Theme 5.

Fiscal Policy
Directions: Each of the questions or incomplete statements below is followed by four or five suggested
answers or completions. Select the one that is the best in each case.

If you find any mistake please send us a message on [email protected]. Thank you!

Instruments and Targets of the Fiscal Policy

1. All of the following actions increase government purchases of goods and services except the:
(A) federal government's sending a Social Security check to a person
(B) federal government's sending a paycheck to the President
(C) federal government's buying a Patriot missile
(D) city of Boston's buying a library book
(E) city of New-York constructing a high-way

2. All of the following items directly raise the disposable income of U.S. households except the:
(A) federal government's sending a Social security check to a person
(B) federal government's sending a paycheck to the President
(C) federal government's buying a Patriot missile
(D) city of Boston's sending a paycheck to its librarian
(E) all the items directly raise the disposable income of U.S. households

3. The components of aggregate expenditure in the closed economy are:

(A) personal consumption expenditure; wages and salaries; corporate profits; net interest
(B) personal consumption expenditure; gross private investment; corporate profits; wages and salaries
(C) personal consumption expenditure; government purchases of goods and services; gross private
investment; net exports
(D) personal consumption expenditure; government purchases of goods and services; gross private
investment
(E) no true answer

4. When we say that government spending and transfer payments are autonomous, we mean that they
are:
(A) exogenous variables
(B) endogenous variables
(C) automatic stabilizers
(D) uncertain
(E) none of the above

5. When there is an increase in lump-sum taxes, the consumption function

(A) shifts upward by the increase in taxes
(B) shifts downward by the increase in taxes
(C) shifts upward by the MPC times the increase in taxes
(D) shifts downward by the MPC times the increase in taxes
(E) shifts downward by the MPS times the increase in taxes

6. Which of the following statements is true?

(A) An increase in lump-sum taxes increases personal disposable income.
(B) A decrease in welfare payments increases personal disposable income.
(C) An increase in social security payments increases personal disposable income.
(D) An increase in the income tax rate increases personal disposable income.
(E) An increase in welfare payments combined with an increase in the income tax rate
increases personal disposable income.
7. An increase in government spending shifts the aggregate spending line
(A) upward by the increase in government spending
(B) downward by the increase in government spending
(C) upward by the increase in government spending times the expenditure multiplier
(D) downward by the increase in government spending times the expenditure multiplier
(E) upward by the increase in government spending times the tax multiplier

8. In the leakages-injection approach to income determination, an increase in lump-sum taxes, shifts

(A) the investment plus government spending line upward
(B) the investment plus government spending line downward
(C) the saving plus taxes line to the right
(D) the saving plus taxes line to the left
(E) the saving plus taxes line to the left and the investment plus government spending line upward

9. According to the Keynesians, an increase in government spending, other things equal, will shift the
aggregate _______ curve to the _________.
(A) demand; right
(B) demand; left
(C) supply; left
(D) supply, right
(E) both demand and supply; left

10. According to the Keynesians, an increase in taxes, other things equal, will shift the aggregate ___
curve to the ________.
(A) demand; right
(B) demand; left
(C) supply; left
(D) supply, right
(E) both demand and supply; left

11. Which of the following will most likely result from a decrease in government spending?
(A) An increase in output.
(B) An increase in the price level.
(C) An increase in employment.
(D) A decrease in aggregate supply.
(E) A decrease in aggregate demand.

12. If government spending increases, the aggregate demand (AD) curve will
(A) shift in
(B) shift out
(C) remain constant
(D) change slope outwards
(E) change slope inwards

13. If government purchases of goods increase, the aggregate supply (AS) curve will
(A) shift in
(B) shift out
(C) remain constant
(D) change slope outwards
(E) change slope inwards
14. Expansionary fiscal policy would best be prescribed to
(A) eliminate a recessionary gap
(B) reduce inflation
(C) reduce the interest rate
(D) eliminate an inflationary gap
(E) avoid crowding out

15. Which of the following policies would a Keynesian recommend during a period of high
unemployment and low inflation?
(A) Imposing wage and price controls to stimulate aggregate supply.
(B) Balancing the budget to stimulate aggregate supply.
(C) Decreasing the money supply to reduce aggregate demand.
(D) Decreasing taxes to stimulate aggregate demand.
(E) Decreasing government spending to stimulate aggregate supply.

