Question 1

One reason the public debt will not bankrupt the Federal government is that the:

Accepted Answer

A)   cost is shifted to future generations.
B)   debt has a pro-cyclical effect on the economy.
C)   debt can be refinanced by selling new bonds.
D)   burden of the debt will be crowded-out by new investment.E) A) and B)
F) A) and C)

Question 2

A major reason that a public debt cannot bankrupt the Federal government is because:

Accepted Answer

A)   the public debt is mostly held by foreigners.
B)   the Federal government has the Social Security Trust Fund.
C)   the public debt can be easily refinanced.
D)   the Federal government can draw on its gold reserves.E) A) and C)
F) A) and B)

Question 3

In an economy, the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .75, then it could:

Accepted Answer

A)   reduce taxes by $12 billion.
B)   reduce taxes by $16 billion.
C)   reduce government spending by $12 billion.
D)   increase government spending by $18 billion.E) A) and B)
F) C) and D)

Question 4

The net export effect works through international trade to:

Accepted Answer

A)   increase the effectiveness of expansionary and contractionary fiscal policy.
B)   decrease the effectiveness of expansionary and contractionary fiscal policy.
C)   decrease the effectiveness of expansionary fiscal policy and increase the effectiveness of contractionary fiscal policy.
D)   increase the effectiveness of expansionary fiscal policy and decrease the effectiveness of contractionary fiscal policy.E) A) and B)
F) A) and C)

Question 5

Refer to the diagram below wherein T is tax revenues and G is government expenditures. All figures are in billions. In this economy:

Accepted Answer

A)   tax revenues and government spending both vary directly with GDP.
B)   tax revenues vary directly with GDP, but government spending is independent of GDP.
C)   tax revenues and government spending both vary inversely with GDP.
D)   government spending varies directly with GDP, but tax revenues are independent of GDP.E) None of the above
F) A) and D)

Question 6

Which cause-and-effect chain would best explain the reason for a decline in net exports? An expansionary fiscal policy:

Accepted Answer

A)   increases domestic interest rates and leads to an appreciation of the dollar that reduces net exports.
B)   decreases interest rates and leads to a depreciation of the dollar that reduces net exports.
C)   increases domestic interest rates and leads to a depreciation of the dollar that reduces net exports.
D)   decreases interest rates and leads to an appreciation of the dollar that reduces net exports.E) None of the above
F) C) and D)

Question 7

Built-in stability refers to the fact that net tax revenues vary inversely with the level of GDP.

Accepted Answer

A) True 
 B)False

Question 8

Proponents of the notion of a "political business cycle" suggest that:

Accepted Answer

A)   the cyclically adjusted budget is a better indicator of the state of the economy than the actual budget.
B)   cyclical swings in the economy are produced by the inherent instability found in capitalist economies.
C)   a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes.
D)   there is a trade-off among goals that tends to make the economic policies of state and local governments pro-cyclical.E) A) and B)
F) A) and C)

Question 9

4 B)  T3 C)  T2 D)  T1" class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. Which tax system has the least built-in stability?

Accepted Answer

A)   T4
B)   T3
C)   T2
D)   T1E) None of the above
F) A) and B)

Question 10

-Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the full-employment or cyclically adjusted deficit is:

Accepted Answer

A)   $40 billion.
B)   zero.
C)   $60 billion.
D)   $20 billion.E) A) and B)
F) B) and D)

Question 11

-In the above diagram, tax revenues vary:

Accepted Answer

A)   directly with the level of GDP.
B)   inversely with the level of GDP.
C)   directly with the level of government spending.
D)   inversely with the level of government spending.E) A) and B)
F) B) and D)

Question 12

Incurring an internal debt to finance a war does not pass the 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 debt.E) None of the above
F) All of the above

Question 13

If the economy is to have automatic stabilizers, when real GDP rises,:

Accepted Answer

A)   tax revenues should fall.
B)   tax revenues should rise.
C)   government spending should rise.
D)   government spending should fall.E) C) and D)
F) A) and C)

Question 14

A contractionary fiscal policy in Canada which reduces domestic interest rates is most likely to:

Accepted Answer

A)   depreciate the international value of the dollar and increase Canadian net exports.
B)   depreciate the international value of the dollar and decrease Canadian net exports.
C)   appreciate the international value of the dollar and increase Canadian net exports.
D)   appreciate the international value of the dollar and decrease Canadian net exports.E) B) and C)
F) A) and B)

Question 15

Refer to the diagram below. Which tax system will generate the largest cyclical deficits? 4 B)  T3 C)  T2 D)  T1" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)   T4
B)   T3
C)   T2
D)   T1E) None of the above
F) All of the above

Question 16

Some economists believe the budget deficit is directly linked to the trade deficit through real interest rates and the international value of the dollar.

Accepted Answer

A) True 
 B)False

Question 17

Crowding out is a decrease in private investment caused by:

Accepted Answer

A)   a contractionary fiscal policy.
B)   an expansionary fiscal policy.
C)   a full-employment budget deficit.
D)   the political business cycle.E) A) and B)
F) A) and C)

Question 18

The Federal budget deficit is calculated each year by:

Accepted Answer

A)   subtracting government spending from government revenues.
B)   subtracting consumption and investment from government spending.
C)   adding up consumption, investment, government purchases, and net exports.
D)   adding up the difference between government revenues and spending over the years of the nation's existence.E) C) and D)
F) A) and B)

Question 19

An expansionary fiscal policy can be partially offset by a(n) :

Accepted Answer

A)   increase in aggregate demand.
B)   increase in aggregate supply.
C)   depreciation of the dollar.
D)   decrease in net exports.E) A) and B)
F) None of the above

Question 20

The "cyclically adjusted budget" refers to:

Accepted Answer

A)   the inflationary impact which the automatic stabilizers have in a full-employment economy.
B)   that portion of a full-employment GDP which is not consumed in the year it is produced.
C)   the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment.
D)   the number of workers who are underemployed when the level of unemployment is 7 to 8 percent.E) B) and D)
F) B) and C)

Exam 11: Fiscal Policy, Deficits, Surpluses, and Debt

Which cause-and-effect chain would best explain the reason for a decline in net exports? An expansionary fiscal policy:

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-Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the full-employment or cyclically adjusted deficit is:

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Refer to the diagram below wherein T is tax revenues and G is government expenditures. All figures are in billions. In this economy:

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In an economy, the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .75, then it could:

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-In the above diagram, tax revenues vary:

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Refer to the diagram below. Which tax system will generate the largest cyclical deficits?

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The "cyclically adjusted budget" refers to:

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-Refer to the above diagram. Which tax system has the least built-in stability?

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A contractionary fiscal policy in Canada which reduces domestic interest rates is most likely to:

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Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because:

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Some economists believe the budget deficit is directly linked to the trade deficit through real interest rates and the international value of the dollar.

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Built-in stability refers to the fact that net tax revenues vary inversely with the level of GDP.

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The net export effect works through international trade to:

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Crowding out is a decrease in private investment caused by:

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An expansionary fiscal policy can be partially offset by a(n) :

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Proponents of the notion of a "political business cycle" suggest that:

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If the economy is to have automatic stabilizers, when real GDP rises,:

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The Federal budget deficit is calculated each year by:

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A major reason that a public debt cannot bankrupt the Federal government is because:

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One reason the public debt will not bankrupt the Federal government is that the:

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