Fiscal policy

Question 1

1. 
   
   Which of the following is an example of fiscal policy?
   

   		a. Fighting the war on terror
   		b. Giving people school vouchers
   		c. President’s Obama’s tax cut package
   		d. All of the above are examples

Question 2

1. 
   
   The federal government can alter aggregate demand by all of the following except:

   		a. Purchasing more or fewer goods and services
   		b. Raising or lowering taxes
   		c. Increasing productivity or output per hour
   		d. Changing the level of income transfers

10 points

Question 3

1. 
   
   The desired tax cut to cure a recessionary gap will be:
   

   		a. Equal to the desired fiscal stimulus divided by MPC
   		b. Equal to the desired fiscal stimulus multiplied by MPC
   		c. Equal to the amount of the recessionary gap
   		d. Equal to the fiscal stimulus divided by the multiplier

10 points

Question 4

1. 
   
   Crowding out occurs when the government:

   		a. Increases taxes, thus causing a decrease in consumption
   		b. Issues debt, thus making it more difficult for the private sector to issue debt
   		c. Prints money, which displaces currency
   		d. Cancels out the effectiveness of the Fed’s policy measures

10 points

Question 5

1. 
   
   Which of the following will not undermine the effectiveness of fiscal policy?

   		a. Private borrowing may be crowded out by government borrowing
   		b. Time lags
   		c. Multiplier effects
   		d. Politicians will disagree about the proper fiscal policy

10 points

Question 6

1. 
   
   According to Keynes the source of high unemployment is:

   		a. Excessive aggregate demand
   		b. Insufficient aggregate demand
   		c. An increase in aggregate supply
   		d. Say’s law

10 points

Question 7

1. 
   
   A tax stimulus measure might not be as powerful as policy makers hope because:
   

   		a. The recipients might save the money
   		b. The recipients might spend it on paying bills
   		c. The recipients might spend it on imported goods
   		d. All of the above

10 points

Question 8

1. 
   
   If MPC is .80, and government spending increases by $200 billion then:

   		a. Total spending will increase by $200 billion
   		b. Total spending will increase by $400 billion
   		c. Total spending will decrease by $200 billion
   		d. Total spending will increase by $1000 billion

10 points

Question 9

1. 
   
   A fiscal stimulus is intended to:

   		a. Shift aggregate demand to the left
   		b. Shift aggregate supply to the right
   		c. Shift aggregate demand to the right
   		d. Shift aggregate supply to the left

10 points

Question 10

1. 
   
   If the government wanted to reduce inflation in the economy, it could:
   

   		a. Increase income transfers
   		b. Increase government spending
   		c. Cut taxes
   		d. Increase taxes

Short Answers

1. What happens to the following variables during an expansion?

a. unemployment compensation

b. welfare payments

c. income tax receipts

d. government budget deficits (surplus)

2. Suppose the government decides to increase taxes by $30 billion in order to increase

Social Security benefits by the same amount. How will this combined tax-transfer policy

affect aggregate demand at current prices?

3. If the AD shortfall is $800 billion and the MPC is 0.8,

a) How large is the desired fiscal stimulus?

b) How large an income tax cut is needed?

c) Alternatively, how much more government spending would achieve the target?

4. If the AD excess is $400 billion and the MPC is 0.9,

a) How much fiscal restraint is desired?

b) By how much do income taxes have to be increased to get that restraint?

5. From the perspective of someone using aggregate-demand and aggregate supply

analysis, what is the impact of a tax cut when the economy is operating above full

employment. Is this a wise policy? Why or why not?