16. A contractionary fiscal policy shifts

(A) aggregate demand to the right
(B) aggregate demand to the left
(C) aggregate supply to the right
(D) aggregate supply to the left
(E) both aggregate demand and aggregate supply to the left

Effect of Fiscal Policy on Consumption, Investment, Aggregate Output and Employment

17. When government spending increases without a change in taxes:
(A) consumption increases
(B) consumption decreases
(C) investment increases
(D) investment decreases
(E) economy is out of equilibrium

18. When taxes decrease without a change in government spending:

(A) consumption and investment both increase
(B) consumption and investment both decrease
(C) consumption increases and investment decreases
(D) consumption decreases and investment increases
(E) economy is out of equilibrium

19. When government spending increases and taxes increase by an equal amount:
(A) consumption and investment both increase
(B) consumption and investment both decrease
(C) consumption increases and investment decreases
(D) consumption decreases and investment increases
(E) economy is out of equilibrium

20. If the economy is in a severe recession, which of the following is the fiscal policy most effective in
stimulating production?
(A) Government spending increases.
(B) Government spending decreases.
(C) Personal income taxes are increased.
(D) The Federal Reserve sells bonds on the open market.
(E) The Federal Reserve buys bonds on the open market.
21. In an economy at full employment, a presidential candidate proposes cutting the government debt in
half in four years by increasing income tax rates and reducing government expenditures. According
to Keynesian theory, implementation of these policies is most likely to increase
(A) unemployment
(B) consumer prices
(C) aggregate demand
(D) aggregate supply
(E) the rate of economic growth

22. Which of the following will result in the greatest increase in aggregate demand?
(A) A $100 increase in taxes.
(B) A $100 decrease in taxes.
(C) A $100 increase in government expenditures.
(D) A $100 increase in government expenditures, coupled with a $100 increase in taxes.
(E) A $100 increase in government expenditures, coupled with a $100 decrease in taxes.

23. If the consumption function is given by C = 500 + 0.5(Y – T), and Y is 6,000, and T is given by
T = 200 + 0.2Y, then C equals:
(A) 2,500 (B) 2,800 (C) 3,500 (D) 4,200 (E) 4,500

24. If the consumption function is given by C = 150 + 0.85(Y – T) and T increases by 1 unit, then
saving:
(A) decreases by .85 units
(B) decreases by .15 units
(C) increases by .15 units
(D) increases by .85 units
(E) decreases by 1.5 units

25. Suppose that the consumption function is given by C = 150 + 0.85(Y – T) and the tax function is
given by T  T  t  Y . If T increases by 1 unit, then consumption:
(A) decreases by .85 units
(B) decreases by .15 units
(C) increases by .15 units
(D) increases by .85 units
(E) decreases by 1.5 units

26. Suppose that the consumption function is given by C = 150 + 0.85(Y – T), the tax function is given
by T  T  t  Y , Y is 5,000. If t decreases from 0.3 to 0.2, then consumption increases by:
(A) 85 (B) 425 (C) 500 (D) 525 (E) 850

27. Suppose that consumption function is given by C = 200 + 0.7(Y – T) and the tax function is given
by T = 100 + t ·Y and Y = 50K5L5, where K = 100 and L = 100. If t increases from 0.2 to 0.25, then
consumption decreases by:
(A) 70 (B) 140 (C) 175 (D) 200 (E) 250

