaken?

Accepted Answer

A)   the total number of jobs created by the program
B)   value generated by the government program that exceeds the value of the production it crowds out
C)   the increase in GDP as a result of the government program
D)   approval by a majority in each of the two branches of CongressE) B) and C)
F) A) and C)

Question 13

Increases in government expenditures and large budget deficits are projected for 2010-2019. The crowding-out and new classical views indicate this fiscal policy will lead to

Accepted Answer

A)   lower interest rates and tax rates that will enhance economic growth.
B)   higher interest rates and tax rates that will slow economic growth.
C)   increases in aggregate demand that will lead to strong economic growth.
D)   high rates of future inflation.E) B) and D)
F) None of the above

Question 14

Since the mid-1980s, the debt-to-income ratio of American households

Accepted Answer

A)   has remained about the same as the previous 25 years.
B)   has been slowly declining.
C)   has fluctuated between about 55 and 70 percent of after-tax income.
D)   has rapidly increased.E) B) and C)
F) None of the above

Question 15

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) C) and D)
F) All of the above

Question 16

The new classical model implies that a

Accepted Answer

A)   budget surplus will effectively retard inflation emanating from excess demand.
B)   budget deficit will increase the real interest rate.
C)   substitution of debt for tax financing will leave aggregate demand and real output unchanged.
D)   planned budget deficit will be a highly effective tool to combat a recession.E) B) and C)
F) A) and D)

Question 17

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

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 the budget surplus relative to GDP
D)   an increase in the nominal (dollar)  size of the budget deficitE) None of the above
F) C) and D)

Question 18

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Accepted Answer

According the new classical theory, a ta...

Question 19

New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will

Accepted Answer

A)   exert a strong expansionary impact on aggregate demand and real output.
B)   affect the timing of taxes but not their magnitude.
C)   lead to higher interest rates.
D)   undermine confidence and reduce the level of private saving.E) B) and C)
F) All of the above

Question 20

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Accepted Answer

A)   savings, in anticipation of future taxes.
B)   output and consumption, stimulated by the additional government spending.
C)   consumer spending, in anticipation of lower future taxes.
D)   aggregate demand, because the additional spending was financed by borrowing rather than current taxation.E) All of the above
F) A) and B)

Exam 12: Fiscal Policy, Incentives, and Secondary Effects

Which of the following most clearly states the "paradox of thrift"?

Correct AnswerverifiedShow Answer

Which of the following best describes the crowding-out effect?

Correct AnswerverifiedShow Answer

Which of the following provides the clearest statement of the Ricardian equivalence theorem?

Correct AnswerverifiedShow Answer

Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in

Correct AnswerverifiedShow Answer

Since the mid-1980s, the debt-to-income ratio of American households

Correct AnswerverifiedShow Answer

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

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

What effect will expansionary fiscal policy have on the economy, according to new classical economists?

Correct AnswerverifiedAccording the new classical theory, a ta...View AnswerShow Answer

The crowding-out effect suggests that

Correct AnswerverifiedShow Answer

Both the crowding-out effect and new classical model indicate that

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 the best test of whether a government program should be undertaken?

Correct AnswerverifiedShow Answer

In the new classical model, a $100 billion increase in government purchases financed by borrowing will

Correct AnswerverifiedShow Answer

The new classical model implies that substitution of debt for tax financing

Correct AnswerverifiedShow Answer

Expansionary fiscal policy during a recession is most effective when it

Correct AnswerverifiedShow Answer

The new classical model implies that a

Correct AnswerverifiedShow Answer

New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will

Correct AnswerverifiedShow Answer

Public choice analysis indicates that politicians will find

Correct AnswerverifiedShow Answer

Increases in government expenditures and large budget deficits are projected for 2010-2019. The crowding-out and new classical views indicate this fiscal policy will lead to

Correct AnswerverifiedShow Answer

Supply-side economics concentrates on the benefits of reducing marginal tax rates. Describe three ways that high marginal tax rates are likely to retard output growth.

Correct AnswerverifiedThe most direct way that high tax rates ...View AnswerShow Answer

Correct Answer
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According the new classical theory, a ta...
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The most direct way that high tax rates ...
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