Question 1

Which of the following best describes the main objective of expansionary fiscal policy?

Accepted Answer

To increase aggregate demand and reduce unemployment

Question 2

Suppose the government increases its purchases by $$100 billion. According to the aggregate expenditure equation Y = C + I + G + NX$, what is the immediate effect on real GDP, ceteris paribus?

Accepted Answer

Real GDP increases by $100 billion

Question 3

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that rise during a recession

Question 4

If the government wants to use contractionary fiscal policy to reduce inflation, which combination of actions should it take?

Accepted Answer

Decrease government purchases and increase taxes

Question 5

Which of the following is the largest category of federal government spending in the United States?

Accepted Answer

Social Security

Question 6

A budget deficit occurs when:

Accepted Answer

Annual government spending exceeds tax revenues

Question 7

Which of the following best explains why Social Security and Medicare are considered 'fiscal time bombs'?

Accepted Answer

Rising costs and an aging population threaten their long-term financial sustainability

Question 8

Which of the following is NOT a source of federal government revenue?

Accepted Answer

Transfer payments

Question 9

If the government enacts a policy that increases both taxes and government purchases by the same amount, what is the likely effect on aggregate demand?

Accepted Answer

The effects may offset each other, resulting in little change to aggregate demand

Question 10

Which of the following best distinguishes discretionary spending from mandatory spending?

Accepted Answer

Discretionary spending is set annually by Congress, while mandatory spending is determined by permanent laws

Question 11

Which of the following equations represents the relationship between real GDP and its components?

Accepted Answer

$$Y = C + I + G + NX$$

Question 12

Which of the following is a plausible consequence of falling birthrates for Social Security and Medicare?

Accepted Answer

A decline in the number of workers per retiree, making the programs harder to fund

Question 13

Which of the following is an example of a discretionary fiscal policy action?

Accepted Answer

Congress passes a new law to fund infrastructure projects

Question 14

If the government is running a budget surplus, which of the following must be true?

Accepted Answer

Tax revenues exceed government spending

Question 15

Which of the following best describes the Broken Window Fallacy as it relates to fiscal policy?

Accepted Answer

Government spending may simply shift employment from one group to another without increasing total employment

Question 16

Suppose the government increases transfer payments during a recession. This is an example of:

Accepted Answer

An automatic stabilizer

Question 17

Which of the following would NOT be considered a goal of fiscal policy?

Accepted Answer

Increasing the money supply

Question 18

If the government wants to restore long-run equilibrium when real GDP is below potential GDP, which fiscal policy should it use?

Accepted Answer

Expansionary fiscal policy

Question 19

Which of the following is a likely effect of contractionary fiscal policy?

Accepted Answer

A decrease in aggregate demand

Question 20

Which of the following best explains the difference between fiscal policy and monetary policy?

Accepted Answer

Fiscal policy involves changes in taxes and government spending, while monetary policy involves changes in interest rates

Fiscal Policy: Concepts, Applications, and U.S. Federal Budget Structure

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