28. Suppose that the consumption function is given by C = 200 + 0.7(Y – T), the tax function is given
by T = 100 + 0.2Y, and Y is given by Y = 50K5L5 and K = 100. If L increases from 100 to 144, then
consumption increases by:
(A) 560 (B) 840 (C) 1,120 (D) 2,120 (E) 2,200
29. Suppose that equilibrium GDP (Y) is 5,000. Consumption is given by the equation
C = 500 + 0.6(Y – T). Net taxes (T) are equal to 1,000. Government spending is 600. In this case,
equilibrium investment is:
(A) 600
(B) 1,100
(C) 1,200
(D) 1,500
(E) 2,200

30. If the government increases its spending during recession in order to assist the economy in recovery,
the funds for such expenditures must come from some source. Which of the following sources would
tend to be the most expansionary?
(A) Additional taxes upon personal incomes.
(B) Creating new money.
(C) Borrowing from the public.
(D) Additional taxes upon corporate profits.
(E) None of the above.

31. Which of the following statements is incorrect?

(A) Given the economy's MPS, a $15 billion reduction in government spending will reduce the
equilibrium GDP by more than would a $15 billion increase in taxes.
(B) Other things being unchanged, a tax reduction of $10 billion will increase the equilibrium GDP
by $25 billion when the MPS is 0.4.
(C) If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate
expenditures of $8 billion.
(D) A government surplus is anti-inflationary; a government deficit is expansionary.
(E) If the MPC is 2/3 and both taxes and government expenditures for goods and services increase by
$25, the equilibrium GDP will rise by $25.

32. The effect of a government surplus upon the equilibrium level of GDP is substantially the same as:
(A) A decrease in net export
(B) A decrease in saving
(C) An increase in saving
(D) An increase in consumption
(E) An increase in investment
33. Assume the economy to be at full employment and planned investment now falls short of planned
saving. Under these conditions government fiscal policy should be directed toward:
(A) An equality of tax receipts and expenditures
(B) An excess of tax receipts over expenditures
(C) An excess of expenditures over tax receipts
(D) A reduction of subsidies and transfer payments and an increase in tax rates
(E) Be unchangeable

34. Assume the economy is in the midst of a severe recession. Which of the following policies would
Keynesian economists favor?
(A) Do not interfere into the economy.
(B) A Parliament proposal to incur a Federal surplus to be used for the retirement of public debt.
(C) A reduction in agricultural subsidies and veterans' benefits.
(D) A postponement of a highway construction program.
(E) A reduction in Federal tax rates on personal and corporate income.
35. In a closed economy with Keynesian unemployment and with fixed demand for investment and
government expenditures a fall in the rate of the proportional tax will bring to:
(A) An increase in output and either increase or decrease in tax receipts
(B) An decrease in output and a fall in tax receipts
(C) An increase in output and no change in tax receipts
(D) A decrease in output
(E) None of the above

36. In the simple Keynesian framework, declines in planned investment spending that produce high
unemployment can be offset by raising
(A) Taxes
(B) Government spending
(C) Consumer confidence
(D) Business confidence
(E) Import

37. Government purchases will have ______ effect on output in an economy without income taxes than
it will be in an economy with them.
(A) A greater
(B) Less of an
(C) It depends on the tax rate
(D) It depends on the mpc
(E) No

38. The expenditure multiplier is the ratio of

(A) The change in equilibrium output to a change in the monetary base
(B) The change in the money supply to a change in the monetary base
(C) The change in the money supply to a change in the autonomous expenditure
(D) The change in equilibrium output to a change in the autonomous expenditure
(E) The change in the equilibrium output to a change in taxes

39. The marginal propensity to save is 0.2 and the proportional rate of tax is 0.4. The multiplier of the
economy will be:
(A) 1.88 (B) 1.92 (C) 1.90 (D) 6 (E) 5

40. If the mpc = 0.8 and there are no income taxes, the multiplier will be
(A) 1. (B) 2 (C) 5 (D) 10 (E) 2.5

41. If the mpc = 0.8 and there are no income taxes, the multiplier relating changes in transfer payments
to changes in national income will be
(A) 4 (B) 5 (C) 6 (D) 8 (E) 0

42. If the mpc = 0.8 and there is a $0.375 tax levied on each dollar of income, the multiplier will be:
(A) 1 (B) 2 (C) 5 (D) 10 (E) 8

43. If the mpc = 0.8 and there is a $0.375 tax levied on each dollar of income, a $40 increase in
government purchases will cause the budget surplus to
(A) Increase by $10
(B) Decrease by $10
(C) Increase by $40
(D) Decrease by $40
(E) Increase by $30
44. One reason for not requiring a balanced federal budget at all times is:
(A) with a balanced-budget rule, expenditures are not limited because, if the government wants to
raise expenditures, it can just raise taxes
(B) with a balanced-budget rule, in a recession even the automatic stabilizing powers of our system
of taxes and transfers could not work, and these stabilizing powers are desirable
(C) a balanced-budget rule minimizes the distorting features of the tax system, and these features are
desirable
(D) a balanced-budget rule makes it possible to shift the burden of a war from current to future
generations, and it is undesirable to make such a shift
(E) no reason

45. If in the closed economy the sum of domestic taxes and savings is greater than the sum of
government expenditures and investment, which of the following is likely to result?
(A) Inventories will accumulate.
(B) Aggregate demand will increase.
(C) Total leakages resulting from the tax will equal the amount of the tax.
(D) An automatic increase in savings will restore equilibrium.
(E) Government expenditures will be exactly equal to taxes.

46. The balanced-budget multiplier indicates that:

(A) equal increases in government spending and taxation will tend to widen an existing recessionary
gap
(B) equal increases in government spending and taxation tend to increase the equilibrium GDP
(C) a small government deficit might have a contractionary or deflationary impact upon the economy
(D) if business saving is zero, that is , business receipts equal resource costs, supply will necessarily
create its own demand
(E) the level of GDP cannot fall below that point at which consumption and disposable income are
equal

47. The basic consideration which underlies the balanced-budget multiplier is that:
(A) tax increases are subject to a larger multiplier effect than are increases in government
expenditures
(B) many taxes (e.g., payroll taxes) are legally linked to disbursement programs (e.g., old-age and
survivor’s insurance)
(C) declines in government spending invariably cause increases in private investment spending
(D) individuals and businesses reduce their expenditures by some amount less than any increase in
their taxes
(E) the anticyclical character of the Federal budget more than compensates for the procyclical
character of state and local budgets

48. Assume that in a private economy the equilibrium level of income is $380 and the mps is 0.25. Now
suppose government collects taxes of $50 and spends the entire amount. As a result:
(A) The equilibrium level of real income and the price level will both remain unchanged
(B) The equilibrium level of income will rise to $530
(C) The equilibrium level of income will rise to $420
(D) The equilibrium level of income will rise to $430
(E) The general price level will decline
49. A $1 increase in government spending on goods and services will have a greater impact upon the
equilibrium GDP than will a $1 decline in taxes because:
(A) Government spending is more employment – intensive than is either consumption or investment
spending
(B) Government spending increases the money supply and a tax reduction does not
(C) A portion of a tax cut may be saved
(D) Taxes vary directly with income
(E) No true answer

50. The multiplier associated with a change in government purchases is

(A) Always equal to 1
(B) Smaller than that associated with an equal change in taxes
(C) The same as that associated with a change in investment
(D) Less than that associated with a change in investment
(E) Greater than that associated with a change in investment

51. Income tax rate growth______ the multiplier.

(A) Increases
(B) Decreases
(C) Does not affect
(D) May increase or not affect
(E) May increase, decrease, or not affect

52. Current equilibrium output equals $2,500,000, potential output equals $2,600,000, and the marginal
propensity to consume equals 0.75. Under these conditions, a Keynesian economist is most likely to
recommend
(A) decreasing taxes by $25,000
(B) decreasing taxes by $100,000
(C) increasing government spending by $25,000
(D) increasing government spending by $33,333
(E) increasing government spending by $100,000

53. According to the Keynesian theory, decreasing taxes and increasing government spending will most
likely change consumption expenditures and unemployment in which of the following ways?

Consumption Expenditures Unemployment

(A) Decrease Increase
(B) Decrease No change
(C) Increase Decrease
(D) Increase Increase
(E) No change Decrease

54. Assume that consumption does not depend on the interest rate. In this case, when the government
lowers taxes on business investment, thus increasing desired investments, but does not change
government spending or change any taxes that affect disposable income:
(A) Investment increases, and the interest rate rises
(B) Investment is unchanged, and the interest rate rises
(C) Investment and the interest rate are both unchanged
(D) Investment decreases, and the interest rate rises
(E) Nothing will change
55. In a closed economy with total income fixed, a reduction in taxes will cause
(A) Consumption to rise and investment to fall
(B) Consumption and investment both to rise
(C) Consumption to fall and investment to rise
(D) Consumption and investment both to fall
(E) No changes in consumption and investment

56. An increase in government spending which is funded by borrowing from the public will bring
about:
(A) An increase in equilibrium level of output and a fall in interest rates if the economy is in Keynesian
unemployment
(B) An increase in prices and a fall in interest rates if the economy is in full-employment
(C) An increase in prices and a fall in investment if the economy is in full employment
(D) A decrease in prices
(E) None of the above

57. In a certain year the full-employment total output for a closed economy is expected to be $280
billion valued at current prices. In this same year it is estimated that government expenditures will be
$80 billion, tax revenues $60 billion, consumer expenditures $140 billion, private investment
expenditures $80 billion, and saving $80 billion. To attain price level stability under these conditions
the government should:
(A) Increase tax rates and reduce government spending
(B) Discourage personal saving by reducing the interest rate on government bonds
(C) Increase government expenditures.
(D) Encourage private investment by reducing corporate income taxes
(E) Do nothing

58. Other things being equal, which of the policies will tend to have the most contractionary effect upon
the economy?
(A) A balanced budget.
(B) A budget surplus held as an idle money balance.
(C) A budget deficit financed by creating new money.
(D) A budget surplus used for debt retirement.
(E) A budget deficit financed by borrowing from the public.

59. According to the Keynesian model which of the following will by the most amount decrease the
equilibrium level of output
(A) An increase in unemployment benefits
(B) The construction of a new road
(C) A decrease in taxes combined with an increase of government spending
(D) A decrease in government spending combined with an equal decrease in taxes
(E) An increase in taxes combined with an equal increase of government spending

60. When government spending increases without a change in taxes:

(A) budget deficit decreases
(B) real output remains the same
(C) consumption decreases
(D) investment increases
(E) investment decreases
61. When taxes decrease without a change in government spending and money supply:
(A) consumption and investment both increase
(B) consumption and investment both decrease
(C) consumption increases and investment decreases
(D) real output remains the same
(E) consumption decreases and investment increases

62. An inflationary gap can be eliminated by all of the following except:

(A) an increase in personal income taxes
(B) a decrease in net exports
(C) an increase in the money supply
(D) a decrease in government spending
(E) an increase in interest rates

63. If at full employment, the government wants to increase its spending by $100 billion without
increasing inflation in the short run, it must do which of the following?
(A) Lower taxes by less than $100 billion.
(B) Lower taxes by $100 billion.
(C) Raise taxes by more than $100 billion.
(D) Raise taxes by $100 billion.
(E) Raise taxes by less than $ 100 billion.

64. If a large increase in total spending has no effect on real gross domestic product, it must be true that
(A) the price level is rising
(B) the economy is experiencing high unemployment
(C) the spending multiplier is equal to 1
(D) the economy is in short-run equilibrium
(E) aggregate supply has increased

65. An increase in government spending will be most inflationary when it is financed by

(A) selling bonds to households
(B) selling bonds to non-bank business firms
(C) selling bonds to commercial banks
(D) selling bonds to the central bank
(E) collecting higher taxes

66. An inflationary gap can be eliminated by

(A) equal increases in net tax revenues and government spending
(B) an increase in government spending and a decrease in lump-sum taxes
(C) equal decreases in net tax revenues and government spending
(D) a decrease in lump-sum taxes
(E) equal decrease in tax revenues and welfare payments

67. Suppose the full-employment level of output is $680, the equilibrium level of output is $600, the
mpc is 0.80, and there is no income tax. Full-employment output can be achieved by a $16 increase
in government spending or which of the following changes in net lump-sum tax revenues?
(A) A $26 decrease.
(B) A $20 decrease.
(C) A $20 increase.
(D) A $16 increase.
(E) A $16 decrease.
68. Suppose the full-employment level of output is $680, the equilibrium level of output is $600, the
mpc is 0.80, and there is a 0.25 income tax. Full-employment output can be achieved by a
(A) $20 increase in government spending
(B) $25 increase in government spending
(C) $30 increase in government spending
(D) $32 increase in government spending
(E) $80 increase in government spending

69. Which of the following situations results in a $50 increase in the equilibrium level of output when
the mpc is 0.80 and there is no income tax?
(A) A $10 increase in both net lump-sum tax revenues and in government spending.
(B) A $12.50 increase in both net lump-sum tax revenues and in government spending.
(C) A $12.50 increase in net lump-sum tax revenues and a $10 increase in government spending.
(D) A $12.50 increase in net lump-sum tax revenues and a $20 increase in government spending.
(E) A $20 increase in net lump-sum tax revenues and a $10 increase in government spending.

70. When spending multiplier is 4, increased government spending is $10, and rising interest rates cause
investment spending to decrease $6, there is a net increase in equilibrium output of
(A) $80
(B) $104
(C) $56
(D) $40
(E) $16

71. When spending. multiplier is 5 and government spending increases $20, aggregate demand and
therefore output increase
(A) $100 when there is no crowding out and aggregate supply is horizontal
(B) $100 when there is crowding out and aggregate supply is horizontal
(C) $100 when there is no crowding out and aggregate supply is positively sloped
(D) $100 when there is no crowding out and aggregate supply is vertical
(E) $20 when there is crowding out and aggregate supply is vertical

Fiscal Policy and Crowding out Effect

72. Expansionary fiscal policy generally
(A) encourages investment
(B) discourages investment
(C) has no effect on investment
(D) increases inventory investment
(E) lowers the interest rate

73. A decrease in real investment stemming from higher interest rates due to government purchases is
most commonly called
(A) crowding out
(B) zero policy effectiveness
(C) the Fisher effect
(D) fiscal defeat
(E) empty policy
74. In a closed economy, with total output and taxes fixed, if government spending rises
(A) consumption falls
(B) national saving rises
(C) the real interest rate falls
(D) investment falls
(E) none of the above

75. Crowding out due to government borrowing occurs when

(A) a smaller money supply increases private sector investment
(B) lower interest rates increase private sector investment
(C) higher interest rates decrease private sector investment
(D) a smaller money supply decreases private sector investment
(E) lower interest rates decrease private sector investment

76. An increase in government expenditures will increase aggregate real income only if it
(A) does not crowd out an equal amount of spending for consumption and business investment
(B) is spent on physical capital projects, not government services
(C) is financed by selling bonds to the central bank
(D) is financed by increased taxes
(E) is accompanied by an increase in the money supply

77. If crowding out only partially offsets the effects of a tax cut, which of the following changes in
interest rates and gross domestic product are most likely to occur?
Interest Rates Gross Domestic Product
(A) Increase Increase
(B) Increase Remain unchanged
(C) Increase Decrease
(D) Remain unchanged Increase
(E) Decrease Decrease

78. Crowding out is more likely to occur when

(A) the demand for money is interest sensitive, and private sector spending is largely interest
insensitive
(B) the demand for money is interest sensitive, and private sector spending is interest sensitive
(C) the demand for money is interest insensitive, and private sector spending is interest insensitive
(D) the demand for money is interest insensitive, and private sector spending is interest sensitive
(E) the demand for money is interest insensitive, and private sector spending interest sensitivity does
not matter

79. Crowding out will occur when

(A) a decrease in the money supply raises interest rates which crowd out interest-sensitive private
sector spending
(B) an increase in taxes for the private sector reduces private sector disposable income and spending
(C) a reduction in income taxes causes higher interest rates, which crowd out interest-sensitive
private sector spending
(D) a reduction in government spending causes induced consumption spending to fall
(E) it will occur in all of the above cases
80. The crowding out effect suggests that:
(A) government spending is increasing at the expense of private investment
(B) imports are replacing domestic production
(C) private investment is increasing at the expense of government spending
(D) consumption is increasing at the expense of investment
(E) such effect does not exist in the economy

81. Suppose that equilibrium GDP (Y) is 5,000. Consumption is given by the equation
C = 500 + 0.6(Y - T). Net taxes (T) are equal to 600. Government spending is equal to 1,000.
Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In
this case, the equilibrium real interest rate is:
(A) 5 percent
(B) 8 percent
(C) 10 percent
(D) 13 percent
(E) 15 percent

82. Suppose that GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.5 (Y - T).
Investment (I) in given by the equation I = 2,000 - 100r, where r is the real interest rate in percent.
Government spending (G) is 1,000, and taxes (T) is also 1,000. When a technological innovation
changes the investment function to I = 3.000 - 100r:
(A) investment rises by 1,000, and interest rate rises by 10 percent
(B) investment rises by 1,000, and interest rate in unchanged
(C) investment is unchanged, and interest rate rises by 10 percent
(D) investment is unchanged, and interest rate rises by 15 percent
(E) nothing will change

83. When government spending increases but taxes are not raised, interest rates:
(A) increase
(B) are unchanged
(C) fluctuate slightly
(D) decrease
(E) can vary wildly

84. When taxes are increased but government spending is unchanged, interest rates:
(A) increase
(B) are unchanged
(C) decrease
(D) can vary wildly
(E) fluctuate slightly

85. When government spending increases and taxes are increased by an equal amount, interest rates
(A) increase
(B) are unchanged
(C) decrease
(D) can vary wildly
(E) fluctuate slightly
86. In order to reduce or eliminate crowding out, expansionary fiscal policy can be accompanied by
(A) an increase in government spending
(B) a decrease in investment
(C) expansionary monetary policy
(D) contractionary monetary policy
(E) an increase in the interest rate

87. Crowding out occurs when

(A) a change in the rate of interest affects the quantity of money demanded
(B) a simulative fiscal policy pushes up the rate of interest, which lowers investment spending
(C) a simulative fiscal policy changes the velocity of money
(D) a simulative fiscal policy increases equilibrium output by G  spending multiplier
(E) all of the above

88. If the government decided to decrease government expenditures and tax revenues by the same
amount, this action will affect output and investment in which of the following ways?
Output Investment
(A) Increase Increase
(B) Increase Decrease
(C) No change No change
(D) Decrease Increase
(E) Decrease Decrease

Fiscal Policy and Budget Deficit

89. A federal deficit exists when
(A) government expenditures are greater than gross tax revenues plus government transfers
(B) government expenditures plus government transfers are greater than gross tax revenues
(C) gross tax revenues less government transfers are greater than government expenditures
(D) gross tax revenues plus government transfers are greater than government expenditures
(E) net tax revenues are greater than government expenditures

90. Which of the following will occur if the federal government runs a budget deficit?
(A) Interest rates will tend to decline.
(B) State governments will run a budget surplus to offset the federal deficit.
(C) The economy's output will decrease.
(D) The size of the national debt will increase.
(E) The expenditure multiplier will increase.

91. What happens to the structural deficit and the cyclical deficit when the unemployment rate is above
the natural unemployment rate?
(A) The structural deficit increases; there is no change in the cyclical deficit.
(B) The structural deficit and the cyclical deficit increase.
(C) The cyclical deficit increases; there is no change in the structural deficit.
(D) The cyclical deficit increases, while the structural deficit decreases.
(E) The answer depends on the level of the tax rate.
92. The full-employment budget refers to:
(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 5 to 6 percent
(E) no true answer
93. Budgets deficits can be a concern because they might
(A) ultimately lead to higher inflation
(B) lead to a higher rate of money growth
(C) lead to higher interest rates
(D) lead to increase of government debt
(E) cause all of the above to occur
94. The public debt imposes a burden on future generations when
(A) the government balances the budget over the business cycle
(B) it is completely owed to citizens of the issuing country
(C) it is largely owed to foreigners
(D) taxes do not have to be increased in the future to cover higher interest payments on the debt
(E) inflation is high

95. The federal deficit increases when

(A) federal outlays increase at a faster rate than federal transfers
(B) federal outlays increase at a faster rate than net tax receipts
(C) federal outlays increase at a faster rate than federal revenues
(D) government expenditures increase at a faster rate than federal transfers
(E) no true answer

96. Faced with a large federal budget deficit, the government decides to decrease expenditures and tax
revenues by the same amount. This action will affect output and interest rates in which of the
following ways?
Output Interest Rates
(A) Increase Increase
(B) Increase Decrease
(C) No change Decrease
(D) Decrease Increase
(E) Decrease Decrease

Discretionary and Automatic Fiscal Policy

97. A discretionary fiscal action involves
(A) automatic changes in net tax revenues that result from the income tax structure
(B) payment of unemployment insurance
(C) a Congressionally mandated change in the level of government spending or net tax revenues
(D) payment of social security to retired individuals
(E) automatic changes in net tax revenues that result from the corporate tax structure

98. A conservative economist who advocates an active fiscal policy would recommend:
(A) tax cuts during recession and reduction in government spending during inflation
(B) tax increases during recession and tax cuts during inflation
(C) tax cuts during recession and tax increases during inflation
(D) increases in government spending during recession and tax increases during inflation
(E) decreases in government spending during recession and tax cut in inflation

99. All of the following could be considered an automatic stabilizer except:

(A) a profit-sharing system for workers
(B) discretionary changes in taxes
(C) a system of unemployment insurance
(D) the federal income tax
(E) a system of medical insurance
100. Built-in stabilizers are
(A) discretionary fiscal actions available to the President
(B) increased government spending on public works projects
(C) a change in the income tax rate
(D) changes in net tax revenues that are the result of a change in the level of economic activity
(E) a change in the unemployment insurance system

101. A tax is an automatic stabilizer if the tax revenues have which of the following characteristics?
(A) They rise during periods of economic expansion and fall during recessions.
(B) They fall during periods of economic expansion and rise during recessions.
(C) They are independent of national income.
(D) They are collected primarily from people in the highest quarter of the income distribution.
(E) They are earmarked for a particular government expenditure program.

102. Which of the following can be described as an 'automatic stabiliser'?

(A) Fixed exchange rate policy.
(B) Balanced budget.
(C) Minimum wage.
(D) Central Bank's policy of keeping the quantity of real balances unchanged.
(E) None of the above.

103. Automatic stabilizers:

(A) require action by Congress before each time that they are put into effect
(B) have no outside lag
(C) have no inside lag
(D) are uncertain
(E) have long and variable inside lags

104. “Built-in-stability” refers to the fact that:

(A) an annually balanced budget will automatically tend to offset the procyclical tendencies created
by state and local finance and thereby stabilize the economy
(B) with given tax rates and expenditure policies a rise in national income will tend to produce a
budget surplus while a decline will tend to result in a deficit
(C) congress will automatically change the tax structure and expenditure programs to correct
upswings and downswings in business activity
(D) government expenditures and tax receipts automatically balance over the course of the business
cycle, though they may be out of balance in any single year
(E) no true answer
105. Which of the following statements is correct?
(A) Built-in stability only partially offsets fluctuations in economic activity.
(B) Built-in stability works in halting inflation, but it is incapable of alleviating unemployment.
(C) Built-in stability can be relied upon to eliminate completely any fluctuation in economic activity.
(D) Built-in stability overcorrects for fluctuations in economic activity, e.g., it may change a small
expansion into a recession.
(E) Built-in stability cannot exist in the market economy.